Risk Management in Global Project

Rohit Dayal Shah drohit2@hotmail.com Supply Chain Project Management

Contents
Introduction ...................................................................................................................................... 4 Complexity of international projects .................................................................................................. 4 Risks associated with Overseas Developmental Project ..................................................................... 5 Political Risk and Response Strategy .............................................................................................. 5 Economic/Financial Risk & Response Strategy ............................................................................... 6 Cultural Risk & Response Strategy ................................................................................................. 7 Integrated Risk Management Model for Global Projects .................................................................... 7 Web-based Integrated Risk Management System .......................................................................... 8 Fuzzy Risk Assessment Model ........................................................................................................ 9 Conclusion......................................................................................................................................... 9 Bibliography ...................................................................................................................................... 9 APPENDIX ........................................................................................................................................ 11 Appendix-1 .................................................................................................................................. 11 Appendix 2 .................................................................................................................................. 12 Appendix 3 .................................................................................................................................. 13

Introduction
Due to globalisation, the world has become a smaller place and restrictions have reduced improving the business environment. In order to increase market share and financial stability, the scope of project management has increased as businesses are being conducted internationally in a more collaborative manner (lientz, 2003). Some of the recent developments are: Mergers and Acquisitions: Numerous projects have arisen due to mergers and acquisitions in various sectors such as pharmaceuticals, energy, banking, insurance, media, manufacturing, entertainment, etc. International agencies and non-profit organizations have increased their activity by increasing number of projects in different locations. Multinational companies are undertaking new projects in many countries to improve their profitability.

Internationalization of businesses has been possible due to progresses made in technology and transport system. It can be further summarized due to following factor such as a) Economies of scale, b) Standardisation of products & services and c) Advances made in technology, e.g.- internet, mobile communication, logistics capabilities, etc. The paper reviews the complexity of international project, classifies risks and risk management approach. Finally it lays emphasis on usage of integrated risk management model.

Complexity of international projects

International projects tend to be complex and very risky than domestic projects (Ijentz et al, 2006). Literatures by Han et al, 2007 and He, 1999 further support the statement by observing more risks and high likelihood of loss/failure due to high exposure of global market in which all information is not known and further, various uncertainties also needs to be taken into consideration. The complexity of international projects may be due to following factors: Culture and Style: Cultural differences exist all around the world, sometimes even simple communication can be misunderstood and may be blown out of proportion Language Barriers Technology Usage: Different organisations are accustomed to using technologies. The standard of technology may vary in different countries Regulations: Projects may need to undergo changes with regards to local rules and regulations Multiple Currencies: Dealing in different currencies and adding to it, currency exchange fluctuations may increase the complexity in project planning and budget. Taxation Policy Different time zones: Creates a communication issues and hence there may be delays in resolving simple problems. Business Policy: due to high complexity, an organisation may have different business policy in different country.

These factors impacts immensely and they may affect the project in the following ways: It may be a challenge to define the purpose of the project. Defining scope may also be huge task as scope needs to different in different countries. Creating project management structure may also be another issue. Issues such as how many project leaders should be designated, should there be only one or should there be different in different countries. Identifying, assembling and allocating team-members for roles for different countries may be cumbersome. Due to huge geographical distance and time difference, communication may be difficult and hence there may be delays in resolving issues. Issues resolving may further difficult as same issues needs to be tackled differently in different countries. Planning of project may vary in different countries because to differences in available technologies.

