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Business Risk Case Study Ba33


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In continuation to our earlier presentations of the Business Risk Management series & case studies, we show here how the time cycles must be determined for tracking market based, credit based and operational risk.

Published in: Business, Economy & Finance

Business Risk Case Study Ba33

  1. 1. Business Risk Case Study - Ba33 Deciding the Time Cycle for Risk Measurement “ Business Risk Management” Series By Sandip Sen & Katerina Voutsara
  2. 2. <ul><li>Can you say, “I will drive safely, every Friday Morning ? “ </li></ul><ul><li>No, because you will crash and die before Friday. </li></ul>
  3. 3. <ul><li>Risk control is everyday business </li></ul><ul><li>Integrating risk control in your daily process plans is a must </li></ul>
  4. 4. <ul><li>Integrating risk control in process plans does not necessarily increase cost </li></ul><ul><li>Not unless you are buying exotic, risk modeling black box generators of random outcomes </li></ul><ul><li>Not unless you are letting your software vendor drive your process. </li></ul><ul><li>Not unless you are letting your consultant bring in his standard options </li></ul>
  5. 5. <ul><li>Outside consultants and software vendors may assist Risk efforts, not lead. </li></ul><ul><li>Consultants and global expertise help make risk technologies foolproof. </li></ul><ul><li>IT vendors help in close knit data feedback and process integration </li></ul><ul><li>They are important and helpful, as long as you control the midfield game. </li></ul><ul><li>Your Risk Manager must be experienced, accountable and empowered </li></ul>
  6. 6. <ul><li>Your Risk manager is your COO, the operations boss who is all powerful, but will sink if your projects fail </li></ul><ul><li>Your Risk manager is your FDIC Chief, the guy or gal who will be on the hot seat if your banks start popping, but must have the full authority to intervene and control. </li></ul><ul><li>Your Risk Manager is your ultimate whistleblower, who could yellow and red card the players, and stop the game temporarily or permanently. </li></ul>
  7. 7. <ul><li>If you manage your Risk well, you will win fewer battles </li></ul><ul><li>If you manage Risk well, you will loose none. </li></ul>
  8. 8. <ul><li>What is a Risk ? </li></ul><ul><li>It is not an uncertainty but a distinct probability of an opportunity or a threat. </li></ul>
  9. 9. <ul><li>What is a systemic Risk </li></ul><ul><li>It is a system at risk. Like in the interlinked financial markets. It happens when multiple individual failures are ignored over a period of time and threats are allowed to grow till the system collapses </li></ul>
  10. 10. <ul><li>How did Credit derivatives bring about a systemic Risk </li></ul><ul><li>The credit derivatives allowed investors to express their credit more efficiently and flexibly, and mitigate credit risk by spreading it among a wider group of investors. </li></ul><ul><li>The problem was these same circumstances magnified systemic risk, especially given the difficulty of identifying the counterparties and pinpointing where credit risk ultimately resided </li></ul>
  11. 11. <ul><li>Why does a systemic Risk cause a collapse at the financial markets? </li></ul><ul><li>Due to a defect in the risk models being used. </li></ul><ul><li>Due to regulator incompetence or regulator connivance. </li></ul><ul><li>Due to political support to enable ballooning of GDP for high debt budgeting </li></ul>
  12. 12. <ul><li>How to avoid systemic Risk? </li></ul><ul><li>By appointing a systemic risk council, a regulatory authority of several regulators, so that the system works without manipulation and fraud. </li></ul><ul><li>By choosing a multi-nation monitoring system like the EU systemic risk council, so that transparency is universal </li></ul>
  13. 13. <ul><li>How to avoid systemic Risk? </li></ul><ul><li>By controlling (volatility) variance against the route map using analytical risk modeling tools and tracking mechanisms. </li></ul><ul><li>By taxing the players as their risk taking grows. Using dynamic cess models to tax the excessive risk takers that ensures that common man won’t be taxed even when the ( too big to fail) TBTF player defaults and requires bailouts. </li></ul>
  14. 14. <ul><li>Risk management is a time bound activity </li></ul><ul><li>Because risk causes are always dynamic </li></ul><ul><li>Because linear and complex variables affect the volatility and the variance from time to time. </li></ul>
  15. 15. <ul><li>Risk management is a time bound activity </li></ul><ul><li>If you don’t tackle opportunities early, you could loose it </li></ul><ul><li>If you don’t tackle threats early, it could turn you into a looser. </li></ul>
