Risk Management in business
Author : Krupa Nimbalkar
The business process outsourcing risk management puzzle.
Yuwei shi (2007) Author explains the management puzzle of business process outsourcing (BPO) involves navigating various challenges to ensure successful outsourcing initiative .There are different risks to bpo clients, Firms undergoing outsourcing have to make changes to tasks, structures, processes, and systems that involve people across different management levels and organizational entities. In the short run, causes include unclear expectations, communication gaps, and suboptimal vendor selection. Business process outsourcing may involuntarily signal competitors, suppliers, and customers about a firm’s irreversible change of commitments, assumptions, and strategies that can potentially erode its long-term competitive advantage. Table 2 classifies the risks, which are the potentially harmful aspects of BPO to a client, by their impact area and time horizon. BPO can also have deleterious effects on the clients’ organizational health. The problem is the inherient difficulties in managing those risks, because the mechanism for creating BPO strategic risks cannot be easily removed. paradoxical nature also infers that popular managerial practices for dealing with long-term outsourcing risks will need to be examined more carefully. First, managers must realize that the effects of outsourcing on the firm’s immediate bottom line may not always be consistent with the effects on the long-term well-being of the firm. Second, managers should expand outsourcing decisions to include factors such as outsourcing industry structure, client-vendor learning dynamics, and future business models. Third managers can specify shorter durations for outsourcing contracts to force more frequent assessment of the projects’ long-term impact. BPO risk management requires a holistic approach that balances immediate needs with long term sustainability to achieve optimal outcomes, and can also enhance the likelihood of successful outsourcing initiatives while minimising potential challenges and disruptions.
Risk Management for Business Owners
Parrish, steve (2019) The author reflects on the challenges posed by the Tax Cuts and Jobs Act of 2017 (TCJA) at the end of 2017. The TCJA introduced significant changes to tax laws, including a 21 percent flat tax rate for C corporations and a 20 percent deduction for “qualified business income” for pass-through businesses. However, the complexity and uncertainties of the law have made it challenging for both taxpayers and advisors. The author discusses the risks associated with the uncertainty surrounding the TCJA, emphasizing the importance of understanding the law before making decisions. They highlight the ongoing lack of clarity, technical mistakes, and the temporary nature of certain provisions in the TCJA. The article suggests several steps to manage uncertainty, including learning the law, developing themes associated with the TCJA, considering business entity planning, and incorporating the uncertainty factor into projections. Furthermore, the author advises caution and careful consideration when making decisions in the face of uncertainty. They acknowledge the risks of swift action or inaction and recommend staying informed about potential legislative changes and clarifications. In conclusion, the article emphasizes the need for advisors to adapt to the evolving tax landscape, consider the risks associated with uncertainties in the TCJA, and provide informed guidance to clients in navigating the complexities of the new tax law.
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Risk management in the automotive supply chain
Vanalle, et. Al. (2020) This article investigates risk management in the supply chains of automotive components in Brazil, specifically analyzing first- and second-tier companies. The study formulated and tested four hypotheses, yielding key findings. The average assessed risks in tier 2 were confirmed to be greater than those in tier 1, with tier-2 companies exhibiting lower performance. Additionally, centralizing production or distribution was linked to increased average risks in the supply chain. Contrary to existing literature, risk management tools were not found to be prioritized for reducing average risk values in the companies. The research contributes to both theory and practice. It is the first to analyze risk management in Brazilian automotive supply chains comprising tier-1 and -2 companies, complementing previous studies conducted in other countries. For practitioners in the Brazilian automotive industry, the findings offer valuable insights into the reality of risk management for decision-making in day-to-day business. However, the study has limitations, including a small number of valid questionnaires, affecting external validity. Future research is recommended with a larger sample. The study’s scope is limited to the first and second tiers of the Brazilian automotive sector, and conclusions cannot be generalized to other levels of the supply chain. The closed questionnaire format may limit responses, prompting the authors to conduct additional exploratory research to address this potential weakness. Overall, this research lays the foundation for further investigations into risk management dynamics in the Brazilian automotive industry.
