Principles of Risk

7/29/2019 Principles of Risk

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Risk Management Assignment

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Assignment One: Risk Assessment

Outline Brief

The basis of this assignment is for you to undertake a critical review of key risks as identified

by a case study organisation.

Case Study: Homeless International

In respect of each example case study you are provided with a schedule of key, priority risks

drawn from recent annual reports. Your detailed task is to:

1. Outline and critically reflect upon the general processes and mechanisms for theidentification and assessment of risk in determining organisational risk

o Most particularly in developing risk assessment criteria and then translatingthese into a risk map and risk register. Consideration must particularly begiven to the theory and practice of determining risk probability and impact;

2. In respect of your chosen case study, explain and evaluate the inclusion of three of theorganisations key risks giving consideration as to why the risk has been identified and

how its overall risk probability and impact may be assessed;

3. For each of the three chosen risk areas, outline appropriate risk managementapproaches (i.e. risk treatment/responses) that may be applied to reduce the overall

potential risk to an acceptable level. Demonstrate your reasoning and argument for the

proposed risk management approaches.

It is acceptable to propose an alternative organisation for the purpose of this assignment for

approval by the module leader.

This assignment is worth 50% of the overall module assessment, and for this there is a

maximum word count of 2,500 words. As a guideline, it is expected that the assignment may

require between 2,000-2,500 words.

Assessment of Competence:

In assessing the submission attention will be paid to the following aspects:

Critical awareness of both theory and practice in the identification and assessment ofrisk in determining organisational risk [30%]

Evidence of an appreciation of the contextual setting(s) in which risk arises and ademonstration of how this interpreted, and the subsequent impact on risk assessment

and evaluation [25%]

Application of appropriate and relevant risk management treatment to the identifiedrisks [25%]


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Clarity of explanation of technical and conceptual issues [10%] Quality of overall presentation [10%]

Case Study 1: Homeless International

Key risk-management priorities identified in the Directors Report and Financial Statements

to the year ended March 2011were as follows:

Funding risk not having the resources available to support planned work Expenditure riskthat international partner organisations wont use grants or financial

services in the agreed way

Implementation risk that the work supported by providing grants or making financialservices available will not achieve the planned results

Financial risk - that international partner organisations might default on direct loans orloans secured with guarantees provided by Homeless International

Health and safety risk that visits to international partner organisations and theirproject sites may put Homeless International staff at risk.


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Table of Contents

1. Introduction ........................................................................................................................................ 5

2. General Risk Management Process .................................................................................................... 52.1 Risk Identification.......................................................................................................................... 5

2.2 Risk Assessment and Evaluation ................................................................................................... 6

2.2.1 Risk Assessment Criteria ........................................................................................................ 7

2.2.2 Risk Register ........................................................................................................................... 7

2.2.3 Risk Map ................................................................................................................................. 8

2.2.4 Probability Impact Index ........................................................................................................ 9

3. Key Risks for Homeless International ............................................................................................... 10

3.1 Funding risks and their Impact .................................................................................................... 10

3.2 Financial risks and their Impact .................................................................................................. 10

3.3 Health and safety risks and their Impact .................................................................................... 10

4. Risk Response Strategies for Homeless International ...................................................................... 11

4.1 Risk Response to Funding Risks .................................................................................................. 11

4.2 Risk Response to Financial Risks ................................................................................................. 12

4.3 Risk Response to Health and Safety Risks ................................................................................... 13

5. Conclusion ......................................................................................................................................... 14

References ............................................................................................................................................ 15

Appendix I ............................................................................................................................................. 17


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1. Introduction

Each organisation has many different kinds of risks that can influence it in many ways.

Organisational risks usually prevent organisations from achieving their core aims and

underlying objectives and often result in financial or reputation losses (Edward and Bowen,

2005). Identifying and addressing probable organisational risks could inform stakeholders

about the hazards before time. The organisational risks can be divided into several kinds

including strategic risks, operational risks, financial risks, compliance risks, reporting risks,

and technological risks (ibid).