Risks associated with Overseas Developmental Project

In line with the literature provided by Wang et al, 2004, El-Sayegh, 2007 described risk management as formal and orderly process of identifying, analysing and responding to risks throughout the lifecycle of project to obtain the optimal degree of risk elimination, mitigation and control. Kayis & Ahmad, 2007 further support the statement by stating risk identification is very important step in risk management to possibly act against the risk. Overseas development projects have different types of risks compared to domestic projects. Figure 1 in appendix provides a detailed list of risks in overseas construction projects. Different authors have categorized risk associated with international business in different ways. Miller (1992) proposed that global business risks can be categorised in 5 types: natural, societal, legal, political and governmental. Khattaba et al., 2007 argued that societal risk and legal may be included in political risk therefore risks in international projects can be classified in four types, however the paper discusses political risk, economic risk and cultural risk only. Political Risk and Response Strategy Economic/ Financial Risk and Response Strategy Cultural Risk and Response Strategy Natural Risk and Response Strategy

Political Risk and Response Strategy

According to Howell, 2001, political risks are political events or societal events of the country that impacts the business environment that causes sponsors to loose money or not make profits as per expectation. Political risks may be caused by unfavourable policy changes, amendment of laws & regulations, restrictions on fund repatriation and restrictions on imports (Ozorhon et al, 2007). It is the most common risk for any international project (Khattaba et al, 2007) as project may take certain time-frame to be completed. During that time, there may be political election and

therefore change of leadership which may have an effect on project completion. Furthermore Ling et al, 2006, bought to light that government may change the policy to favour local organisations. The policies focus on decreasing foreign ownership or limiting foreign businesses to assume disproportional amount of risk. For instance, politicians of India in election year may pass unfavourable resolutions to restrict foreign organisations to show their interest in developing and nurturing local industries. Further the research conducted by Khattaba et al., 2007 indicated that political risks are major concern to Jordanians international projects in which it was observed that host-society & interstate risks were more riskier than host-government risks.

Response Strategy Various researches showed the difficulty of international projects to mitigate political risks as it is hard to forecast political risk. However Ling et al, 2006, came out with the suggestion for project stakeholders to reduce the impact of political risks. It may be put forward in the following points: Political hotspots must be avoid while evaluating and selecting project location To lessen the impact of possible political risks, shorter time-frame project should be given preference over longer duration project. Maintain good relationship with local government obtain insurance for political risks

Economic/Financial Risk & Response Strategy

Organization objective to achieve predetermined economic benefits may be compromised if economic & financial are not managed in best possible level manner (Kangari, 1995). Ozorhon et al, 2007 classified financial risks as domestic countrys macroeconomic conditions such as foreign exchange rate, inflation and fluctuations in economic conditions. The profitability of the overseas project is also by impacted by special taxation law for foreign corporations and also on transferring of funds to their home country. For instance, in United Arab Emirates (UAE), there is huge economic risks due to material & labour shortage, inflation and fluctuating prices (El-Sayegh, 2007 and Ling & Hoi, 2006).

Response Strategy Various researchers have suggested different mitigation strategies, they have been elaborated below: According to Ozorhon et al, 2007, the financial risks can be mitigated by making sure that contract between the firms are clearly stated and duties, responsibilities and liabilities of the firms are unambiguous. Risks such as interest rate fluctuation, inflation, tax-rate increase, foreign currency exchange rate, etc may be allocated to local party to diminish the effect. Wang et al,

2001 concurred that risk of currency fluctuation could be avoided by making a dualcurrency contract wherein some section of project could be dealt in local currency and other in foreign currency as per planning. According to Dey et al, 2001, some part of financial risks could be also be dealt as political risks, hence reduction in political risk may also mitigate financial risks.

Cultural Risk & Response Strategy

Project team members should be fully aware of culture of host country in order to successfully manage the project. It is one of the important risks that need adequate attention. Its can cause delays, misunderstandings and unproductiveness in the projects if not managed properly (Low et al., 2001). Normally in overseas project, people from different nationalities with different language, culture, background and perspective come together for a project. These factors make co-ordination and communication very difficult. For instance, Ling et al., 2006 observed that it was difficult for Singaporean firm to co-ordinate construction project in India due various cultural differences between foreigners and the local people. Response Strategy Li et al., 2006 suggested that project manager should try change the foreign personnel working culture instead of local people. Foreign workers should try to appreciate local culture and try to win the trust of local people thereby making the work environment very friendly and productive. Pheng et al, 2000 concurred with the view that project manager role is very important for the success of overseas project. Project Manager should be fully aware of the cross-cultural differences and should be able to manage and train his team well accordingly. Author further identified five key skill-sets necessary for the overseas project managers, leadership, communication, inter-personality, flexibility and adaptability. Low et al, 2001 further emphasized the need for project managers experience in the local environment to be the critical factor in the success of projects success.

