Managing Risk in Organizations: a Guide for Managers

Frame.ffirs 6/16/03 12:59 PM Page i Frame.ffirs 6/16/03 12:59 PM Page ii Frame.ffirs 6/16/03 12:59 PM Page iii Managing Risk in Organizations Frame.ffirs 6/16/03 12:59 PM Page iv Frame.ffirs 6/16/03 12:59 PM Page v J. Davidson Frame Q Managing Risk in Organizations A Guide for Managers Frame.ffirs 6/16/03 12:59 PM Page vi Copyright © 2003 by J. Davidson Frame. Published by Jossey-Bass A Wiley Imprint 989 Market Street, San Francisco, CA 94103-1741 www.josseybass.com No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-750-4470, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008, e-mail: [email protected]. The Washington Post story on pp. 13–14 is © 2001, The Washington Post. Reprinted with permission. Jossey-Bass books and products are available through most bookstores. To contact Jossey-Bass directly call our Customer Care Department within the U.S. at 800-956-7739, outside the U.S. at 317-572-3986 or fax 317-572-4002. Jossey-Bass also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. Library of Congress Cataloging-in-Publication Data Frame, J. Davidson. Managing risk in organizations : a guide for managers / by J. Davidson Frame.—1st ed. p. cm.—(The Jossey-Bass business & management series) Includes bibliographical references and index. ISBN 0-7879-6518-9 (alk. paper) 1. Risk management. I. Title. II. Series. HD61.F726 2003 658.15’5—dc21 2003008144 Printed in the United States of America FIRST EDITION HB Printing 10987654321 Frame.ffirs 6/16/03 12:59 PM Page vii The Jossey-Bass Business & Management Series Frame.ffirs 6/16/03 12:59 PM Page viii Frame.ftoc 6/16/03 1:00 PM Page ix Q Contents Preface xi About the Author xix 1 The Big Picture 1 2 Practical Limitations of Risk Management 17 3 Organizing to Deal with Risk 32 4 Identifying Risk 49 5 Assessing Impacts of Risk Events— Qualitative Impact Analysis 68 6 Assessing Impacts of Risk Events— Quantitative Analysis 83 7 Assessing the Impacts of Risk Events: The Role of Probability and Statistics 104 8 Planning to Handle Risk 134 9 Monitoring and Controlling Risk 150 10 Business Risk 177 11 Operational Risks 204 12 Project Risk 227 13 Conclusions 248 References 255 Index 259 ix Frame.ftoc 6/16/03 1:00 PM Page x To Yanping and Koko Frame.fpref 6/16/03 1:00 PM Page xi Q Preface Toward the end of the 1990s, we approached the coming millennium with a foreboding that was similar to what our ancestors experienced a thousand years earlier. In 999, many of them envisioned the new millennium as ushering in Armageddon and the end of the world. Today, we are more sophisticated. Like our ancestors, we saw the new millennium as bringing chaos and uncertainty, but this time it as- sumed a peculiarly high-tech and secular cast in the form of what we called “the Y2K problem.”We breathed a collective sigh of relief when January 1, 2000, came and went with no collapse of our economic in- frastructure. But whatever security we felt did not last long. For the proponents of doom and gloom, the new millennium has not been disappointing. Even as the economies of the industrialized world reached unprecedented peaks of affluence at the outset of 2000, they were caught in the grips of a free-fall decline within a year. Then on September 11, 2001, an event of terrorism shook the capitalist world to its roots. The attacks on the World Trade Center and Penta- gon reinforced the view that despite all the appurtenances of wealth and stability that we have grown accustomed to, the world is a dan- gerous place. The subsequent anthrax attack on the U.S. postal system confirmed this perspective. Fear of terrorism and uncertainty took a big toll on global stock markets. Stock prices plunged. Retirees who had jumped on the bull market bandwagon toward the end of the 1990s watched their savings being wiped out. The pounding of the stock market continued when the largest financial scandals of modern times were revealed. Major cor- porations such as Enron, WorldCom, and Global Crossing confessed that they had cooked their financial books, abetted by prestigious ac- counting firms such as Arthur Andersen LLP. These events reminded us of something many of us had forgotten: the world is a risky place. Planet Earth itself is a bull’s eye on a target; one day an asteroid will hit the mark, with devastating consequences. xi Frame.fpref 6/16/03 1:00 PM Page xii xii PREFACE Global warming is causing ice caps to melt and sea levels to rise. One portion of the planet experiences unprecedented floods, while another faces unparalleled drought. Meanwhile, malcontents around the globe justify unconscionable acts of murder and mayhem on religious, cul- tural, or political grounds. And financial markets regularly prove that Newton’s views on gravity prevail: what goes up must come down. Awareness of life’s dangers has sparked an interest in risk and its consequences. Untoward events are occurring regularly throughout the world. We are loathe to stand by passively as they ruin our lives. The question many people raise is: What can we do to lessen the like- lihood of their occurrence and to reduce their impacts when they do arise? That is, what can we do to manage risk? This book is written to help you understand and cope with the risks you come across on the job. It examines the risks you routinely encounter and explains their origins. It offers prescriptions for assessing their impacts and developing strategies to cope with them. It suggests how you can organize your operations to deal with them. To help you manage risk more effectively, it offers an abundance of tools and techniques that risk practitioners regularly employ. I have been teaching risk management in business schools and ex- ecutive development programs since the mid-1980s. Although I have come across a fair number of risk management books over the years, I did not find any that addressed the risk management concerns of general managers in business and government enterprises. This cre- ated problems for me because there was little written work I could use to supplement my class presentations. The risk management books I encountered focused on narrow areas. There are a number of excel- lent texts on understanding and handling risk from the perspective of the insurance industry. I have come across other useful works that approach risk management from the purview of hazards and occupa- tional safety. There are quite a few books written for investors in the stock market that show readers how to accommodate investment risks. Finally, there are substantial numbers of books that are heavily quantitative and approach risk management from the viewpoint of operations research. But there is very little that general managers would find useful. I hope this book fills the information gap that I perceive. I have de- signed it to provide managers with all they need to know in the risk management arena. I have attempted to increase its relevance to general managers by offering a large number of practical examples and case studies that bring theoretical principles to life. I have even in- Frame.fpref 6/16/03 1:00 PM Page xiii Preface xiii cluded a friendly primer on statistics: Chapter Seven will help managers appreciate better the quantitative aspects of risk management. Beyond this, I have worked to make the book as up-to-date as possi- ble. For example, I show how real options concepts borrowed from the financial community can be employed to reduce project risk. I encountered two major challenges in writing this book. The first was putting boundaries around the topic. Everyone who works in the risk area quickly recognizes that risk is ubiquitous. Insurance compa- nies see it as the prospect of loss of or damage to assets. Financial investors see it in terms of returns on investments. Hazard and safety managers approach it from the perspective of loss of life and limb. En- vironmentalists worry about damage to the environment. Project managers are primarily concerned with the possibility of missing deadlines, or encountering cost overruns, or not achieving specifica- tions. Operations managers view it as the prospect of the breakdown of basic processes. Scientists and engineers focus on their ability to work in uncharted terrain to achieve results that have never before been achieved. And the ordinary citizen encounters it in all of its man- ifestations: If I work in a room of smokers, will I get lung cancer? Where should I invest my retirement savings to maximize returns and minimize risk? Will I be able to handle a Christmas party with sixty guests? Are my smoke detectors working? The book’s title indicates the work’s boundaries.

Load more