Risk Short Definitions

8/2/2019 Risk Short Definitions

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Environment risk

Process risk

Information for decision making risk

Competitor, Customer wants, Technological innovation, Sensitivity, Shareholder relations, Capital,

Sovereign/political, Legal, Regulatory, Industry, Financial markets, Catastrophic loss

Operations Empowerment

Information processing/

technology

Integrity

Financial

Customer satisfactionHuman resources

Knowledge capitalProduct development

EfficiencyCapacity

Performance gapCycle timeSourcing

Channel effectivenessPartneringCompliance

Business interruptionProduct/service failure

Environmental

Health and safetyTrademark/brand erosion

LeadershipAuthority/limit

OutsourcingPerformance incentivesChange readiness

Communications

Relevance

IntegrityAccess

AvailabilityInfrastructure

Management fraud

Employee/third party fraud

Illegal actsUnauthorized use

Reputation

Interest rate

CurrencyEquityCommodityFinancial instrument

Cash flow

Opportunity costConcentration

DefaultConcentration

Settlement

Collateral

Price

Liquidity

Credit

Process/operational Business reporting Environment/strategicProducts/service pricing

Contract commitmentMeasurement (operations)

Alignment

Budget and planning

Accounting informationFinancial reporting evaluation

Taxation

Pension fundInvestment evaluationRegulatory reporting

Environmental scanBusiness modelBusiness portfolio

Valuation

Organization structureMeasurement (strategy)

Resource allocationPlanningLife cycle

Business risk modelShort definitions of business risk


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ENVIRONMENT RISK

Environment risk arises when there are external forces that could affect the viability of theenterprises business model, including the fundamentals that drive the overall objectives andstrategies that define that model.

1. Competitor risk. Actions of competitors or new entrants to the market impair the firmscompetitive advantage or even threaten its ability to survive.

2. Customer wants risk. Pervasive customer needs and wants change and the firm isntaware, e.g. increased demand for faster delivery or turnaround on products and services.

3. Technological innovation risk. The firm is not leveraging advancements in technology inits business model to achieve or sustain competitive advantage or is exposed to theactions of competitors or substitutes that do leverage technology to attain superiorquality, cost and/or time performance in their products, services and processes.

4. Sensitivity risk. Over commitment of resources and expected future cash flows threatensthe firms capacity to withstand changes in environmental forces (e.g. interest rates,market demand, changes in regulations, etc.) beyond its control.

5. Shareholder relations risk. A decline in investor confidence in the firms business modelor ability to execute its model threatens its capacity to efficiently raise capital or sustainshare valuations.

6. Capital availability risk. Insufficient access to capital threatens the firms capacity to grow,execute its business model and generate future financial returns.

7. Sovereign/political risk. Adverse political actions threaten the firms resources and futurecash flows in a country in which the firm has invested significantly, is dependent on asignificant volume of business or has entered into a significant agreement with acounterparty subject to the laws of that country.

8. Legal risk. Changing laws threaten the firms capacity to consummate importanttransactions, enforce contractual agreements or implement specific strategies andactivities.

9. Regulatory risk. Changing regulations threaten the firms competitive position and itscapacity to efficiently conduct business.

10. Industry risk. Changes in opportunities and threats, capabilities of competitors, and otherconditions affecting the firms industry threaten the attractiveness or long-term viability ofthat industry.

11. Financial markets risk. Movements in prices, rates, indices, etc., affect the value of thefirms financial assets and stock price, which may also affect its cost of capital and/or itsability to raise capital.

12. Catastrophic loss risk. A major disaster threatens the firms ability to sustain operations,provide essential products and services or recover operating costs.


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PROCESS RISKProcess risk is the risk that the firms business processes are not effectively acquiring, managing,renewing and disposing the assets of the business; are not clearly defined; are poorly aligned

with the strategies driving the firms business model; are not performing effectively and efficientlyin satisfying customer needs; are not creating value; or are diluting value by exposing significantfinancial, physical, information and intellectual assets to unacceptable losses, risk-taking,misappropriation or misuse. These risks affect the success with which the firm executes itsbusiness model.

A. Operations riskOperations risk is the risk that operations are inefficient and ineffective in executing the firmsbusiness model, satisfying customers and achieving the firms quality, cost and time performanceobjectives.

