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WHY RISK MANAGEMENT ???

encourage people to take a conscious, systematic approach to dealing with risks,


move from the realm of the accidental to the realm of the proactive.
reduce the number of surprises that managers encounter in their work efforts.
enable managers to calculate the consequences of untoward event so managers can make
informed judgments on what directions they want to travel in.
provide managers with guidance on what steps they can take to reduce the likelihood of
untoward events arising, and when they do arise, what steps they can take to minimize their
negative impacts.
HOW ELABORATE SHOULD RISK
MANAGEMENT EFFORTS BE?
How much good-quality information is available to
guide you in the risk management undertaking?
How many resources can you afford to expend on
preparing for risk events?
What difference would it make whether you are
prepared thoroughly to handle risk events?
HOW MUCH GOOD-QUALITY
INFORMATION IS AVAILABLE?
The need for risk management is often greatest in situations where information is
lacking or faulty.
If knowing exactly what the consequences are of doing something, dont need to
expend much effort conducting formal risk management exercises
Information
Poor information/
environment
qualitative and
informal
Rich information/
environment
quantitative and
formal
AN INFORMATION-POOR SCENARIO:
WEB-BASED ADVERTISING CAMPAIGN
Katy is trying to determine what kind of advertising campaign to launch in order to
promote a new product her company has developed. She has recently read that Web-
based advertising can help her reach a huge audienceliterally, an audience of
millions of people. With traditional targeted direct mail advertising, her audience has
been restricted to the 80,000 to 100,000 prospective clients on her standard mailing
list.
Intrigued by the possibilities of Web-based advertising, Katy reads a dozen articles
about it. These articles offer contradictory conclusions. Proponents support it eagerly,
emphasizing that vendors can reach very large audiences of potential customers with
modest financial outlays. They argue that if even a minuscule percentage of the
audience responds to an advertisement, this may translate into a large number of
responses. Skeptics see it as a waste of time and money, pointing out that untargeted
promotion campaigns seldom work. Furthermore, they maintain, Internet users are so
bombarded with unsolicited advertising that they ignore it entirely.
The fact is that Katy has little information that she can use to guide her on the risks of
launching a Web-based advertising campaign. Such campaigns are so new that even
advertising experts have little consensus on their efficacy. Yet before committing
hundreds of thousands of dollars to pursuing Web-based advertising, she feels
compelled to conduct an analysis of the risks of such an undertaking. What kind of a
risk analysis makes sense here?
The principal constraint Katy faces is lack of information. Not only does she
personally have no experience with this new form of advertising, the industry itself
has almost no track record that she can draw on. The level of sophistication of
her risk assessment will necessarily be low.
Lets examine what Katy can do as she steps through the standard risk management
process.
DISCUSS IT !
AN INFORMATION-RICH SCENARIO: PUBLIC SEMINARS
Shivraj is the director of operations for Events Plus, a management training company
that offers public seminars on a range of management topics of interest to the private
and public sectors. Events Plus holds an average of 120 seminars a year. The company
has developed a database of enrollments for its past seminars. The information
contained in the database enables Shivraj to determine which programs will have
sufficient enrollments to make money and which will not.
Events Pluss marketing department has great hopes for a new seminar the company
recently developed that shows managers how to conduct 360-degree reviews. They
created a brochure advertising the course and sent it to fifty thousand managers on
their mailing list. Shivrajs job is to monitor enrollments in order to determine whether a
particular course will have sufficient sign-ups to warrant offering it. If enrollments are
below a predetermined threshold, the seminar may be cancelled.
The risk event Shivraj is concerned with is that a seminar will not have enough
enrollments to cover costs. Events Plus is so experienced in offering public seminars
that it can offer them in automatic pilot mode. It has a standard checklist of eighteen
items that helps in identifying risk events when preparing to offer seminars. The
database allows the company to compute the probability that a seminar will generate
good revenue streams. It even has developed standard risk-handling strategies to deal
with different events that might arise.
Based on experience, Shivraj knows that a key indicator of enrollments is the
number of course registrations six weeks before the seminar is to be offered.
The data show that if at the six-week marker the course has already broken
even financially, then there is a 91 percent chance that it will be held. If more
than 70 percent of expenses have been covered at the six-week marker,
there is a 70 percent chance that it will be held. Finally, if less than 70
percent of expenses have been covered at the six-week marker, there is a 60
percent chance that it will be held.
Six weeks before the seminar on conducting 360-degree reviews is
scheduled to be held, Shivraj learns that only 55 percent of seminar costs
have been covered. These results are not encouraging and warrant
investigation. Random telephone calls to some of Events Pluss loyal
customers suggest that the market for seminars on 360-degree reviews is
glutted.
Based on data garnered from the calls, Shivraj conducts a Monte Carlo
simulation where he factors in data for best-case, most likely, and worst-case
scenarios. The results suggest there is only a 35 percent chance that the
seminar will break even. Shivraj pulls the plug on the seminar.

ARE QUANTITATIVE ANALYSES BETTER
THAN QUALITATIVE ANALYSES?
QUOTATION OF WILLIAM THOMSON, LORD KELVIN :
When you can measure what you are
speaking about, and express it in numbers,
you know something about it; but when you
cannot measure it, when you cannot
express it in numbers, your knowledge is of
a meager and unsatisfactory kind: it may be
the beginning of knowledge, but you have
scarcely, in your thoughts, advanced to the
stage of science [Bartlett, 1992, p. 504].
TWO SIGNIFICANT PROBLEMS WITH
QUANTIFICATION IN RISK ANALYSIS
Not be adequate data to support
efforts for quantification.
Innumeracy
owing to their inadequate knowledge of
mathematics and measurement, incapable of
conducting quantitative analyses or
interpreting the results of such analyses.
The Absence of Data
To quantify something, you must have data, which need to be collected
in some fashion.
- repeatable processes or not
CONCLUSION
Risk management has its limitations. When dealing with stable,
well defined environments, it almost assumes the aspect of
science. Such environments are information rich, and this
information can be employed to estimate the likelihood of such
untoward events as schedule slippages, cost overruns, and
resource bottlenecks.
However, todays business environment is characterized by
chaos and uncertainty. Product life cycles are impossibly short,
customer loyalty has vanished, boom cycles are followed by
busts, todays business leaders are tomorrows phantoms.
THANK YOU

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