Honeywell's restructuring of integrated risk management strategy

Honeywell

Restructuring Risk Management at Honeywell

As a large, multinational manufacturer and distributor of a variety of commercial and consumer products, Honeywell faces a large number of varying risks in its operations. Ranging from financial risks such as changing exchange rates combined with fixed-price future payments to risks more directly associated with operations such as employee liability and a variety of product flow interruptions, the variety and degree of risk exposure Honeywell has necessitates a comprehensive and careful risk management system and strategy that promotes the control of risks and the mitigating of damages (Case, n.d.). The following pages detail a proposed change in risk management strategy at Honeywell, assessing its objectives, its apparent degree of success in achieving those objectives, and an estimation of the cost difference between the old and new risk management programs, concluding with a recommendation for Honeywell as it moves forward in its risk management strategy.

Program Objectives

The primary objective of the proposed new risk management program at Honeywell is, of course, to properly and comprehensively manage the company's risks at least as effectively as the old program; no other change in risk strategy would make rational sense given organizational constraints (Case, n.d.; Lam, 2003). While this is not a very specific assessment of objectives, it does provide some insight into the more definitive and sought after objectives of the new program being proposed. The objectives quite clearly align with creating greater shareholder value.

One of the problems with the old risk management program at Honeywell was its lack of coherency and comprehensiveness. The new program seeks to integrate many areas of risk management into a single risk insurance system, making the program easier to value, track, implement, and maintain (Case n.d.; Lam, 2003). It also seeks to lower the cost of risk management and, in certain specific actions not necessarily directly related to the insurance change, seeks to lower overall risk exposure (Case, n.d.). All of these risk management objectives can create shareholder value in any firm through the creation of lower-cost and higher-efficiency actions and systems, and through the lowered exposure of profits to mismanaged risks (Lam, 2003). Value is also created for shareholders in a less direct manner; as the risks at Honeywell become better managed, investor and lender confidence in the organization ought to improve (not that it was bad to begin with), which in turn leads to a decrease in the cost of capital and an increase in the value of ownership (Lam, 2003).

Cost Difference

The new program is estimated to cost approximately 15-20% less than the old program, with substantial savings coming in the form of reduced premium payments (Case, n.d.). The estimated retention of thirty million on an annual basis, which is the contracted deductible that is part of the new proposed risk insurance plan, represents a potential light increase, however this is more than offset by premium differences (Case, n.d.). The old program included gross overpayments for limits many times higher than necessary (Case, n.d.).

Summary and Recommendation

It should be fairly clear at this point that the new risk management and risk insurance program being proposed for Honeywell would definitely be advantageous to the company for a variety of reasons. The cost effectiveness and efficiency of the program is an excellent way to maximize shareholder value and to protect this value against risks at the same time, and also represents a commitment on the part of the company to adequately and carefully address risks that have been identified and can be measured. The higher level of integration and aggregation of the risk assessment and management that will occur under the new proposal will also make the entire risk management process and strategy at Honeywell more efficient, which again maximizes shareholder value and renews company commitments to careful and controlled operations. A more comprehensive and accurate risk assessment procedure will also enable the company to be more flexible in its approach to capital generation and overall operational capabilities, through establishing an even more solid and secure reputation as a trustworthy and consistent yet innovative and ever-improving firm.

Risk management is a key element of ongoing strategy for any business. For Honeywell, with its divers multinational operations and its high degree of risk exposure in various areas, the development of a comprehensive and integrated risk management program could help propel the company to new profitability and success. This proposed program should certainly, yet carefull, be implemented.