1. Customer satisfaction risk. A lack of focus on customers threatens the firms capacity tomeet or exceed customer expectations.

2. Human resources risk. A lack of requisite knowledge, skills and experiences among thefirms key personnel threatens the execution of its business model and achievement ofcritical business objectives.

3. Knowledge capital risk. Processes for capturing and institutionalizing learning across thefirm are either non-existent or ineffective, resulting in slow response time, high costs,repeated mistakes, slow competence development, constraints on growth andunmotivated employees.

4. Product development risk. Ineffective product development threatens the firms ability tomeet or exceed customers needs and wants consistently over the long term.

5. Efficiency risk. Inefficient operations threaten the firms capacity to produce goods or

services at or below cost levels incurred by competitors or world-class performingcompanies.

6. Capacity risk. Insufficient capacity threatens the firms ability to meet customer demands,or excess capacity threatens the firms ability to generate competitive profit margins.

7. Performance gap risk. Inability to perform at world-class levels in terms of quality, costand/or cycle time performance due to inferior internal operating practices and/or externalrelationships threatens the demand for the firms products or services.

8. Cycle time risk. Unnecessary activities threaten the firms capacity to develop, produceand deliver goods or services on a timely basis.

9. Sourcing risk. Limited sources of energy, metals and other key commodities, rawmaterials and component parts threaten the firms ability to produce quality products atcompetitive prices on a timely basis.

10. Channel effectiveness risk. Poorly performing or positioned distribution channels threatenthe firms capacity to effectively and efficiently access current and potential customersand end users.

11. Partnering risk. Inefficient or ineffective alliance, joint venture, affiliate and other externalrelationships affect the firms capability to compete; these uncertainties arise due tochoosing the wrong partner, poor execution, taking more than is given (resulting in loss ofa partner) and failing to capitalize on partnering opportunities.


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12. Compliance (Regulatory and Other) Risk. Non-compliance with customer requirements,prescribed organizational policies and procedures or laws and regulations may result in

lower quality, higher production costs, lost revenues, unnecessary delays, penalties,fines, etc.

13. Business interruption risk. Business interruptions stemming from the unavailability of rawmaterials, information technologies, skilled labour, facilities or other resources threatenthe firms capacity to continue operations.

14. Product/service failure risk. Faulty or non-performing products or services expose the firmto customer complaints, warranty claims, field repairs, returns, product liability claims,litigation and loss of revenues, market share and business reputation.

15. Environmental risk. Activities harmful to the environment expose the firm to liabilities forbodily injury, property damage, cost of removal, punitive damages, etc.

16. Health and safety risk. Failure to provide a safe working environment for its workersexposes the firm to compensation liabilities, loss of business reputation and other costs.

17. Trademark/ brand erosion risk. Erosion of a trademark or brand over time threatens thedemand for the firms products or services and impairs its ability to grow future revenuestreams.

B. Financial riskFinancial risk is the risk that cash flows and financial risks are not managed cost-effectively to (a)maximize cash availability, (b) reduce uncertainty of currency, interest rate, credit and otherfinancial risks, or (c) move cash funds quickly and without loss of value to wherever they areneeded most.

Price riskPrice risk is the exposure of earnings or net worth to changes in market factors (e.g. interestrates, currency rates, etc.) which affect income, expense or balance sheet values.

1. Interest rate risk. Significant movements in interest rates expose the firm to higherborrowing costs, lower investment yields or decreased asset values.

2. Currency/foreign exchange risk. Volatility in foreign exchange rates exposes the firm toeconomic and accounting losses.

3. Equity risk. Exposure to fluctuations in the value of equity securities or income streamsfrom equity ownership in an incorporated entity.

4. Commodity pricing risk. Fluctuations in commodity prices expose the firm to lowerproduct margins or trading losses.

5. Financial instrument risk. Exposure to excessive management costs or losses due tocomplexity or unintended consequences of financial instrument structures.


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Liquidity riskLiquidity risk is the exposure to loss as a result of the inability to meet cash flow obligations in atimely and cost-effective manner. It also includes the exposure of asset valuations or traded

positions to an imbalance or lack of buyers and sellers in a particular market, i.e. an illiquidmarket.

1. Cash flow risk. Exposure to lower returns or the necessity to borrow due to shortfalls incash or expected cash flows (or variances in their timing).