Risk management framework for outsourcing in the defence sector
Parelekar, et. Al. (2019) This research employs Grey FMEA to develop a risk management plan for outsourcing in a defense sector organization. The framework is established through literature review, expert interviews, and group discussions to finalize risk categories and sub-categories. Grey FMEA is then utilized to analyze associated risks, with subjective ratings of severity, occurrence, and detection collected from experts. These ratings are converted into crisp values, and a Risk Priority Number is calculated to rank the risks. The study concludes with a ten-point action plan for risk mitigation, deemed practical and satisfactory by experts. Key contributions include the development of an initial framework for outsourcing risk management in the defense sector, with an emphasis on simplicity and practical implementation. The research provides a platform for future studies in an underexplored area, offering a list of main risk criteria and recommending a quantitative Grey FMEA-based analysis framework. Despite the limitation of relying on experts from a single organization for criteria and ratings, the experts accept the practical applicability of the framework. Potential directions for further research include updating risk criteria based on evolving government policies, exploring the impact of cost reduction and product value improvement efforts, and considering different weightings for severity, occurrence, and detection. The analytical approach of Grey FMEA can be applied to other technical and managerial problems in the defense sector and beyond, suggesting versatility. The study discloses no reported conflicts of interest among the authors.
Fretting about Modest Risks Is a Mistake.
Rabin, et. Al. (2019), This article argues that managers frequently exhibit risk-averse behavior, considering risk aversion as a preference. The author suggests that this risk aversion may lead to mistakes in decision-making. However, the article emphasizes that these mistakes can be corrected through greater reflection. The primary focus is on guiding individuals and organizations towards more thoughtful decision-making processes, ultimately leading to a more profitable overall portfolio of decisions. The author highlights the costly nature of inconsistency in risk preferences across various decisions, emphasizing that this inconsistency can be detrimental to both individuals and organizations. The central message revolves around the importance of overcoming risk aversion through careful consideration and reflection in order to make more informed and profitable decisions.
Labor Adjustment Costs and Risk Management.
AR “Qiu, Yue” (2019) This paper examines the impact of labor adjustment costs on corporate derivative hedging and cash holding strategies. The study integrates labor adjustment costs into the risk management model proposed by Froot et al. (1993). Key findings include: Correlation Between Investment Opportunity and Internal Funds The paper shows that higher labor adjustment costs lead to a weakened positive correlation between a firm’s investment opportunity and its internal funds. Firms experiencing more costly labor force adjustments are less aligned in terms of available internal funds and investment opportunities. Incentives for Risk Management: Due to the attenuated correlation, firms are motivated to engage in risk management activities to mitigate the impact of labor adjustment costs and ensure smoother future internal funds. Empirical Testing Using Wrongful Discharge Laws (WDLs): The study focuses on employers’ firing costs and leverages cross-state variation in Wrongful Discharge Laws (WDLs) for empirical testing. A state border discontinuity approach is employed to estimate the effects of WDLs on corporate foreign currency derivative hedging and cash holding policies. Significance of the Good-Faith Exception: The research finds that, among WDLs, only the good-faith exception is crucial for influencing risk management decisions. For firms with high exposures to foreign currency risk, the good-faith exception positively impacts the utilization of foreign currency derivative contracts. Impact on Cash Holding: The study reveals a positive and significant impact of the good-faith exception on corporate cash holding. This effect is more pronounced in firms that do not use derivative contracts, highlighting the concentration of the influence on cash holding decisions in these cases. Role of Labor Adjustment Costs: The results suggest that labor adjustment costs emerge as a key determinant shaping corporate risk management policies.
The paper contributes to understanding how labor market frictions interact with and influence decisions related to corporate risk management. the research underscores the crucial role of labor adjustment costs in shaping corporate risk management strategies. The findings provide valuable insights into how labor market dynamics interact with risk management practices in organizations.
Risk Shifting and Corporate Pension Plans
Pedersen david, (2019) This paper explores the challenge of identifying evidence of risk-shifting behavior in corporate pension plans due to the multitude of factors influencing a firm’s default risk. Existing studies often rely on cross-sectional differences and within-firm variation, but the lack of exogenous variation in firm risk complicates the interpretation of observed effects. The study builds on the work of GM (2011) and utilizes a natural experiment to investigate whether firms, facing an increased default risk due to their employees’ exposure to newly identified carcinogens, underfund their pension plans. Natural Experiment on Default Risk: The research employs a natural experiment involving a shock to default risk caused by employees’ exposure to carcinogens. Firms experiencing this exogenous increase in bankruptcy risk respond by increasing the size of the firm. Lack of Evidence for Risk Shifting: Despite the theoretical expectation that increased default risk would lead to risk-shifting behavior benefiting shareholders, the study finds no evidence of such behavior. Even in subsamples of financially vulnerable firms or those with fewer agency conflicts, there is little trace of risk-shifting activities. Managerial Incentives and Reputation Concerns: The paper suggests that managers may not engage in risk-shifting due to the potential harm to their reputation with employees, despite the theoretical prediction that such actions could increase shareholder value. Unlike certain investment decisions where managers may act in their self-interest, underfunding a pension plan is unlikely to substantially impact a manager’s utility but could harm their reputation with employees. Reputational Concerns and Consistency with Experimental Findings: The lack of risk-shifting in pension plans aligns with experimental findings where participants limit risk-shifting activities due to reputational concerns. This indicates that reputational considerations may play a significant role in influencing managerial decisions regarding risk management in the context of pension plans. Conclusion in the study suggests that, contrary to theoretical predictions, underfunding corporate pension plans is not a primary response to a firm approaching distress. The absence of risk-shifting behavior is attributed to managers considering reputational concerns and the potential harm to their relationships with employees.
