Business Risk Business Risk Case Study - Ba33Case Study - Ba33

Deciding the Time Cycle for Risk MeasurementDeciding the Time Cycle for Risk Measurement

““Business Risk Management” Series Business Risk Management” Series

By Sandip Sen & Katerina Voutsara By Sandip Sen & Katerina Voutsara

Can you say, “I will drive Can you say, “I will drive safely, every Friday safely, every Friday

MorningMorning?? “ “

No, because you No, because you will crash and die will crash and die before Friday.before Friday.

Risk control is everyday Risk control is everyday businessbusiness

Integrating risk control Integrating risk control in your daily process in your daily process plans is a mustplans is a must

Integrating risk control in Integrating risk control in process plans does not process plans does not necessarily increase costnecessarily increase cost

Not unless you are buying Not unless you are buying

exotic, risk modeling exotic, risk modeling black box generators of black box generators of random outcomesrandom outcomes

Not unless you are letting Not unless you are letting

your software vendor your software vendor drive your process.drive your process.

Not unless you are letting Not unless you are letting your consultant bring in your consultant bring in his standard optionshis standard options

Outside consultants and Outside consultants and software vendors may assist software vendors may assist Risk efforts, not lead.Risk efforts, not lead.

Consultants and global Consultants and global expertise help make risk expertise help make risk technologies foolproof.technologies foolproof.

IT vendors help in close knit IT vendors help in close knit

data feedback and process data feedback and process integrationintegration

They are important and They are important and

helpful, as long as you control helpful, as long as you control the midfield game.the midfield game.

Your Risk Manager must be Your Risk Manager must be experienced, accountable and experienced, accountable and empoweredempowered

Your Risk manager is your Your Risk manager is your COO, the operations boss COO, the operations boss who is all powerful, but who is all powerful, but will sink if your projects will sink if your projects failfail

Your Risk manager is your Your Risk manager is your

FDIC Chief, the guy or gal FDIC Chief, the guy or gal who will be on the hot who will be on the hot seat if your banks start seat if your banks start popping, but must have popping, but must have the full authority to the full authority to intervene and control.intervene and control.

Your Risk Manager is your Your Risk Manager is your ultimate whistleblower, ultimate whistleblower, who could yellow and red who could yellow and red card the players, and stop card the players, and stop the game temporarily or the game temporarily or permanently.permanently.

If you manage If you manage your Risk well, your Risk well, you will win you will win fewer battlesfewer battles

If you manage If you manage

Risk well, you Risk well, you will loose none.will loose none.

What is a Risk ?What is a Risk ?

It is not an uncertainty It is not an uncertainty but a distinct but a distinct probability of an probability of an opportunity or a threat.opportunity or a threat.

What is a systemic What is a systemic RiskRisk

It is a system at risk. It is a system at risk. Like in the Like in the interlinked financial interlinked financial markets. It happens markets. It happens when multiple when multiple individual failures individual failures are ignored over a are ignored over a period of time and period of time and threats are allowed threats are allowed to grow till the to grow till the system collapsessystem collapses

How did Credit derivatives How did Credit derivatives bring about a systemic Riskbring about a systemic Risk

The credit derivatives allowed The credit derivatives allowed investors to express their credit investors to express their credit more efficiently and flexibly, and more efficiently and flexibly, and mitigate credit risk by spreading it mitigate credit risk by spreading it among a wider group of among a wider group of investors.investors.

The problem was these same The problem was these same circumstances magnified circumstances magnified systemic risk, especially given systemic risk, especially given the difficulty of identifying the the difficulty of identifying the counterparties and pinpointing counterparties and pinpointing where credit risk ultimately where credit risk ultimately residedresided

Why does a systemic Why does a systemic Risk cause a collapse at Risk cause a collapse at the financial markets?the financial markets?

Due to a defect in the Due to a defect in the risk models being used.risk models being used.

