Insights – Risky Business

Risk ………a journey into the unknown! April 19

Assessing risk Risk assessment is important to businesses of ALL sizes Recent business catastrophes Typical assessment process Identifying Risks - don’t focus on the trivial – make it real! Risk process example Risk mapping Outcome of example Workshop, presentations back to group and discussions Conclusions April 19

Why do you think we should bother assessing risk? What is risk? Why do you think we should bother assessing risk? April 19

Risk assessment is important to businesses of ALL sizes The business world is volatile, subject to more regulation, and becoming more complex which means that it is fraught with risk Risk assessment is a mechanism for identifying pitfalls and opportunities Risks can be anticipated before they arise and actions put in place Forms the foundation for an effective Enterprise Management Programme (ERM) which can be reviewed regularly, offer insights, help the business achieve its objectives and prepare it for lasting success BUT it needs to be tailored to the organisation April 19

Recent business catastrophes Tesco, Findus, Lidl, Iceland, Aldi Shame on you BP! IT failure at RBS/NatWest resulted in some re-payments taken out of borrowers’ accounts twice April 19

Typical assessment process Step 1 Identify relevant business objectives Step 2 Identify, describe and document risks that could affect success Step 3 Estimate the Impact and likelihood of risks Step 4 Evaluate the portfolio of risks and determine risk responses Step 5 Assess residual Likelihood and Impact of risks - proceed/not proceed Define risk tolerance April 19

Identifying risks - Need to take internal and external risk factors into consideration External Risk Factors (Examples) Internal Risk Factors (Examples) Availability of Customers Strategic Changing markets Operational Degree of Competition Compliance Political Arena Financial health Environmental Market risk (Could be currency exchange if operating offshore) Social media (Twitter, FB etc.) Credit risk – offering customers credit Technological changes Customer profiles Legal Supply chain risk Economic Product risk IT and Security Human Resources (talent, availability etc.) Reputation - Brand April 19

Focus on real risks not trivial! April 19

Process example: NPD – cooker Identified Risk Likelihood of Occurrence Impact Category Category Coding for Mapping The final quality of the product poor Low High Product P1 Failure to follow customers needs/wants Customers C1 Changing health and safety regulations for cookers Medium Compliance R1 Cost of raw materials Financials/Profit F1 Reactions of competitors Sales S1 Availability of skilled workforce Resources HR1 Supply chain network – many suppliers/providers Operations O1 Many providers overseas companies – adverse actions by their Governments Macro-environment E1 Changes in economic conditions E2 Exchange rate fluctuations F2 April 19

Evaluate portfolio of risks - mapping April 19

Outcome of risk assessment (for NPD – cooker example) Consider actions to mitigate risks Re-evaluate residual risk Determine whether to proceed/not proceed April 19

Practical – Workgroups Using your scenario and choosing the borrower/s and stakeholders, evaluate the potential that the borrower/s will fail to meet the obligations in accordance with the terms Identify and consider all the risks inherent to the business, as well as the risk in individuals (typically performed by credit risk specialists) Determine an overall risk score (1- 5, 1= Low, 5 = High) Score 6 if you wouldn’t lend Would you lend? Prepare presentations and report back to group with reasons for decision April 19