Spatial Distance and Risk Category Effects in Enterprise Risk Management Practice.
Sutton, et. Al. (2022) Top of FormThis study investigates the impact of spatial distance and risk category on decision-makers’ assessment of the probability that a given risk will occur. The research responds to calls for exploration into risk registers and the influence of risk categories on risk assessment. Key findings and contributions include: Spatial Distance Influence: The study, conducted through an experiment involving 141 risk managers, reveals that spatial distance from a risk assessment target affects decision-makers’ subjective probability judgments. Participants assessing a spatially remote risk target tend to judge the probability of various risk factors materializing as lower compared to those evaluating a spatially proximate risk target. Operational vs. Non-Operational Risk Assessment: While participants did not inherently perceive operational risk factors as more likely than non-operational ones, the differences in probability judgments between operational and non-operational risk factors were more pronounced when assessing a proximate risk target compared to a remote one. This suggests that the distinction between operational and non-operational risk assessments is less significant when the risk target is spatially remote. Implications for Risk Management Practice: The study suggests potential implications for risk management practices, explaining why operational risks tend to attract more attention from risk managers. The findings highlight the importance of considering psychological distance as a potential bias in corporate risk assessment processes. Debiasing Mechanisms and Awareness: The research recommends the design of debiasing mechanisms to counteract the tendency to underestimate risk assessments for psychologically distant targets. It raises awareness of the influence of psychological distance on decision-makers’ risk assessments and encourages practitioners to consider this factor in designing risk management strategies. Wider Applicability and Future Research: The study asserts that its findings have broader implications beyond enterprise risk management (ERM), extending to managerial decision-making in various contexts (e.g., multi-national organizations, audit, tax, and financial decision-making). The research suggests avenues for future exploration, such as examining the impact of risk category in more detail, incorporating a wider variety of risk factors, and exploring the impact of group assessments on risk probability judgments. Limitations and Opportunities for Future Research: Limitations include the absence of accountability and potential lack of pertinent information in a real risk management environment. Future research opportunities involve exploring the impact of risk category in a more nuanced manner, considering diverse risk taxonomies, and investigating how the reported bias may affect the quality and reliability of risk disclosure. Conclusion in the study contributes valuable insights into the influence of spatial distance and risk category on decision-makers’ risk assessments, shedding light on potential biases and providing practical considerations for risk management practices.
The Importance of Risk Management
Jensson, et. Al.( 2024)Despite substantial investment and rhetoric around risk management, businesses often treat it primarily as a compliance issue. The implementation of risk management is largely rule-based, focusing on ensuring employee adherence to established rules. While some rules make sense and reduce harmful risks, this approach, as argued by Kaplan and Mikes (2012), is insufficient to significantly reduce the likelihood or impact of a disaster. Accredited certification is seen as a method for managers to guarantee that business functions adhere to proper processes and procedures, potentially reducing risk. However, the study argues that this approach falls short in addressing the complexity of sociotechnical systems, emergent behavior, and nonlinear causal relations. It emphasizes the need for better guidelines for analyzing and managing risk than what the current ISO standards provide. ISO standards have been integral tools in organizational management, and the results of ISO surveys highlight the increasing focus and importance of risk management. The study anticipates a significant rise in ISO certificates in response to heightened societal risks and increased requirements for risk management, as indicated in the Global Risks Report 2020. The number of certificates not only reflects the distribution of ISO standards across industry sectors and countries but also indicates their accessibility to those who need to apply them. However, the study notes a reduction in certification and use of certain ISO standards (ISO 9001, ISO 14001, ISO 13585, ISO 22301). This suggests a need for adjustments to the ISO standards to better align with business needs, or a potential decline in their general use. The study speculates that other standards organizations, such as the U.S.-based National Institute of Standards and Technology (NIST), might take a more prominent role in global standardization, and organizations like SRA could gain increased importance. Based on the study’s results, there is a hypothesis that flaws in current risk management practices will be evident in real-world applications. A follow-up study, involving six real-life case study examples, aims to verify this hypothesis and will be presented in an upcoming paper. This research suggests a need for continual assessment and improvement in risk management practices and the alignment of standards with evolving business needs.