2. Opportunity loss risk. The use of funds in a manner that leads to the loss of economicvalue, including time value losses and transaction costs.

3. Concentration risk. Exposure to loss due to participation in a narrow market consisting ofa limited group of counterparties resulting in inability to consummate transactions atreasonable prices within a reasonable timeframe.

Credit risk

The exposure to actual loss or opportunity cost as a result of the default (or other failure toperform) by an economic or legal entity (the debtor) with which the company does business.

1. Default risk. A counterparty to a financial transaction is unable to fulfill its obligations.

2. Concentration risk. Exposure of a significant portion of business to a company or group ofcompanies that are similarly impacted by events.

3. Settlement risk. Different settlement times between the capital markets of the firm and itscounterparties expose the firm to a short-term risk of counterparty default on obligations.

4. Collateral risk. The loss of value or inability to secure control of an asset provided to afirm as security.

C. Empowerment riskEmpowerment risk is the risk that managers and employees (a) are not properly led, (b) dontknow what to do when they need to do it, (c) exceed the boundaries of their assigned authorities,or (d) are given incentives to do the wrong thing.

1. Leadership risk. The firms people are not being effectively led, which may result in a lackof direction, customer focus, motivation to perform, management credibility and trustthroughout the firm.

2. Authority/limit risk. Ineffective lines of authority may cause managers or employees to dothings they should not do or fail to do things they should. Failure to establish or enforcelimits on personnel actions may cause employees to commit unauthorized or unethicalacts, or to assume unauthorized or unacceptable risks.

3. Outsourcing risk. Outsourcing activities to third parties may result in the third parties notacting within the intended limits of their authority or not performing in a manner consistentwith the firms strategies and objectives.

4. Performance incentives risk. Unrealistic, misunderstood, subjective or non-actionableperformance measures may cause managers and employees to act in a mannerinconsistent with the firms objectives, strategies and ethical standards, or with prudentbusiness practice.

5. Change readiness risk. The people within the firm are unable to implement process andproduct/service improvements quickly enough to keep pace with changes in themarketplace.


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6. Communications risk. Ineffective communication channels may result in messages thatare inconsistent with authorized responsibilities or established performance measures.

D. Information processing/technology riskInformation processing technology risk is the risk that the information technologies used in thefirm (a) are not operating as intended, (b) are compromising the integrity and reliability of dataand information, (c) are exposing significant assets to potential loss or misuse, or (d) areexposing the firms ability to sustain the operation of critical processes.

1. Relevance risk. Irrelevant information created or summarized by an application systemmay adversely affect users decisions.

2. Integrity risk. All of the risks associated with the authorization, completeness andaccuracy of transactions as they are entered into, processed by, summarized by andreported by the various application systems deployed by the firm.

3. Access risk. Failure to adequately restrict access to information (data or programs) may

result in unauthorized knowledge and use of confidential information, or overly restrictiveaccess to information may preclude personnel from performing their assignedresponsibilities effectively and efficiently.

4. Availability risk. Unavailability of important information when needed threatens thecontinuity of the firms critical operations and processes.

5. Infrastructure risk. The risk that the firm does not have the information technologyinfrastructure (e.g. hardware, networks, software, people and processes) it needs toeffectively support the current and future information requirements of the business in anefficient, cost-effective and well-controlled fashion.

E. Integrity riskIntegrity risk is the risk of management fraud, employee fraud, illegal acts and unauthorized acts,

any or all of which could lead to reputation loss in the marketplace.

1. Management fraud risk. Intentional misstatement of financial statements ormisrepresentation of the firms capabilities or intentions may adversely affect externalstakeholders decisions.

2. Employee/third-party fraud risk. Fraudulent activities perpetrated by employees,customers, suppliers, agents, brokers or third-party administrators against the firm forpersonal gain (e.g. misappropriation of physical, financial or information assets) exposethe firm to financial loss.

3. Illegal acts risk. Illegal acts committed by managers or employees expose the firm tofines, sanctions and loss of customers, profits and reputation, etc.

4. Unauthorized use risk. Unauthorized use of the firms physical, financial or informationassets by employees or others exposes the firm to unnecessary waste of resources andfinancial loss.