The purpose of this report is threefold. First to outline and critically reflect upon the general

processes and mechanisms for the identification and assessment of risk in determiningorganisational risk by employing an appropriate risk assessment criteria and then translating

these into a risk map and risk register. Secondly, to explain and evaluate three key risks i.e.

funding, financial, and health and safety risks to NGOs with a special case of Homeless

International which is a British NGO focusing on urban poverty issues including social

housing and slums. Finally, in the third part of the report the author suggests appropriate risk

response and risk treatment strategies for Homeless International to reduce the impact of

potential risks to an acceptable level.

2. General Risk Management Process

A general risk management process to identify and assess organisational risks is illustrated in

figure A1 in Appendix I.

2.1 Risk Identification

Risk identification is a major and significant part of the risk management process which

initiates with recognising and classifying numerous risks associated with the project/

campaign. Hillson (2009) asserts that all possible risks must be recognised before starting a

new project or campaign. However, Webb (2003) believes that risk identification is an

iterative process which starts after the formulation of risk management plan and continues

during all the phases of risk management process. In case of Homeless International which is

a British NGO focuses on urban poverty issues (including social housing and slums), the

managers must recognise all possible risks in the early phases of the campaign. For this

purpose, they can follow six fundamental steps recommended by Bartlett (2004) which


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include understanding the existence of uncertainty, preparing risk checklist, recognising

emerging risks, mapping possible risks, risk categorisation scheme, and making summary

sheet for risk categories. Table 1.1 presents five essential inputs/requirements prior to initiate

the risk identification process. Also, the table shows a list of identification tools that can be

used at the risk identification stage which will allow Homeless managers to prepare a risk

register.

Table 1.1Risk identification requirements and tools

Source: Epstein and Buhovac (2006)

2.2 Risk Assessment and Evaluation

After recognising probable risks, the NGO can assess and evaluate the likelihood and

consequence of each risk quantitatively or qualitatively (Garlick, 2007). The hazards can be

assessed qualitatively by ranking each risk factor in terms of its probability of occurrence andits impact on the project/campaign as a whole. On the other hand, while analysing risk factors

quantitatively, each risk and its impact can be evaluated numerically using various tools and

techniques. Table 1.2 includes prerequisites to start the risk assessment process as well as a

list of qualitative and quantitative risk assessment tools that the NGO can use to analyse

identified risks and consequently can update the risk register.


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Table 1.2Risk assessment requirements and tools

Source: Epstein and Buhovac (2006)

2.2.1 Risk Assessment Criteria

Bartlett (2004) describes the risk assessment criteria to assess probable risks that can be

translated into a risk register and risk map. The criteria illustrated in table 1.3 will be used to

assess risks for Homeless International.

Table 1.3Risk Assessment Criteria

2.2.2 Risk Register

A risk register contains the outcomes of qualitative and quantitative risk analysis which

facilitates the organisation to develop the risk response/treatment strategy at the next stage


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(Hillson, 2009). It usually consists of risk categories, risk description, risk probability, risk

impact, and proposed risk treatment. The risk register of Homeless International is prepared

and presented in table 1.4 which highlights three fundamental risks categories i.e. funding

risks, financial risks, health and safety risks, along with the description and impact of each

risk. Total ten risks are identified in the risk register that are ranked according to risk

assessment criteria defined in table 1.3.

Table 1.4Risk register of Homeless International

Rank Risk

Category Risk Description

Probability

Impact

Sc

ore=PxI

Risk Impact

R1Funding

Risk

Problems in achieving NGOscore aim and objectives

4 5 20Decline in profit, inevitable

growth

R2Health &

SafetyReduce international partners 4 5 20 Funding problems

R3Funding

Risk

Lack of financial resources for

support activities4 4.5 18 Inability to initiate new projects

R4Financial

Risk

Inadequate cash flow and

reserves4 4.5 18

Unexpected cash flow

shortages, expense or losses

R5 FinancialRisk

Default on direct loans 4 4 16 High liabilities and loans

R6Funding

Risk

Inability to support slum

dwellers3 4 12

Loss of stakeholders confidence

Decline in funding

R7Financial

RiskReliance on few funding sources 4 3 12

Lack of service provision to

slum dwellers

R8Financial

RiskInsufficient investment policies 3 3 9

Fall in potential investment

opportunities

R9Health &

Safety

Accidents or unforeseen events 3 3 9Rise in cost of damages i.e.

compensations lost-work hours

R10Financial

RiskUnsatisfactory insurance cover 2 3 6 Financial drain, legal problems

2.2.3 Risk Map

A risk map helps the organisation to highlight and map hazardous areas that are vulnerable

and may be affected in the near future (Cooper et al., 2004). The risk map of Homeless


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International is depicted in figure 1.2 which illustrates seven high risks and three significant

risks according to the probability and impact of each risk factor.