Due to regulator Due to regulator incompetence or incompetence or regulator connivance.regulator connivance.

Due to political support Due to political support to enable ballooning of to enable ballooning of GDP for high debt GDP for high debt budgetingbudgeting

How to avoid How to avoid systemic Risk?systemic Risk?

By appointing a systemic By appointing a systemic risk council, a regulatory risk council, a regulatory authority of several authority of several regulators, so that the regulators, so that the system works without system works without manipulation and fraud.manipulation and fraud.

By choosing a multi-By choosing a multi-nation monitoring nation monitoring system like the EU system like the EU systemic risk council, so systemic risk council, so that transparency is that transparency is universaluniversal

How to avoid systemic How to avoid systemic Risk?Risk?

By controlling (volatility) By controlling (volatility) variance against the route variance against the route map using analytical risk map using analytical risk modeling tools and tracking modeling tools and tracking mechanisms.mechanisms.

By taxing the players as their By taxing the players as their risk taking grows. Using risk taking grows. Using dynamic cess models to tax dynamic cess models to tax the excessive risk takers that the excessive risk takers that ensures that common man ensures that common man won’t be taxed even when the won’t be taxed even when the ( too big to fail) TBTF player ( too big to fail) TBTF player defaults and requires bailouts. defaults and requires bailouts.

Risk management is Risk management is a time bound a time bound activityactivity

Because risk causes Because risk causes are always dynamicare always dynamic

Because linear and Because linear and complex variables complex variables affect the volatility affect the volatility and the variance and the variance from time to time. from time to time.

Risk management is Risk management is a time bound activitya time bound activity

If you don’t tackle If you don’t tackle opportunities early, opportunities early, you could loose it you could loose it

If you don’t tackle If you don’t tackle threats early, it could threats early, it could turn you into a turn you into a looser.looser.

So, when you set So, when you set your route map, your route map, remember to update remember to update it at timely intervalsit at timely intervals

Setting the route map Setting the route map based on historical based on historical data is easydata is easy

Updating the route Updating the route map by incorporating map by incorporating the effect of variables the effect of variables is complexis complex

It is the Risk manager It is the Risk manager who must periodically who must periodically update the route map update the route map

For market based For market based and credit based and credit based risks, this updating risks, this updating can be at regular can be at regular time intervalstime intervals

For market based & For market based & credit bases risks, credit bases risks, this updating can this updating can be limit controlledbe limit controlled

For operational risks this For operational risks this updating is both at fixed updating is both at fixed intervals as well as intervals as well as continuous continuous

For operational risks like For operational risks like project and technology project and technology risks, can occur at any risks, can occur at any time.time.

This is why operational This is why operational risks are more complex risks are more complex and difficult to handleand difficult to handle

Hence predictive Hence predictive analytics have to be used analytics have to be used in projects instead of in projects instead of classical methods or VaR classical methods or VaR to ensure lower failure to ensure lower failure rates. rates.

Predictive analytics is a time Predictive analytics is a time based phenomenonbased phenomenon

Predictive analytics is an Predictive analytics is an incidence based incidence based phenomenonphenomenon

You predict based on the You predict based on the prices in the marketplaceprices in the marketplace

You predict based on the You predict based on the current happenings and the current happenings and the credit inflows credit inflows

You predict based on You predict based on operational and non-operational and non-operational inputsoperational inputs

You predict based on You predict based on

variance outputs to the route variance outputs to the route mapmap

Developing the Developing the boundary boundary conditionsconditions Ba32Ba32

Boundary Conditions are Boundary Conditions are shortlisted from the list of shortlisted from the list of expected and un-expected expected and un-expected RisksRisks

This short listing is done by This short listing is done by the Project Manager the Project Manager or Risk or Risk Manager Manager who is the hands on who is the hands on Project Expert and not by the Project Expert and not by the external consultants.external consultants.