Integrated Risk Management Model for Global Projects

Different risk factors could be dealt in various ways; various methods of managing individual risks have already been studied in the previous sections. However Dikmen et al., 2007 suggested that success of the company relies in combing the risks and dealing with them in integrated responsive manner. Various methods of managing individual risks have already been studied in the previous sections. Further He, 1999 and Han et al., 2007 supported the author by specifying that identifying and assessing all the risks in overseas project life-cycle is very complex, time-consuming and costly. Thus there is need for integrated risk management model. Various authors have come out with many integrated response strategy. He, 1999 came forward with a model that combined risk probability analysis with risk impact assessment for identification and managing the risks in overseas construction projects. Some other models are described below:

Web-based Integrated Risk Management System

Han et al., 2007 developed the model which could continuously check for various risks during the life-cycle of the project. It could be easily accessed anytime by anyone, from any location in the world and with any device. The model is designed specifically for overseas construction companies which has following objectives; Identification of critical risk factors that may hinder the success of the project Provides reliable decision for different phase of project taking in consideration the criticality of the risk. Identifies many alternative mitigation strategies for risks that may affect the outcome of the project. Monitors all types of risks and their actual or residual impacts'

Figure 1: Integrated risk management process (Han et al., 2008) Han et al., 2008 have grouped life-cycle of the project in five stages: a) b) c) d) e) Establishment of a project plan Bid preparation period Contracting Construction and Commissioning and operation

The risk management process has decision making capability from the bidding stage to project completion. The risk management system prepares extensive decision support models and calculates profitability of the project in different circumstances. It helps stakeholders to evaluate merits and demerits of going ahead with the project (Han et al., 2008).

Fuzzy Risk Assessment Model

Dikmen et al, 2007 suggested the risk assessment model to rate cost overrun risk in global construction projects by using the fuzzy logic concept. The model provided the process of quantifying risk rating and hence could be managed accordingly by following the guidelines. International construction organisation had already used the model for managing risks during bidding process. The model is integrated into computer system and uses influence diagrammatic method. Appendix 2 and 3 shows influence diagram of country risk and construction project, both the diagrams are integrated by using fuzzy logic to create a integrated risk management model for overseas projects. The author further elaborated that, though the model was developed for their organisation, however it could be modified for various variations such as different countries, different industries, risk-criterion, etc.

Conclusion
The paper describes the importance of overseas projects due to globalization. It further investigates various risks of the global projects and the ways to manage them. Three risks categories (political, economical & cultural risk) and their response strategy were discussed in details. Among those political risk was quite difficult to manage because of its uncertainty and choosing a good location, project-type and maintaining good relations were important tools in managing the risk. Economic risk could be mitigated by having a proper contract and sharing the risk with local counterpart. Cultural risks could be mitigated by making sure that project manager has great cross-cultural skills. The individual should have good understanding and respect for local culture. Further it was analysed that dealing with individual risks differently is very cumbersome, complex and expensive, hence there is need for integrated risk management strategy. However, it is suggested that different projects in different countries have unique risks and should choose the risk management system accordingly.

Bibliography
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APPENDIX
Appendix-1
Figure 1: Risk Identification for overseas construction projects (Zhi, 1995)

Appendix 2
Figure-2: Influence diagram of country risk (Dikmen et al, 2007)

Appendix 3
Figure-3: Influence diagram of construction risk (Dikmen et al, 2007)