Figure 1.2Risk map of Homeless International

2.2.4 Probability Impact Index

The probability impact index allows managers to rate probable risks in two dimensions where

risk probability occurs on one axis of the chart and risk impact occurs on the other. Table 1.5

presents the probability impact index of Homeless International where each risk is rated

according to the assessment criteria defined in table 1.3.

Table 1.5Probability impact index of Homeless International


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3. Key Risks for Homeless International

This section briefly illustrates why three risks i.e. funding risks, financial risks, and health

and safety risks have been identified and how they can affect Homeless International and its

future projects/campaigns.

3.1 Funding risks and their Impact

Funding risks are chosen because they are the most significant hazards for any non-profit

organisation. Due to lack of funds and grants, Homeless International may face problems in

achieving its aims and objectives which will affect its growth (Viravaidya and Hayssen,

2001). Similarly, lack of financial resources will hinder the organisation to initiate new

campaigns for supporting slum dwellers and social housing and ultimately the organisation

will lose the confidence of stakeholders including the donors and current partners.

3.2 Financial risks and their Impact

The financial risks are those hazards which may lead the organisation to huge expense or

financial losses and unexpected cash flow shortages (Malevergne and Sornette, 2005). In case

of Homeless International, the financial risks could be: reliance on few funding sources,

unsatisfactory insurance cover, default on direct loans, and insufficient investment policies.

The reliance on few funding sources may lead the NGO to provide limited services to slum

dwellers while an unsatisfactory insurance cover and default on direct loans may result in

legal problems, financial drain, or high liabilities and loans. Moreover, insufficient

investment policies can lead Homeless International to fall in potential investment

opportunities which may affect the long-term planning of the NGO.

3.3 Health and safety risks and their Impact

Health and safety risks are significant for Homeless International because they may cause to

reduce international partners and the NGO may face funding problems. In addition, not

complying with current health and safety regulations, the NGO may face a rise in cost of

damages i.e. compensations or lost-work hours due to accidents or other unforeseen events.


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4. Risk Response Strategies for Homeless International

Once all probable risks are identified, assessed, and evaluated, then the next step is to develop

and implement appropriate risk response strategy for Homeless International. A risk response

strategy refers to developing alternative options and taking corrective actions to increase

opportunities to minimise threats to project aims and objectives (Hillson, 2001). According to

Cooper et al (2004), a risk response strategy must be appropriate, achievable, actionable,

affordable, and accepted to all stakeholders. The Homeless International can adopt different

risk response strategies to mitigate or reduce the impact of risk factors. The risk response

strategies recommended by several experts are: risk acceptance, risk reduce/transfer, and risk

avoidance (Hillson, 2001, 2009; Chapman, 2001; Bartlett, 2004; Garlick, 2007). Risks

emerged due to natural tragedies or unexpected events can be accepted. However, risk

transfer refers to shifting the impact of risk to the third party such as insurance company

while risk reduction or risk mitigation strategy can be adopted to reduce the effect of

common risks. Finally, risk avoidance strategy involves (1) an attempt to avoid the hazard;

(2) engage in alternative activity; or (3) otherwise finish a particular exposure.

Figure A2 in Appendix I shows the priority and severity of these risk strategies.