Developing a temporary workforce transaction mechanism from risk sharing perspectives.
Chou ying chyi, et.(2024) Al. This study is centered around quantity flexibility contracts within the manufacturing industry. Drawing from existing literature, particularly the work of Wu, Baron, and Berman (2009), the study establishes that pricing and quantity adjustments are key tools for managing risks. In response, the study adopts the concept of risk sharing as the foundation for contractual agreements between user firms and temporary work agencies. The research focuses on developing employment contracts that involve controllable risks, utilizing labor quantity and pricing adjustments. Supply chain contracts incorporating period quantity adjustment and total quantity adjustment are designed and analyzed. The study finds that reasonable flexibility in these adjustments enables the temporary work agency and user firm to share the risks associated with demand uncertainty, leading to a substantial increase in total expected profit. The analysis reveals that, except for a specific contract type under certain conditions, the expected profit for all contract models increases as the cost of basic labor rises. Importantly, the study concludes that a contract incorporating flexible period and total quantity adjustments can prevent an increase in basic labor cost from negatively impacting total expected profit. However, an increase in specialized labor cost negatively affects profitability across all contract models. In a scenario-based simulation, Contract 1 without quantity flexibility demonstrates the lowest expected profit. The study emphasizes that the flexibility of period quantity adjustment positively influences a user firm’s expected profit, especially when changes in the estimated profit are small. Similarly, greater flexibility in total quantity adjustment in Contract 3 leads to higher overall expected profit for user firms. From a market mechanism perspective, the study highlights the value of temporary work agencies in risk sharing and management for user firms, particularly in the face of uncertainties arising from global competition. The research suggests that user firms rely on temporary work agencies to fulfil labor demands while jointly managing the risks associated with labor surplus or shortage. The study emphasizes the importance of Enterprise Risk Management (ERM) for both temporary work agencies and user firms. In conclusion, the study provides insights into effective contract management that allows user firms to adjust labor demand and costs based on external changes. This approach not only protects the interests of temporary work agencies through risk sharing but also enhances the overall management system of the temporary work industry, contributing to overall economic growth.
SUMMARY
The collection of studies on risk management across diverse business domains provides a comprehensive understanding of the challenges and strategies associated with navigating uncertainties. The diverse range of topics presented in these studies collectively emphasizes the critical role of risk management in various business domains. In summary, a nuanced and adaptable approach to risk management, tailored to the specific challenges of each industry, is crucial for organizations to thrive in an environment characterized by uncertainties and dynamic changes. The studies collectively emphasize the need for strategic foresight, continuous evaluation, and a proactive stance in addressing risks across diverse business landscapes.
In conclusion, these studies collectively emphasize that a dynamic and adaptive approach to risk management is essential in today’s complex business landscape. Organizations need to tailor their strategies to specific contexts, continually reassess risks, and adopt innovative approaches to address uncertainties and challenges effectively.
REFRENCES
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PARRISH, S. Risk Management for Business Owners: How to Deal with the Uncertainties of the Tax Cuts and Jobs Act of 2017. Journal of Financial Service Professionals, [s. l.], v. 72, n. 4, p. 30–34, 2018. Disponível em: https://research.ebsco.com/linkprocessor/plink?id=a1100dab-ecdc-3aec-8ab9-31166d32c580. Acesso em: 25 fev. 2024.
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CHOU, Y.-C.; YEN, H.-Y.; YU, S.-J. Developing a temporary workforce transaction mechanism from risk sharing perspectives. International Journal of Production Research, [s. l.], v. 56, n. 5, p. 1865–1881, 2018. DOI 10.1080/00207543.2016.1174341. Disponível em: https://research.ebsco.com/linkprocessor/plink?id=81bce9aa-baba-30fc-abf0-6c6bdc765b59. Acesso em: 25 fev. 2024.
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