  16. 16. <ul><li>So, when you set your route map, remember to update it at timely intervals </li></ul><ul><li>Setting the route map based on historical data is easy </li></ul><ul><li>Updating the route map by incorporating the effect of variables is complex </li></ul><ul><li>It is the Risk manager who must periodically update the route map </li></ul>
  17. 17. <ul><li>For market based and credit based risks, this updating can be at regular time intervals </li></ul><ul><li>For market based & credit bases risks, this updating can be limit controlled </li></ul>
  18. 18. <ul><li>For operational risks this updating is both at fixed intervals as well as continuous </li></ul><ul><li>For operational risks like project and technology risks, can occur at any time. </li></ul><ul><li>This is why operational risks are more complex and difficult to handle </li></ul><ul><li>Hence predictive analytics have to be used in projects instead of classical methods or VaR to ensure lower failure rates. </li></ul>
  19. 19. <ul><li>Predictive analytics is a time based phenomenon </li></ul><ul><li>Predictive analytics is an incidence based phenomenon </li></ul><ul><li>You predict based on the prices in the marketplace </li></ul><ul><li>You predict based on the current happenings and the credit inflows </li></ul><ul><li>You predict based on operational and non-operational inputs </li></ul><ul><li>You predict based on variance outputs to the route map </li></ul>
  20. 20. <ul><li>Developing the boundary conditions Ba32 </li></ul><ul><li>Boundary Conditions are shortlisted from the list of expected and un-expected Risks </li></ul><ul><li>This short listing is done by the Project Manager or Risk Manager who is the hands on Project Expert and not by the external consultants. </li></ul>
  21. 21. <ul><li>Boundary conditions give binding metric for the predictors in analytics </li></ul><ul><li>This binding metric is time adjusted, could be different for bull phase or bear markets . Hence the development of boundary conditions is time based and situation bound. </li></ul><ul><li>The development of boundary conditions is from project checklists, </li></ul><ul><li>(grass-root level) </li></ul>
  22. 22. <ul><li>Defining the Boundary limits in the TCM </li></ul><ul><li>Boundary conditions may permit a boundary limit of a higher Beta value of 1.3 if the value of slope gradient ratio is at 1:30. </li></ul><ul><li>If the slope gradient ratio is steep at 1:4 the permissible boundary limit Beta value may be perhaps only 1.1 in the TCM </li></ul>
  23. 23. <ul><li>What is the TCM ? </li></ul><ul><li>( Time Cycle Module ) </li></ul><ul><li>The Time Cycle Module is the unit of time (a week, a month, or an hour) in which any large activity is divided into rationalized equitable modules of work to achieve optimum resource utilization. </li></ul><ul><li>Ref : The Project Management Time Cycle : Time Cycle Module (ISBN 1440493332) </li></ul><ul><li>Defining the Time Cycle Module TCM : Ref: Managing Risks in Business : (Ba01) </li></ul>
  24. 24. <ul><li>The TCM for boundary limits will depend on what to protect (Ba 32) </li></ul><ul><li>The TCM for boundary limits will depend on how to protect (Ba 32) </li></ul><ul><li>The TCM for boundary limits will depend on the route map (Ba 32) </li></ul><ul><li>The TCM for boundary limits will depend on the segmentation ( Ba32 </li></ul><ul><li>The TCM for boundary limits will also depend on boundary conditions (Ba 32) </li></ul>
  25. 25. <ul><li>“ What to protect” affects the Time Cycle (TCM) of Risk </li></ul><ul><li>If your Risk is a genetic change, your observation Time Cycle could be a nano-second </li></ul><ul><li>For it is the process that will influence the Time Cycle TCM of what to protect. </li></ul><ul><li>It could be the sub-zero conditions or high pressures time cycles that w ould decide TCM in a science / metallurgy project </li></ul><ul><li>It could be the seasons and demand and supply position that could be a guiding factor in the commodities or grain markets </li></ul>
  26. 26. <ul><li>How to protect” has its effect on the Time Cycle (TCM) of Risk </li></ul><ul><li>Protection from Risk is a matter of need , value, budget and many other things. </li></ul><ul><li>The oldest form of Risk Management was to retain an industry veteran to supervise </li></ul><ul><li>This experienced professional used all his skills and expertise to create a hands-on checklist based Risk Management system keeping the industry safe and running for years. As the targets and returns were healthy but never over-ambitious, they managed Risk at the lowest cost by using common-sense, alertness, diligence, experience. </li></ul>
