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MOHSG Nov 2005 CHALLENGING BOUNDARIES
The Risk Management Standard
Jeff Roycroft
Risk Manager Northern & Central Europe
Rhodia UK Limited
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2MOHSG Nov 2005 CHALLENGING BOUNDARIES
Agenda
• What is risk?
• Define risk management
• Standard structure
• Examples of use
• Summary
• Questions.
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3MOHSG Nov 2005 CHALLENGING BOUNDARIES
Definition of risk
• Risk defined as the combination of the probability of an event and its consequences
• In the safety field, risk is generally regarded as negative
• Risk management focus on prevention and mitigation of harm.
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4MOHSG Nov 2005 CHALLENGING BOUNDARIES
Definition of risk
• The RM Std considers risk as:• Potential for opportunities (upside)
• Threats (downside)
• Risk as uncertainty
• The standard has a loss bias.
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5MOHSG Nov 2005 CHALLENGING BOUNDARIES
Risk management
• Central to strategic management
• Process of addressing risks attaching to their activities
• Goal of achieving sustained benefit within each activity and across the portfolio of all activities.
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6MOHSG Nov 2005 CHALLENGING BOUNDARIES
Risk management
• Fragmentation• Health & safety
• Insurance
• Financial
• Corporate governance.
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7MOHSG Nov 2005 CHALLENGING BOUNDARIES
Risk drivers
Strategic
Operational
Hazard
Financial
Internallydriven
Externally driven
Externally driven
Externally drivenE
xter
nally
driv
en
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8MOHSG Nov 2005 CHALLENGING BOUNDARIES
Background
• Standard prepared by 3 leading UK risk bodies:• The Institute of Risk Management (IRM)
• The Association of Insurance and Risk Managers (AIRMIC)
• ALARM - The National Forum for Risk Management in the Public Sector.
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9MOHSG Nov 2005 CHALLENGING BOUNDARIES
Background
• Aims was to standardise risk management in terms of:• Terminology and words used
• The risk management process
• Organisation structure for risk management
• Risk management objectives
• Implicitly to bring RM ‘under one roof’.
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10MOHSG Nov 2005 CHALLENGING BOUNDARIES
Risk management process
Organisationalstrategic
objectives
Risk assesment &analysis
Risk reporting(threats &
opportunities)
Decision
Risk treatment
Residual riskreporting
Monitoring
Risk evaluation
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11MOHSG Nov 2005 CHALLENGING BOUNDARIES
Risk management process
Organisationalstrategic
objectives
Risk assesment &analysis
Risk reporting(threats &
opportunities)
Decision
Risk treatment
Residual riskreporting
Monitoring
Risk evaluationFormal audit
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12MOHSG Nov 2005 CHALLENGING BOUNDARIES
Risk assessment
• Assuming a high level of knowledge• Identify risks
• Describe risks
• Estimate risks.
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13MOHSG Nov 2005 CHALLENGING BOUNDARIES
Risk evaluation
• Evaluate to determine how to treat:• Anticipate
• Eliminate
• Reduce
• Control
• Transfer
• Retain (with knowledge).
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14MOHSG Nov 2005 CHALLENGING BOUNDARIES
Reporting, treatment & monitoring
• Internal reporting for decision making• e.g. via audit committee
• External reporting for information• via annual reports.
• Decide how to treat
• Implement measures
• Determine residual risk
• Monitor effectiveness.
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15MOHSG Nov 2005 CHALLENGING BOUNDARIES
Some case studies
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16MOHSG Nov 2005 CHALLENGING BOUNDARIES
The importance of good risk management
• General Motors• Health care for retirees• Huge liabilities• May be forced into bankruptcy protection in 2006• Once the world’s largest company• Ford is not far behind
• Risk management solution• Consideration of future impacts• Should not be a surprise• GM retained a risk w/o knowledge.
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17MOHSG Nov 2005 CHALLENGING BOUNDARIES
The importance of good risk management
• Nokia vs Ericsson• Fire at Phillips chips plant in USA
• Key supplier for both companies
• Phillips reassurance over disruption
• Nokia aggressively sought alternative suppliers
• Ericsson waited until it was too late
• Disruption was serious after all
• Nokia became world leader
• Risk management• Nokia had a superior business continuity plan.
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18MOHSG Nov 2005 CHALLENGING BOUNDARIES
The importance of good risk management
• Pfizer• Developed a drug to treat angina
• ‘Interesting’ side effects
• Drug developed and marketed for another type of patient
• Its name?
• Viagra
• Risk management• Pfizer were able to capitalise on an unexpected opportunity.
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19MOHSG Nov 2005 CHALLENGING BOUNDARIES
The importance of good risk management
• Apple• Sony world leaders in portable music players
• Managed transition from tape to CD
• Sony missed the download revolution
• Apple quickly cornered the market with the iPod
• Sales of $2.9bn Q1 2005
• Risk management• Apple anticipated the shift to downloads
• Had a plan should Sony stumble.
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20MOHSG Nov 2005 CHALLENGING BOUNDARIES
Closing thoughts
• Source of sustainable competitive advantage
• Differentiate from competition
• Difficult for ‘mature’ products & services
• Consider internal processes.
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21MOHSG Nov 2005 CHALLENGING BOUNDARIES
Summary
• Risk management is important
• Currently a fragmented discipline
• The RM std brings it all under one roof
• Methodology as a philosophy rather that an ISO type standard
• Not a panacea
• Must select correct treatment options
• If used very well can differentiate from competition.
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22MOHSG Nov 2005 CHALLENGING BOUNDARIES
Questions