Boundary conditions give Boundary conditions give binding metric for the binding metric for the predictors in analytics predictors in analytics

This binding metric is time This binding metric is time adjusted, could be different adjusted, could be different for bull phase or bear for bull phase or bear marketsmarkets.. Hence the Hence the development of boundary development of boundary conditions is time based conditions is time based and situation bound.and situation bound.

The development of The development of boundary conditions is boundary conditions is from project checklists,from project checklists,

(grass-root level)(grass-root level)

Defining the Boundary Defining the Boundary limits in the TCMlimits in the TCM

Boundary conditions may permit Boundary conditions may permit a boundary limit of a higher Beta a boundary limit of a higher Beta value of 1.3 if the value of slope value of 1.3 if the value of slope gradient ratio is at 1:30. gradient ratio is at 1:30.

If the slope gradient ratio is steep If the slope gradient ratio is steep at 1:4 the permissible boundary at 1:4 the permissible boundary limit Beta value may be perhaps limit Beta value may be perhaps only 1.1only 1.1 in the TCM in the TCM

What is the What is the TCM ?TCM ? ((Time Cycle ModuleTime Cycle Module))

The Time Cycle Module is the The Time Cycle Module is the unit of time (a week, a month, unit of time (a week, a month, or an hour) in which any large or an hour) in which any large activity is divided into activity is divided into rationalized equitable modules rationalized equitable modules of work to achieve optimum of work to achieve optimum resource utilization. resource utilization.

Ref : The Project Management Ref : The Project Management Time Cycle : Time Cycle Time Cycle : Time Cycle Module (ISBN 1440493332)Module (ISBN 1440493332)

Defining the Time Cycle Module Defining the Time Cycle Module

TCMTCM : Ref: Managing Risks in : Ref: Managing Risks in Business :Business : (Ba01) (Ba01)

The TCM for boundary limits will The TCM for boundary limits will depend on what to protect (Ba depend on what to protect (Ba 32)32)

The TCM for boundary limits will The TCM for boundary limits will

depend on how to protect (Ba 32) depend on how to protect (Ba 32)

The TCM for boundary limits will The TCM for boundary limits will depend on the route map (Ba 32)depend on the route map (Ba 32)

The TCM for boundary limits will The TCM for boundary limits will depend on the segmentation ( Ba32depend on the segmentation ( Ba32

The TCM for boundary limits will The TCM for boundary limits will

also depend on boundary conditions also depend on boundary conditions

(Ba 32)(Ba 32)

““What to protect” affects the What to protect” affects the Time Cycle (TCM) of RiskTime Cycle (TCM) of Risk

If your Risk is a genetic If your Risk is a genetic change, your observation Time change, your observation Time Cycle could be a nano-secondCycle could be a nano-second

For it is the process that will For it is the process that will influence the Time Cycle TCM influence the Time Cycle TCM of what to protect.of what to protect.

It could be the sub-zero It could be the sub-zero

conditions or high pressures conditions or high pressures time cycles time cycles that that wwould decide ould decide TCM TCM in a science in a science / / metallurgy metallurgy projectproject

It could be the seasons and It could be the seasons and

demand and supply position demand and supply position that could be a guiding factor that could be a guiding factor in the commodities or grain in the commodities or grain marketsmarkets

How to protect” has its effect on How to protect” has its effect on the Time Cycle (TCM) of Risk the Time Cycle (TCM) of Risk

Protection from Risk is a matter Protection from Risk is a matter of of need need, , value, value, budget and many budget and many other things.other things.

The oldest form of Risk The oldest form of Risk Management was to retain an Management was to retain an industry veteran to superviseindustry veteran to supervise

This experienced professional This experienced professional used all his skills and expertise used all his skills and expertise to to createcreate a hands-on checklist a hands-on checklist based Risk Managementbased Risk Management system system keeping the industry safe and keeping the industry safe and running for years. As the targets running for years. As the targets and returns were healthy but and returns were healthy but never over-ambitious, they never over-ambitious, they managed Risk at the lowest cost managed Risk at the lowest cost by using common-sense, by using common-sense, alertness, diligence, experience.alertness, diligence, experience.

