• Enterprise risk management in business includes the methods and processes used by organizations to manage risks and seize opportunities related to the achievement of their objectives. ERM provides a framework for risk management, which typically involves identifying particular events or circumstances relevant to the organization's objectives (risks and opportunities), assessing them in terms of likelihood and magnitude of impact, determining a response strategy, and monitoring progress. By identifying and proactively addressing risks and opportunities, business enterprises protect and create value for their stakeholders, including owners, employees, customers, regulators, and society overall.

Companies now think in terms of two factors: oversight and management.

• “Risk oversight” is how a company’s owners govern the processes for identifying, prioritizing, and managing critical risks, and for ensuring that these processes are continually reviewed.
• “Risk management” refers to the detailed procedures and policies for avoiding or reducing risks.

Risk types

• Strategic risks
  • Integration problems arising from a merger or acquisition
  • Changes in the market such as a new competitor or changes in demand
  • New technologies that threaten your business model
  • Political / Economic instability in an export market
• Operational risks
  • Breakdown of key equipment
  • Supply other problems: late delivery, quality issues, etc.
  • IT failure: loss of data, damage due to viruses or hackers
  • Poor accounting that fails to show the real financial situation
  • Employee issues: recruitment difficulties, lack of people with the right skillset, etc.
• Financial risks
  • Cash flow (.i.e. liquidity) problems
  • Bad debt
  • Increased bank charges on a loan (more expensive credit)
  • Changes in foreign exchange rates
  • Embezzlement ( = when someone steals money from their own company)
• Failure compliance (with new laws)
  • New employment legistlation
  • New health and safety legislation
• Hazard risks
  • Liability torts
  • Property damage
  • Natural catastrophe

Scenario planning, also called scenario thinkingor scenario analysis, is a strategic planning method that some organizations use to make flexible long-term plans. It is in large part an adaptation and generalization of classic methods used by military intelligence.

Scenario planning may involve aspects of systems thinking, specifically the recognition that many factors may combine in complex ways to create sometime surprising futures (due to non-linear feedback loops). The method also allows the inclusion of factors that are difficult to formalize, such as novel insights about the future, deep shifts in values, unprecedented regulations or inventions. Systems thinking used in conjunction with scenario planning leads to plausible scenario story lines because the causal relationship between factors can be demonstrated. In these cases when scenario planning is integrated with a systems thinking approach to scenario development, it is sometimes referred to as dynamic scenarios.

Dr. Vanston provides an overview of the philosophy and methods behind Technology Futures "Five Views of the Future Strategic Framework" for planning and forecasting.

• Extrapolators believe that the future will represent a logical extension of the past. Large scale, inexorable forces will drive the future in a continuous, reasonably predictable manner, and one can, therefore, best forecast the future by identifying past trends and extrapolating them in a reasoned, logical manner.
• Pattern Analysts believe that the future will reflect a replication of past events. Powerful feedback mechanisms in our society, together with basic human drives, will cause future trends and events to occur in identifiable cycles and predictable patterns. Thus, one can best address the future by identifying and analyzing analogous situations from the past and relating them to probable futures.
• Goal Analysts believe that the future will be determined by the beliefs and actions of various individuals, organizations, and institutions. The future, therefore, is susceptible to modification and change by these entities. Thus, the future can best be projected by examining the stated and implied goals of various decision-makers and trend setters, by evaluating the extent to which each can affect future trends and events, and by evaluating what the long-term results of their actions will be.
• Counter Punchers believe that the future will result from a series of events and actions that are essentially unpredictable and, to a large extent, random. Therefore, one can best deal with the future by identifying a wide range of possible trends and events, by carefully monitoring developments in the technical and social environments, and by maintaining a high degree of flexibility in the planning process.
• Intuitors are convinced that the future will be shaped by a complex mixture of inexorable trends, random events, and the actions of key individuals and institutions. Because of this complexity, there is no rational technique that can be used to forecast the future. Thus, the best method for projecting future trends and events is to gather as much information as possible and, then, to depend on subconscious information processing in the brain and personal intuition to provide useful insights.

Black Swan

In The Black Swan: The Impact of the Highly Improbable, Nassim Nicholas Taleb explains how individuals, businesses, and governments place too much weight on the odds that past events will be repeated.

Forecasting the future from the past ignores the fact that the future holds different possibilities, as yet unseen. For example, if you have only ever seen white swans, you might assume that all swans are white; unless you traveled to Australia and chanced upon a black swan. Taleb used the metaphor of the black swan to discuss major scientific discoveries and historical events. These “black swan events” combine low predictability and high impact. Examples include the 9/11 terrorist attacks in the US and the stock market crash of 1987. Taleb states that companies can never predict black swan events, but they do need to build robustness against potential negative eventualities, and be ready to exploit positive ones.