4.1 Risk Response to Funding Risks

Funding risks have great significance for non-profit organisations. Thus, Homeless

International needs to adopt the risk avoidance strategy for all funding risks. In addressing the

problems in achieving NGOs core aim and underlying objectives (R1), the organisation can

acquire funds by attracting international donors. Similarly, the lack of funds may lead

Homeless International to the inability to support slum dwellers (R6). The author

recommends the organisation to increase fundraising activities locally and internationally.For this purpose, Homeless International needs to develop a sustainable framework driven by

the basic requirements of the community and then use social media to increase fundraising

activities by attracting local and international donors (Ullah et al, 2012). In addition, the

NGO can maintain good financial records and build a solid track record for supporting slums

and carrying out social housing activities.

In order to overcome the issue of lack of financial resources for support activities (R3), the

NGO may look for other funding sources such as individuals, corporations, or federated


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funding. Additionally, to manage funding risk, the Homeless International may hedge funds

by investing in different types of financial instruments and securities.

4.2 Risk Response to Financial Risks

Like funding risks, financial risks are also vital for Homeless International. Among five

financial risks identified by the author, three risks i.e. R4, R5, and R7 have more severe

impact and the NGO can adopt risk avoidance strategy to treat them. For example, to stabilise

inadequate cash flows and reserves, Homeless International can adopt appropriate cash flow

strategies. In this regard, the author recommends NGO to use funds responsibly, periodically

re-evaluate expenses, perform a good monthly forecast, invoice before, or soon after

donation/grant collection, segment donors and slums, and cash disbursements (Helfert, 2001).The author also recommends Homeless International not to rely on few funding sources (R7)

and look to generate funding from alternative sources such as fundraising from individuals,

federal and local governments, grant-making public charities, multi-year grants, community

foundations, and episodic funding (funding from special events). Similarly, the NGO can

look for the support of government and international donors to avoid default on direct loans

(R5).

On the other hand, two financial risks with moderate impact can be reduced or transferred.

For instance, to reduce the impact of R8 (insufficient investment policies), Homeless

International can develop stable investment policies by involving stakeholders. To develop an

efficient investment policy, the organisation may follow following steps: gain trustees

support, define investment objectives, identify social ethical and environmental standards,

determine positive and negative screening approach, define responsibilities of trustees and

staff, effectively communicate investment policy, reporting on investments to stakeholders,

and finally, periodically reassess the policy (Robert, 1998).

In order to reduce the impact of unsatisfactory insurance cover (R10), and to avoid financial

drain and legal problems, Homeless must adopt adequate insurance policy which must cover

at least statutory and contractual insurances which is required by every countrys laws. Such

insurances may cover property insurance, liability insurance, and insurance to protect

volunteers rights.


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4.3 Risk Response to Health and Safety Risks

Among two health and safety risks, reduction in international partners (R2) is more critical.

In the authors opinion, this risk can be avoided by complying with current health and safety

legislations. Therefore, it is recommended to Homeless International to follow health and

safety checklist which includes different laws regarding cleanliness, first aid, display screen

equipments, fire safety, violence and harassment, and other health and safety regulations

while carrying out support activities.

On the other hand, the NGO can adopt risk reduce/transfer strategy to respond to accidents

and unforeseen events. For this purpose, Homeless International may develop various

workplace safety programs for the prevention of injury and illness during support activities.In addition, various hazard analyses such as Preliminary Hazard Analysis, Subsystem Hazard

Analysis, System/Integrated Hazard Analysis, and Operating and Support Hazard Analysis

can be performed using numerous tools which include Fault Tree Analysis, Event Tree

Analysis, Cause/Effect Analysis or Human Error Analysis (Ericson, 2005; Hardy, 2010).

Table 1.6 presents the summary of risk response and risk treatment strategies for Homeless

International.

Table 1.6Risk response and treatment strategies

Category Risk Description Response Strategy Risk Treatment

Funding

Risks

R1 - Problems in

achieving NGOs coreaim and objectives

Avoid Arrange funds by attracting

international donors

SMART Framework

R3 - Lack of financial

resources for support

activities

Avoid Look for other resources or

hedge funds

R6 - Inability to support

slum dwellers

Avoid Increase fundraising

activities locally and

internationally

Financial

Risks

R4 - Inadequate cash

flow and reserves

Avoid Adopt proper cash flow

strategies

R5 - Default on direct

loans

Avoid Look for government support

Look for international donorsR7 - Reliance on few Avoid Generate alternative sources