““How to protect” has its effect How to protect” has its effect on the Time Cycle (TCM) of on the Time Cycle (TCM) of RiskRisk

Large Projects conduct Risk Large Projects conduct Risk audits once every year or audits once every year or every quarterevery quarter

Some who do not do so, Some who do not do so, conduct Risk audits when conduct Risk audits when accidents increaseaccidents increase

Several public Several public corporations, Banks & corporations, Banks & financial institutions bfinancial institutions buyuy expensive black box expensive black box generators of random generators of random outcomes that relieveoutcomes that relieve risk risk managers of cerebral managers of cerebral involvement but as we now involvement but as we now know failknow fails s when it matterwhen it matterss most, triggering a systemic most, triggering a systemic risk collapse.risk collapse.

““How to protect” has its effect on How to protect” has its effect on the Time Cycle (TCM) of Riskthe Time Cycle (TCM) of Risk

Yet others wove it into their Yet others wove it into their process and started in house data process and started in house data mining, collaborative filtering or mining, collaborative filtering or neural network analysis, cluster neural network analysis, cluster analysis or opinion markets all analysis or opinion markets all branching out from variance based branching out from variance based predictive analyticspredictive analytics by by sampling sampling output data and integrating input output data and integrating input variablesvariables

““The route map” affects the The route map” affects the Time Cycle (TCM) of Risk.Time Cycle (TCM) of Risk.

Few Route maps could require Few Route maps could require daily monitoringdaily monitoring

Others could be functional Others could be functional based on weekly or monthly based on weekly or monthly datadata

Yet others could be monitored Yet others could be monitored only when pre-set alarms go off only when pre-set alarms go off like in process controllike in process control

The segmentation also affects The segmentation also affects the Time Cycle (TCM) of Riskthe Time Cycle (TCM) of Risk

Segmentation as per pattern, Segmentation as per pattern, associations, hierarchy, class, associations, hierarchy, class, intensity or any other selected intensity or any other selected metric are formed based on metric are formed based on common traits (clusters) . At common traits (clusters) . At

times these trends are seasonal, times these trends are seasonal, as in commodities markets or as in commodities markets or could be based on daytime could be based on daytime patterns as in a departmental patterns as in a departmental store monitoring customer store monitoring customer trends or as per cluster forms as trends or as per cluster forms as at peak hours in the case of at peak hours in the case of traffic controltraffic control

For framework of case-study refer earlier presentation Ba31http://bit.ly/LJofP

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)

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.

TERMS OF

REFERENCE

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

ProjectTime :To kill point in 20

weeks

Risk :Insignificant market response

TERMS OF REFERENCE

Case study of Operational Risk : The product launch of a soft drink brand

For Route map, identification of variables, adapting on route map, doing the segmentation, framing the boundary conditions – refer our earlier presentation Ba 32

http://tinyurl.com/lnkv9hhttp://tinyurl.com/lnkv9h

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

Setting time limits for Setting time limits for Boundary conditionsBoundary conditions

Boundary conditions in above case study Ba 32 have been identified as

Taste attributes Promotion attributes Strategy attributes

For Taste Attributes variables For Taste Attributes variables are to be identified with the are to be identified with the help of chemical testing and help of chemical testing and physical testingphysical testing

So time limits need to be set for chemical testing of the soft drink as well as its physical testing

That further depends on the feedbacks of the samplers tasting the product and the sample size and location of the sample group.

More you are away from your route map during the testing phase, the more no of sample tests you need to conduct.

Insuring your Risk in TCM Insuring your Risk in TCM does not mean finding a does not mean finding a third party Insurer.It means third party Insurer.It means simply allocating more simply allocating more resources on that activity to resources on that activity to ensure that it is foolproofensure that it is foolproof..