  27. 27. <ul><li>“ How to protect” has its effect on the Time Cycle (TCM) of Risk </li></ul><ul><li>Large Projects conduct Risk audits once every year or every quarter </li></ul><ul><li>Some who do not do so, conduct Risk audits when accidents increase </li></ul><ul><li>Several public corporations, Banks & financial institutions b uy expensive black box generators of random outcomes that relieve risk managers of cerebral involvement but as we now know fail s when it matter s most, triggering a systemic risk collapse. </li></ul>
  28. 28. <ul><li>“ How to protect” has its effect on the Time Cycle (TCM) of Risk </li></ul><ul><li>Yet others wove it into their process and started in house data mining, collaborative filtering or neural network analysis, cluster analysis or opinion markets all branching out from variance based predictive analytics by sampling output data and integrating input variables </li></ul>
  29. 29. <ul><li>“ The route map” affects the Time Cycle (TCM) of Risk. </li></ul><ul><li>Few Route maps could require daily monitoring </li></ul><ul><li>Others could be functional based on weekly or monthly data </li></ul><ul><li>Yet others could be monitored only when pre-set alarms go off like in process control </li></ul>
  30. 30. <ul><li>The segmentation also affects the Time Cycle (TCM) of Risk </li></ul><ul><li>Segmentation as per pattern, associations, hierarchy, class, intensity or any other selected metric are formed based on common traits (clusters) . At </li></ul><ul><li>times these trends are seasonal, as in commodities markets or could be based on daytime patterns as in a departmental store monitoring customer trends or as per cluster forms as at peak hours in the case of traffic control </li></ul>
  31. 31. <ul><li>For framework of case-study refer earlier presentation Ba31 </li></ul><ul><li> </li></ul>Case : Risk Measurement for the product launch of an aerated soft drink. Project Name : Zephyr Vertical : FMCG Domain : Marketing & Advertisement Deliverable : Brand launch of a new soft drink Vehicle : Promotional campaign for the launch Association : Taste association with Brand name Taste : Tangy, “zyzy” taste at the tip of the tongue Campaign : A promotional campaign to match the unforgettable “zyzy” taste Case Study of product launch of a soft drink brand . (In continuation to our previous presentations Ba31 & Ba 32)
  32. 32. Case study: Ba 31 and Ba 32 discusses the frame work and the terms of reference and part of the route mapping till Boundary conditions. <ul><li>TERMS OF </li></ul><ul><li>REFERENCE </li></ul>Product Quality : A fizzy drink blended with a salt that is mildly pungent and tickles (irritates) the skin at the tongue tip for a few minutes. A matching promotional campaign that creates the feel Project Cost : Launch cost US$45 million Project Time : To kill point in 20 weeks Risk : Insignificant market response TERMS OF REFERENCE
  33. 33. <ul><li>Case study of Operational Risk : The product launch of a soft drink brand </li></ul><ul><li>For Route map, identification of variables, adapting on route map, doing the segmentation, framing the boundary conditions – refer our earlier presentation Ba 32 </li></ul> Drawing the Route Map The Scope Constraint The fizzy Drink Identifying Variables Taste attributes Promotion Attributes Adapting on route map Sample tests For taste co-relation For promotion success Do segmentation Taste segments Physical sampling Chemical tests Promotion segments Brand Recall Market Survey Boundary Conditions Taste attributes Fizzy, Tangy, Pungent Promotion attributes Too verbose, poor recall Strategy attributes Rival product launch
  34. 34. <ul><li>Setting time limits for Boundary conditions </li></ul><ul><li>Boundary conditions in above case study Ba 32 have been identified as </li></ul><ul><li>Taste attributes </li></ul><ul><li>Promotion attributes </li></ul><ul><li>Strategy attributes </li></ul>
  35. 35. <ul><li>For Taste Attributes variables are to be identified with the help of chemical testing and physical testing </li></ul><ul><li>So time limits need to be set for chemical testing of the soft drink as well as its physical testing </li></ul><ul><li>That further depends on the feedbacks of the samplers tasting the product and the sample size and location of the sample group. </li></ul><ul><li>More you are away from your route map during the testing phase, the more no of sample tests you need to conduct. </li></ul>
  36. 36. <ul><li>Insuring your Risk in TCM does not mean finding a third party Insurer.It means simply allocating more resources on that activity to ensure that it is foolproof . </li></ul><ul><li>To minimize risk you can increase the sample size or have 3 or 4 separate taster groups. However costs and time both increase with higher sample sizes </li></ul><ul><li>However only when you risk analyze all your activities, will you know where to judiciously spend that resource for maximum effect . </li></ul>
