Risk and Strategic Management Risk

Risk and Strategic Management

Risk assessments inform decision making about effective actions for 'managing' risk - i.e. avoiding, removing, reducing, improving and generally controlling risks." (Waring and Glendon, 2007)

Based on your analysis of risk, evaluate the central risk contingencies faced by Tetra Tech, paying particular attention to the salience and likely impact of these risks.

Introduction to Risk Management

As the world evolves, the business community is forced to adapt along. The changes in the past few years have revolved around an increased focus on customer satisfaction, employees' on the job satisfaction and increased shareholder value. Ultimately, it can be said that the contemporaneous business community has to deal with more categories of stakeholders. The fact that the demands of more individuals and groups of individuals have to be considered means that the organizations are faced with more needs to satisfy and consequently, more chances of failure. In a more simplistic formulation, today's organizations face more risks that they predecessors in the past decades.

The specialized literature on the field of risk and risk management is rather extensive, introducing the reader to the techniques and features of risk and risk management. The Longman Dictionary of Contemporary English (2000) defines risk as "the possibility that something bad, unpleasant, or dangerous may happen." The Website Investor Words (2008) defines risk as "The quantifiable likelihood of loss or less-than-expected returns." A third example of risk definition is given by Jonathan E. Ingersoll in his Theory of Financial Decision Making and it says that "risk generally conveys only the notion of uncertainty or dispersion of outcomes." Finally, the forth and last example of a definition given to risk is retrieved from the Website of the Australian Trade Commission (2008) and states that "Risk is anything that threatens or limits the ability of a project to achieve its goal, objectives, or the production of project deliverables."

Simply put, risk means the possibility that an undesired event would occur, leading to undesired outcomes. Some examples of risk include the failure to recuperate the account receivables from customers, the risk that the currency rate will change and result in financial losses, or the risks that the merchandize will suffer damages throughout the transportation process. Exchange rate risks is often covered through various contracts, called hedging contracts. In the case of cargo, organizations insure their merchandize with insurance companies. Otherwise put, all economic agents strive to protect themselves (including their assets, human resource, technologies, capitals and ultimately, profits) against the occurrence of an undesirable event. This protection is often channelled in three directions:

Entirely eliminating the threats of the risk

Reducing the chances that the undesirable event will occur

Limiting the negative effects of the undesirable event, once this has occurred.

All the measures taken to reduce the risk are called risk management. More specific definitions of risk management, as provided by the specialized literature, are presented below:

Business Dictionary (2008): Risk management represents the totality of "policies, procedures, and practices involved in identification, analysis, assessment, control and avoidance, minimization or elimination of unacceptable risks."

The Chief Executive Officer (2008): "Risk Management is the process of defining and analysing risks, and then deciding on the appropriate course of action in order to minimise these risks, whilst still achieving business goals."

Investor Words (2008): Risk management is the "process of analyzing exposure to risk and determining how to best handle such exposure."

Australian Trade Commission (2008): "Risk management is a process of thinking systematically about all possible undesirable outcomes before they happen and setting up procedures that will avoid them, minimise or cope with their impact."

The Website of the Australian Trade Commission proposes a six step implementation of risk management process, as to make sure that the organization retrieves the most fruitful outcomes. These steps are succinctly presented below:

Clearly analyzing and identifying the features of the given context

Identifying the incurred risks

Determining the probability that the risks will materialize in a undesirable event and identifying the possible consequences of the risks

Coming up with strategies to mitigate the identified risks

Monitoring and constantly reviewing the outcomes of the implemented solutions, and Maintaining constant communications and consultations with the other parties involved

2. Risk Management at Tetra Tech

The case commences with a background on the company, since its beginnings to its present days, following several process of organizational restructuring. EBASCO, the acronym for the Electric Bond and Share Company was activating in the remediation market and was in charge of cleaning up the environment. The ceasing of government funds to support the organizations in this industry resulted in EBASCO's loss of its points of difference. Consequently then, the entry barriers to the market were significantly reduced, meaning more new entrants emerged and competition increased exponentially.

EBASCO stood the risk of major financial losses and had to develop processes to protect its assets. The company underwent process of corporate restructuring, merges and acquisitions and became ENSEARCH, Foster Wheeler Environmental Corp. And eventually, in 2003, Tetra Tech.