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funding sources of funding/grants

R8 - Insufficient

investment policies

Reduce/Transfer Develop stable policies for

investment

R10 - Unsatisfactory

insurance cover

Reduce/Transfer Adequate insurance policy

Health &

Safety

Risks

R2 -Reduce international

partners

Avoid To comply with current

health and safety legislations

R9 - Accidents and

unforeseen events

Reduce/Transfer Workplace safety programs

Workplace injury and illness

prevention

5. Conclusion

It is concluded from the above discussion that funding, financial, and health and safety risks

are critical for Homeless International and if these risks are not treated properly then the

NGO might face problems in the near future. The author has identified different probable

risks under these risk categories according to the probability and impact of each risk factor

(see table 1.1) and then outlined these risks through risk map and probability impact index

which shows the severity of each risk factor. According to the likelihood and consequence,

the top five risk factors include: problems in achieving NGOs core aim and objectives,

reduce international partners, lack of financial resources for support activities, inadequate

cash flow and reserves, and inability to support slum dwellers. Finally, the author has

recommended appropriate risk response and treatment strategies to mitigate the impact of the

risk factors (see table 1.6).


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References

Bartlett, J. (2004). Project Risk Analysis and Management Guide. 2nd

edition, APM Publishing

Limited

Burtonshaw-Gunn, S. A. (2009).Risk and financial management in construction. Gower Publishing

Ltd

Chapman, R. J. (2001). The controlling influences on effective risk identification and assessment for

project design management.International Journal of Project Management, 19(3), pp. 147-

160.

Cooper, D.F., Grey, S., Raymond, G. and Walker, P. (2004). Project Risk Management Guidelines:

Managing Risk in Large Projects and Complex Procurements. John Wiley & Sons

Edwards, P.J. and Bowen, P. (2005). Risk Management in Project Organisations. NewSouth

Publishing

Ericson, C.A. (2005).Hazard Analysis Techniques for System Safety. Wiley.

Epstein, M.J. and Buhovac, A.R. (2006). The reporting of organisational risks for internal and

external decision-making. Management Accounting Guideline by CIMA Global. [online].

Available from:

http://www1.cimaglobal.com/Documents/ImportedDocuments/Tech_MAG_Reporting_Organisational_Risks_for_Decision_Making_Sept06.pdf(Accessed: 20 November 2012)

Garlick, A. (2007).Estimating risk: a management approach. Aldershot: Gower Publishing Company

Hardy, T. (2010).Hazard analysis types and tools. Great Circle Analytics.

Heldman, K. (2005). Project Manager's Spotlight on Risk Management. John Wiley & Sons

Helfert, E. (2001). Financial Analysis Tools and Techniques: A Guide for Managers. McGraw Hill

Professional

Hillson, D. (2001). Effective Strategies for Exploiting Opportunities. Proceedings of the Project

Management Institute Annual Seminars and Symposium. November 110, 2001,Nashville,Tenn., USA

Hillson, D. (2009). Managing Risk in Projects. Gower Publishing
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Malevergne, Y. and Sornette, D. (2005).Extreme Financial Risks: From Dependence to Risk

Management. Springer

Robert, P. F. (1998).Nonprofit investment policies: Practical Steps for Growing Charitable Funds.

New York: Wiley

Ullah, S., Ahmad, A. and Khan, T.F. (2012). Fundraising for Sustainable Community Development

and Role of Social Media. International Journal of Business, Humanities and Technology,

2(3), pp. 73-79.

Viravaidya, M. and Hayssen, J. (2001). Strategies to strengthen NGO capacity in resource

mobilisation through business activities. PDA and UNAIDS Joint Publication. [online].

Available from: http://data.unaids.org/Publications/IRC-pub06/jc579-strategies_ngo_en.pdf

(Accessed: 24 November 2012)

Webb, A. (2003). The Project Manager's Guide to Handling Risk. Gower Publishing

www.homeless-international.org/
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Appendix I

Figure A1The risk management process

Source: Epstein and Buhovac (2006, p. 7)


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Figure A2Risk response strategies