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

However only when you risk analyze all your activities, will you know where to judiciously spend that resource for maximum effect.

When America fought the When America fought the Vietnam war, it resorted to Vietnam war, it resorted to carpet bombing. It had the carpet bombing. It had the excess resource and firepower excess resource and firepower to spend and thought that was to spend and thought that was the easiest route to victorythe easiest route to victory

When China fought When China fought the proxy war in the proxy war in Vietnam they Vietnam they deployed guerilla deployed guerilla warfare tactics. warfare tactics. Here each enemy Here each enemy soldier was tracked soldier was tracked one by one in the one by one in the deep forests and deep forests and killed by surprise killed by surprise individual attacks. individual attacks. Resources used Resources used were lesser, but were lesser, but effort and tracking effort and tracking skills needed were skills needed were phenomenalphenomenal

Risk Analysis in the TCM Risk Analysis in the TCM is like guerilla warfareis like guerilla warfare

You set the route map to You set the route map to the target pointthe target point

Keenly track and analyze the enemies (variance) within

Then allocate resources to shoot down the volatilities

Of course you can use the Of course you can use the American way of carpet American way of carpet bombing toobombing too

Use the black box generator Use the black box generator of random outcomes!!!!of random outcomes!!!!

They require little human skill, They require little human skill, but they are expensive but they are expensive solutions.solutions.

And of course you could And of course you could still mess up using still mess up using random fire and get random fire and get shot, like they did in the shot, like they did in the recent housing credit recent housing credit crisis.crisis.

For promotion attributes, variables are to be identified with the help of brand recalls and market surveys.

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.

Market surveys are conducted on random customer groups to

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

Setting the time cycle for strategy is both critical and difficult

It is a spot on decision by the man in command after observing and analyzing the ground conditions and the variance

This is an operational risk of

the highest importance and is critical to the TCM risk management procedure

Operational strategy risk could be bpth expected and unexpected

Setting the time cycle for Setting the time cycle for strategy is check list basedstrategy is check list based

It includes all linear and It includes all linear and complex variable inputs that complex variable inputs that could affect outcomescould affect outcomes

It includes from the daily It includes from the daily outputs the analysis of outputs the analysis of volatility and variance from volatility and variance from the route map updated till the route map updated till the current period.the current period.

The Risk Manager must The Risk Manager must individually monitor the individually monitor the strategy risk and decide strategy risk and decide action on merit.action on merit.

Thus time period (TCM) of Thus time period (TCM) of evaluation of business risk evaluation of business risk depends on the route map, depends on the route map, the segmentation & the the segmentation & the boundary conditionsboundary conditions

The boundary conditions are set as per the acceptable quality variations within the Time cycle Module.

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.

This slide show is a sequel to our earlier presentations already AVAILABLE AT SLIDESHARE

Living Dangerously : Managing Risks in Business Ba01 Business Risk Case study : Laying down the framework : Ba 31 n Business Risk Case study : Identifying boundary conditions &

inputs required for analysis: Ba 32

OTHERS IN PIPELINE due shortly Specifying the terms of reference of

acceptable quality Ba 34 Identifying the relevant predictors Ba 35 Investigating the Risk cause Ba 36 Measuring Risk and determining the Value at

Risk Ba 37 Formulating the Risk Response Ba 38 Risk margin and transferring of Risk Ba 39 Mitigating Threat by sacrificing Opportunity

Ba 40

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 VoutsaraTo Google, flickr and other image sources.

For any queries mail to Sandip Sen sen.sandip@gmail.com

Other presentations in this series

Business Risk management Serieshttp://www.slideshare.net/SandipSen/living-dangerously-managing-risks-in-business-ba01ppt

Business Risk Case Studies Ba31http://www.slideshare.net/SandipSen/business-risk-case-study-ba31

Business Risk Case Studies Ba32

http://www.slideshare.net/SandipSen/business-risk-case-study-ba-32-1751378