  37. 37. <ul><li>When America fought the Vietnam war, it resorted to carpet bombing. It had the excess resource and firepower to spend and thought that was the easiest route to victory </li></ul>
  38. 38. <ul><li>When China fought the proxy war in Vietnam they deployed guerilla warfare tactics. Here each enemy soldier was tracked one by one in the deep forests and killed by surprise individual attacks. Resources used were lesser, but effort and tracking skills needed were phenomenal </li></ul>
  39. 39. <ul><li>Risk Analysis in the TCM is like guerilla warfare </li></ul><ul><li>You set the route map to the target point </li></ul><ul><li>Keenly track and analyze the enemies (variance) within </li></ul><ul><li>Then allocate resources to shoot down the volatilities </li></ul>
  40. 40. <ul><li>Of course you can use the American way of carpet bombing too </li></ul><ul><li>Use the black box generator of random outcomes!!!! </li></ul><ul><li>They require little human skill, but they are expensive solutions. </li></ul><ul><li>And of course you could still mess up using random fire and get shot, like they did in the recent housing credit crisis. </li></ul>
  41. 41. <ul><li>For promotion attributes, variables are to be identified with the help of brand recalls and market surveys. </li></ul><ul><li>Brand recall tests can be either mock tests giving a group of respondents a set of similar case studies to determine recall. The time cycle for this can be set at periodic intervals. </li></ul><ul><li>Market surveys are conducted on random customer groups to </li></ul><ul><li>get market feedback on a product under development . The time cycle for this depends on the product development stages and could be once or twice during the pre-launch period </li></ul>
  42. 42. <ul><li>Setting the time cycle for strategy is both critical and difficult </li></ul><ul><li>It is a spot on decision by the man in command after observing and analyzing the ground conditions and the variance </li></ul><ul><li>This is an operational risk of the highest importance and is critical to the TCM risk management procedure </li></ul><ul><li>Operational strategy risk could be bpth expected and unexpected </li></ul>
  43. 43. <ul><li>Setting the time cycle for strategy is check list based </li></ul><ul><li>It includes all linear and complex variable inputs that could affect outcomes </li></ul><ul><li>It includes from the daily outputs the analysis of volatility and variance from the route map updated till the current period. </li></ul><ul><li>The Risk Manager must individually monitor the strategy risk and decide action on merit. </li></ul>
  44. 44. <ul><li>Thus time period (TCM) of evaluation of business risk depends on the route map, the segmentation & the boundary conditions </li></ul><ul><li>The boundary conditions are set as per the acceptable quality variations within the Time cycle Module. </li></ul><ul><li>Hence after the Time Cycle has been decided we now set out (in the next show of the series Ba34) to find the acceptable quality or variance limits over the time period. </li></ul>
  45. 45. <ul><li>This slide show is a sequel to our earlier presentations already AVAILABLE AT SLIDESHARE </li></ul><ul><li>Living Dangerously : </li></ul><ul><li>Managing Risks in Business Ba01 </li></ul><ul><li>Business Risk Case study : </li></ul><ul><li>Laying down the framework : Ba 31 </li></ul><ul><li>Business Risk Case study : </li></ul><ul><li>Identifying boundary conditions & inputs required for analysis: Ba 32 </li></ul><ul><li>OTHERS IN PIPELINE due shortly </li></ul><ul><li>Specifying the terms of reference of acceptable quality Ba 34 </li></ul><ul><li>Identifying the relevant predictors Ba 35 </li></ul><ul><li>Investigating the Risk cause Ba 36 </li></ul><ul><li>Measuring Risk and determining the Value at Risk Ba 37 </li></ul><ul><li>Formulating the Risk Response Ba 38 </li></ul><ul><li>Risk margin and transferring of Risk Ba 39 </li></ul><ul><li>Mitigating Threat by sacrificing Opportunity Ba 40 </li></ul>
  46. 46. References: The Project Management Time Cycle – Vol. I TIME CYCLE MODULE: From concept to feasibility ISBN 1440493332 (find at Amazon) Economy to Ecology: Our goal is to help promote clean, safe and better practices in economy and ecology worldwide. Balanced, efficient and a little more sustainable. Kindle Blog Ecothrust ASIN: B0029ZAUAY Acknowledgements: To our Art Director Katerina Voutsara To Google, flickr and other image sources. For any queries mail to Sandip Sen [email_address]
  47. 47. Other presentations in this series Business Risk management Series Business Risk Case Studies Ba31 Business Risk Case Studies Ba32