Grove claimed that business data (like white swans) is relevant only to the company’s past, and cannot be used to predict the future. He suggests that when searching for clues about how to deal with the future, executives should look elsewhere, such as scrutinizing any misalignment between the company’s strategy statements and its strategy actions. Actions are driven by the stark reality of having to win business in the marketplace against the competition; a company’s front-line personnel are likely to see and adapt to a new reality first. They are the people best positioned to identify critical issues.

This means that leaders in the organization have to be prepared to listen to people dealing with customers and suppliers—who often tend to be at the lower level of a company’s hierarchy—and absorb what they are saying. For the same reasons, it is just as important for senior management to listen to the kind of information being exchanged in corridor conversations, networking functions, and the general office grapevine as it is for them to use competitive analysis and modeling.

Insurance management

• Liability insurance covers damage caused to other people. An employee might suffer a work-related accident, or a visitor might slip on a polished floor and break an arm. In either case, they can sue you and will try to prove negligence (= failure to take enough care). There is also product liability insurance (in case someone sues you after using a product), and professional indemnity insurance (AmE malpractice insurance) in case a client sues you for making a costly mistake while advising them.
• Property insurance covers damage to the insured’s own property. Damage might be caused by fire, vandalism, etc. The company might also need automobile insurance.
• When you take out an insurance policy (i.e. contract), you make a regular payment called a ’premium’ to an insurer. The policy states how much will be paid and under which circumstances. Read it carefully, check the small print, and in particular check any exclusion clauses. After a year, before the contract expires, you will be sent a renewal notice.
• Insurance is available through several channels: agents (who work directly for one insurance company), independent brokers (who search for the best policy amongst many alternatives) and direct selling (often over the Internet). Agents and brokers work on commission.

• If you need to make a claim, you fill out a form and wait for it to be processed. If the insurance company suspects that you’re underinsured, or claiming too much money, they can appoint a loss adjuster (AmE claims adjuster) to examine the situtation. Eventually, they pay out and you receive your compensation.
• If an insurer feel that they habe been taken on too much risk, then they can go to a reinsurance company to provide cover for themselves.

Exercise 1: Complete this text about risk management with the words in the box.

Exercise 2: Dorfman’s 4 Ts in relations to risk management - Try to fill in the missing gaps with the words!

 Video 1: Deepwater Horizon

The Case: The Deepwater Horizon Fatal Disaster

• The Deepwater Horizonwas an exploratory oil platform located in U.S. waters in the Gulf of Mexico. 
• Transocean, the world’s primary operator of offshore oil rigs, owned this oil platform.
• At the time of the explosion and fire in 2010, the Deepwater Horizon was under contract to BP, which owned the rights to oil exploitation in the Macondo Prospect area of the Gulf.
• Deepwater Horizon’s job was to locate an oil deposit, drill it and move on while another rig exploited the find.
• Additionally, Halliburton, a major supplier of products and services to the energy industry, was under contract to provide the cement foam seal and cement well plugs that would be used to cap the well prior to the crew abandoning the Deepwater Horizon. Schlumberger, a provider of oil and gas technology and analysis, was contracted to analyze data from the well logs.
• But on April 20, 2010, the Deepwater Horizon rig exploded and sank, killing 11 workers and injuring 17 others. It was the largest maritime oil spill in history. Had emergency measures gone as planned, the rig would have been successfully sealed and temporarily abandoned.

Several key human error factors were involved. Correct the mistakes in the text!

1) The Schlumberger team did a full analysis of the geologic safety of the well. The team performed the mud log analysis, but its request to perform a CBL was denied.

The team then requested that kill fluid be dumped down the well. This request was also denied. Schlumberger’s subsequent request for a helicopter and evacuation suggests the company was concerned about the safety of operational decisions regarding the abandonment of the well.

2) The post-disaster hearings did not question whether the cement used by Halliburton to seal the well was in line with industry best practices. Halliburton earlier had pled guilty to charges of destroying the results of two tests on the type of cement used in the Macondo Prospect well.  While the test results were claimed to be satisfactory, the subsequent destruction of the results raises ethical questions and casts doubt on the official claims.

3) Transocean and BP personnel conducted one negative pressure tests to check the safety of the well on the night of the catastrophe. One test was conducted on the main well pipe and the second was conducted on the smaller “kill line.”

There are two pressure gauges in the Deepwater Horizon control room – one for the main pipeline and one for the kill line. A questionable reading on the kill line gauge was misinterpreted, which affected the decision to temporarily abandon the well with the ensuing fatal results.

4) An alarm activated on the Deepwater Horizon rig. The alarm was allegedly placed intentionally in an inhibited state due to an administrative decision. This human error had a considerable impact on the safety of the people onboard the Deepwater Horizon.