Don Rogers implemented a program of risk management called TIP, or the Task Initiation Procedure, aimed to identify and address risks. It was cored on five types of risks and eleven types of risk management programs. The five types of risks were "site conditions, technical performance and how the process of performance and the outcome affect the site, stakeholder issues, regulatory issues and contract issues." The planning elements were "the work plan, the quality assurance / quality control plan, the staffing plan, he cost / schedule control plan, the communication plan, the health and safety plan, the status and monitoring plan, the risk management plan, the documentation plan, the cash management plan and the regulatory compliance plan" (Fletcher and Newel, 2007).

However the eleven steps programme was comprehensive and strived to address risks at numerous organizational levels, it also posed some limitations. Some of the most relevant ones are succinctly presented below:

it was extremely difficult and implied tedious work the difficulty of the programme meant employees would not find it easy to understand and work with employee reticence to the agenda would materialize in a need for training programs imply additional costs the challenging implementation of TIP meant a reduced operational efficiency, and once more, financial losses the tedious process may not be understood by the customers, partners and other categories of stakeholders, reducing therefore their trust in the organization and increasing their reticence the programme closely followed the imposed regulations - this is generally a plus for the organization, but it has also been observed that the large multitude of both internal and external regulations make the process even harder to implement, understand and function the programme was based on a clear plan and whenever the outcome was not identical to the plan, the processes were ceased and replanned interruptions and replanifications generate additional expenditure, reduced operational efficiency, financial losses, and the dissatisfaction of various categories of stakeholders

Recognizing the complexity of the process, the executives at Tetra Tech increased their efforts to simplify the process. They requested in this the assistance of their employees in revealing any issues which reduced operational efficiency. In other words, they recognized the limitation of TIP and strived to implement the concepts of the learning organization, in which the economic agents further develops based on his process and continually learns and improves his agenda and capabilities (Easteraby-Smith, Araujo and Burgoyne, 1999). Their statement to the employees was formulated as follows: "You have an obligation to raise your hand and say if I do it the way you are making me do it, it is not going to be optimal. Everything is about continuous improvement" (Fletcher and Newel, 2007).

The organization understood the importance of their employees reporting mistakes in the process in order to repair them. However, they also understood that their personnel could be reticent to reporting the identified limitations. In order to encourage them to do so, the management at Tetra Tech implemented an incentive policy, offering several benefits to the employees that reported limitations in the TIP. These individuals were called "incident person" and they were helped by the management to fill in the paper work, generally tedious, which followed the reporting of an incident. The report was then analysed and based on it, the adherent modifications were made. The employees at Tetra Tech would often receive memos stating changes in the process due to reported limitations. This only goes to show the improvements in adaptability that the organizations has made throughout the past recent years.

But despite these improvements, the economic agent has yet to reach its maximum operational efficiency. The most relevant risks they face today could be succinctly summarized as follows:

given the complexity of the process, employees may still find it difficult to comprehend and properly implement - especially new employees, who would have to be trained, generating as such additional expenditure the old employees are usually accustomed to the process, but the new ones may find it difficult to adjust, deciding in some instances to leave the employer employees' identification of errors means they stop working to report them, reducing as such the operational efficiency is also reduced as the process is changed and adapted to the newly identified error reduced operational efficiency would result in financial losses for the organization, but also non-financial losses, associated with the lack of trust from stakeholders the complex TIP may make it at times difficult to clearly distinguish between process and therefore, generate the inability to implement a strategy to the correct process

Risk of losing staff members

The older employees are generally familiar with the TIP and have found a way to continually adjust to both the complexity of the process, as well as the incurred changes to it. Some of the older employees will however retire in the near future and they will have to be replaced. This will not only generate financial investments with the recruitment and training of new staff members, but it could also materialize in a failure to integrate and attract newer employees. To better explain, the process is difficult and tedious and a young candidate may not feel at ease with working with it. Consequently then, this would lead to two possible situations. The first one refers to Tetra Tech's inability to hire news staff members to replace the retiring ones, and the second one relates to the organization's difficulties in retaining the newly hired employees, meaning then increased employee turnover and high costs of continually replacing the human resource.