5. Reputation risk. Damage to the firms reputation exposes it to loss of customers, profitsand the ability to compete.


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INFORMATION FOR DECISION-MAKING RISKInformation for decision-making risk is the risk that information used to support the execution ofthe business model, the internal and external reporting on performance and the continuous

evaluation of the effectiveness of the firms business model is not relevant or reliable. These risksrelate to every aspect of the firms value creation activities.

A. Process/operational information for decision-making risk

1. Product/service pricing risk. Lack of relevant and/or reliable information supporting pricingdecisions may result in prices or rates that customers are unwilling to pay, or that do notcover development and other costs, or do not cover the cost of risks undertaken by thefirm.

2. Contract commitment risk. Lack of relevant and/or reliable information concerningcontractual commitments outstanding as of a point in time may result in subsequentincremental contractual commitment decisions that are not in the best interests of thefirm.

3. Measurement (operations) risk. Non-existent, irrelevant and/or unreliable non-financialmeasures may cause erroneous assessments of and conclusions about operationalperformance.

4. Alignment risk. Failure to align business process objectives and performance measureswith enterprise-wide and/or operating unit objectives and strategies may result inconflicting, uncoordinated activities throughout the firm.

B. Business reporting information for decision-making risk

1. Budget and planning risk. Non-existent, unrealistic, irrelevant or unreliable budget andplanning information may cause inappropriate financial conclusions and decisions.

2. Accounting information risk. Overemphasis on financial accounting information to managethe business may result in the manipulation of outcomes to achieve financial targets at theexpense of not meeting customer satisfaction, quality and efficiency objectives.

3. Financial reporting evaluation risk. Failure to accumulate relevant and reliable external andinternal information to assess whether adjustments to or disclosures in financial statementsare required may result in the issuance of misleading financial reports to externalstakeholders.

4. Taxation risk. Failure to accumulate and consider relevant tax information may result innon-compliance with tax regulations or adverse tax consequences that could have beenavoided had transactions been structured differently.

5. Pension fund risk. Incomplete and/or inaccurate information pertaining to compensationand benefits (i.e. pension plans, deferred compensation plans, retiree medical plans, etc.)

may preclude the firm from meeting its defined obligations to employees on a timely basisand result in a loss of morale and reputation, work stoppages, litigation and additionalfunding requirements.

6. Investment evaluation risk. Lack of relevant and/or reliable information supportinginvestment decisions and linking the risks undertaken to the capital at risk may result inpoor investment decisions.

7. Regulatory reporting risk. Incomplete, inaccurate and/or untimely reporting of requiredfinancial and operating information to regulatory agencies may expose the firm to fines,penalties and sanctions.


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C. Environment/strategic information for decision-making risk

1. Environmental scan risk. Failure to monitor the external environment or formulation of

unrealistic or erroneous assumptions about environment risks may cause the firm toretain business strategies long after they have become obsolete.

2. Business model risk. The firm has an obsolete business model and doesn't recognize itand/or lacks the information needed to make an up-to-date assessment of its currentmodel and build a compelling business case for modifying that model on a timely basis.

3. Business portfolio risk. Lack of relevant and reliable information that enablesmanagement to effectively prioritize its products or balance its businesses in a strategiccontext may preclude a diversified firm from optimizing its overall performance.

4. Valuation risk. Lack of relevant and reliable valuation information may preclude owners or

prospective owners from making informed assessments of the value of the firm or any ofits significant segments in a strategic context.

5. Organization structure risk. Management lacks the information needed to assess theeffectiveness of the firms organizational structure, which threatens its capacity to changeor achieve its long-term strategies.

6. Measurement (strategy) risk. Non-existent, irrelevant or unreliable performancemeasures that are inconsistent with established business strategies threaten the firmsability to execute its strategies.

7. Resource allocation risk. An inadequate resource allocation process and the informationsupporting it may preclude the firm from establishing and sustaining competitive

advantage or maximizing shareholder returns (e.g. channelling scarce resources towardthose opportunities that provide the best prospects for balancing risk and reward).

8. Planning risk. An unimaginative and cumbersome strategic planning process may resultin irrelevant information that threatens the firms capacity to formulate viable businessstrategies.

9. Life cycle risk. Lack of relevant and reliable information that enables management tomanage the movement of its product lines and monitor the evolution of its industry alongthe life cycle threatens the firms capacity to remain competitive.

Risk Short Definitions

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