Generically, the human resource risks can be divided into six categories (PK-RH, 2008), all with high chances of becoming present within Tetra Tech. They refer to the following:

fatigue and exhaustion relative to the professional activities - continuous change is tiring and employees may want to switch employers or retire early accidents incurred at the work place or employee illnesses, which could be determined by uncertainties and errors in the system the outdated skills of the older employees may no longer be useful in the contemporaneous context; this is even more risky as the older the employee is, the least eager he is to gain new skills (McDonnel, 2008) disputes between employees or employee and employer on personal or professional grounds, which could easily occur doe to dissatisfactions related to the difficulty of comprehending, implementing and constant modifications to the process given once again the complex nature of the TIP, it is extremely likely that human errors occur, further reducing the efficiency of the Tetra Tech operations due to their dissatisfactions and professional frustrations, employees may come to divulge professional secrets to Tetra Tech competition

The risk of reduced operational efficiency high operational efficiency is the key to organizational profits. The aspects of the operational efficiency are multifaceted and refer to areas such as increased profitability, efficient resource allocation, maximized outcomes, adequate use of technologies and ultimately, minimal costs. Otherwise stated, "operational efficiency is - what occurs when the right combination of people, process, and technology come together to enhance the productivity and value of any business operation, while driving down the cost of routine operations to a desired level. The end result is that resources previously needed to manage operational tasks can be redirected to new, high value initiatives that bring additional capabilities to the organization" (ENSYNCH, 2007).

Given the extended understanding of operational efficiency, its achievement requires optimum functioning parameters at all organizational levels. Considering however the high operational costs, the potential costs with the personnel and the constant interruptions and changes to the processes, Tetra Tech could find it rather difficult to achieve an increased operational efficiency.

The risk of damaged relations with the stakeholders

Given the internal problems faced by Tetra Tech, it is only expected that they will become matters to be revealed to the public. This could happen through a failure in satisfying a customer or through the inability to comply with the terms of a contract signed with a partner. Whichever the case, once the public becomes aware of the risks Tetra Tech is facing, their perception will be significantly reduced as the stakeholders will lose trust in the organization. A negative market perception and reduced trust from other categories of stakeholders would easily materialize in a reduced demand and consequently, reduced profits.

However all risks threatening Tetra Tech are serious, this particular one deserves an increased attention simply because stakeholder relations are difficult to repair and once a damage has occurred, the business would be seriously affected. To avoid this from happening then, the leaders at Tetra Tech should develop a stakeholder risk management program. This would be built in three steps: identifying risks, analyzing and quantifying the risks and finally, developing a suitable response (Articles Base, 2008).

The necessity of the first step is explained by the fact that an organization can only deal with those stakeholders it is aware of. Numerous organizations make the mistakes of only considering stakeholders their own customer and other few groups they directly work with, impact or are impacted by. In fact, they should also consider the customers of their customers, regulators or end users of their products and services. Therefore, in identifying them, Tetra Tech should be "creative and energetic" as to make sure that not a single category is left unaddressed.

The analyze and quantify stage of the process refers to categorizing the stakeholders in accordance with their ability to influence organization's project, as well as by the interest manifested by each stakeholder group. Finally, the third stage will allow the managers at Tetra Tech to make the best informed decisions.

The risk of improperly identifying a process

Several executives have stated that the proper identification of a business process, with the aim of improving it, is generally a challenging chore. It becomes even more difficult to achieve when the internal process are not as efficient as they could be. The answer then resides in what exactly makes the process identification so troubling for the management. "The quick answer is that definitions don't define, names don't identify, examples aren't exemplary, and an organization's processes are essentially unknowns (but, thank goodness, not unknowable)" (Fletcher and Newel, 2007).

This particular type of risk is only limitedly dealt with by the specialized literature and a reason for it could be that the definition of a process simple cut and clear. Thomas Davenport (1993) for instance defines the process as "a structured, measured set of activities designed to produce a specified output for a particular customer or market." In Reengineering the Corporation, Michael Hammer and James Champy (1993) state that the process is "a collection of activities that takes one or more kinds of input and creates an output that is of value to the customer."