Individual Learning Project II
Enterprise Risk Management
PERI Group is the market leader in formwork and scaffolding industries at the current time. In order to stay competitive, the company makes sure to stay up to date with the current trends, does well research on the investment and constantly develop new business strategies. Even though, the company uses many of the contemporary management techniques that are mentioned in the Blocher et al. textbook, the company has not implemented the enterprise risk management technique. Blocher et al. (2013) define the enterprise risk management as a framework and process that companies use to manage their risks that could affect the company’s competitiveness and success (Blocher et al., p14). PERI Formwork Systems understands the importance of risk management, especially in construction industry. The risks the company could face are finance, operation with customers, employees and products, and decision to expand and real estate investment.
Enterprise risk management is an important technique for all types of businesses. PERI Formwork Systems in the USA is becoming larger each year and investing more in offices and yards throughout the U.S. Currently, the operation management team is exploring the market in Hawaii and Puerto Rico. The company is investing thousands of dollars in research of market units and trying to decide whether they should take the risk to expand to these territories. The idea of expanding to U.S. territories has been the talk discussion for many years but not knowing the risk prevents the company to take the next step. For that reason, PERI Formwork Systems could benefit upgrading their traditional risk management to enterprise risk management.
PERI Formwork Systems currently uses the traditional risk management. Traditional risk management places the responsibilities on management to manage risks within their responsible areas. Right now each manager of each department do their own strategy and come up with ideas how to minimize the risk within their department. This worked well when the company was smaller but now the company is expanding quickly. The expansion makes for the executives and managers to oversee and monitor risks difficult.
The company has four business units, eastern, western, industrial, and central. Each business units have its own risks and limitations. Even though the company’s leaders and management teams are accomplished business professionals, some things can go undetected or unrecognized. On certain situations, some management team leader might be aware of certain risks, but the risk might not concern the department. This could cause the managers to ignore the risk because it does not concern the department. However, the ignored risk could affect other departments heavily. For that reason, it is important to communicate with each other and report any risks that are noticed. Enterprise risk management could help the company to have a clear view of the overall risks.
At PERI Formwork Systems the most common problem the management team experience is that people do not communicate with each other effectively. Due to its four separate business units, it is hard to keep track of what is happening in each region. Each region has its own state laws and guidelines. When working with other parties it is important for PERI to know with whom they are working, what situation they are dealing with, and what state law and guideline would apply in any given situation. Sometimes, it is hard to be informed because none is fully responsible in such cases, and none knows the exact answer correctly. Lack of communication makes the job harder and frustrates many employees who are involved in the projects.
Many of the sales engineers have been working for the company for a long time. They started to work when the company just started. Back then, the company had only two or three departments. Sales engineers were used to take care of things by themselves, or got things done right away since the work load was little. Nowadays, it is impossible to agree doing business with customers without consulting with several departments. Yet, the older sales engineers have hard time to follow guidelines that are invented to help everyone to be on the same page. For example, some sales engineers do businesses with customers without consulting with other departments. This puts the company into a big risk. Each sales engineer must make sure that A/R representatives, project managers, and sales managers approve the contracts between the two companies before signing. However, some engineers ignore the requirements, and make their own decision by signing the contract without any consultation.
The reason why signed contract that are not pre-approved by the managers could cause risk to the company is that some contracts contain conditions that does not agree with PERI’s terms and conditions. Once the contract is signed, it is too late to fix the problem, and therefore there is nothing PERI can do to fix it or reverse it. When customer’s contracts’ language is not easy to understand by the project managers, the company hires lawyers to mitigate and explain the contracts. Hired lawyers correct the contracts and override to PERI standard guidelines and terms, or negotiate with the customers, so both companies are happy. This however cost the company thousands of dollars to hire lawyers. For that reason, the company needs someone who oversees any activities that could put the company in risk and prevent these problems before happening.
In depth analysis of the technique
According to Protiviti, an independent risk consulting company, almost 50 percent of senior executives with 150 fortune 2000 companies in the United States worries that their organization’s current risk management programs identify and manage poorly all potential business risks. This is a common problem everywhere, and not only in United States. The study of risk management made by Protiviti showed that in Europe 70 percent of senior executive have the same concerns about the risk management.
In order to prevent and prepare for any significant business risks, companies management teams and executives have to assess their potential risks and have plans ready on how to respond to these risks. Enterprise risk management is defined as a process of planning, organizing, leading, and controlling the activities of an organization in order to minimize the effects of risk on an organization’s capital and earning. Dr. Beasley described in his article that enterprise risk management is a great tool to help management and the board of directors keep an eye on risks that could impact the organizations’ long-term strategic success. (Beasley, 2016)
The great feature of the enterprise risk management is that it helps companies to focus on strategies that address risks in multiple areas such as customer satisfaction, finance, operations and technology. No one could know 100 percent what could happen tomorrow or next week. When doing business, it is important to be prepared for bad times. Readiness could save the company from any financial damages or even protect them from hitting the ground.
PERI works with several attorneys and insurance companies. Yet, it is important to implement enterprise risk management to their schedule because the company is getting bigger and taking more jobs with new customers. Doing business with new customers is also very risky because some customers are not reliable or have bad reputation. The account receivable departments do their best to try to screen the new customers and try to get credit report but it is not always so easy to get information that they need. Currently, many of the department managers are working with insurance companies on certain topics that apply to them, but there is no specific person or department that make sure the company is protected from overall risks.
There are many external factors that prevent the company to reach the critical success factors. In construction industry, there are high risks such as workers getting injured on the job site, materials breaking due to defects, natural disaster happening during construction, economy collapsing, political changes and so on. Not only the company has to worry about liabilities, they also have to worry about getting paid by the customers on time, getting the materials back in good condition, and not being sued for defected materials due to manufacturing error or wrong assembly and so on. These are the major risks that PERI has to consider, and it is impossible task for a person to identify and monitor all of these in entire U.S PERI locations.
The formwork and scaffolding company depends on construction development in the country and its economy. If the economy would not do well, PERI will face a big problem due to decreased contracts with builders. What works in other industry does not necessarily would work for PERI. Zhao et al. (2014) state construction firms should approach enterprise risk management differently since the risk level and goals are different than the financial and insurance industries.
Another risk that PERI could face is the expansion. Currently the company is expanding rapidly. Just alone last two years the company hired over 200 employees, opened several yards and offices all over the country. This is great development for the company because it shows that it is doing well. However, with any expansion there are risks. Expansion causes the loss of the current situations that could potentially damage the company.
Godson and Werner (2016) state in today’s economy, it is crucial to have an effective risk management in order to stay competitive and in business. However, the authors mentioned that there have been very few studies done on enterprise management implementation process. So far, in North America industries that have been heavily implementing the enterprise risk management are insurance and financial institutions.
According to Hoyt (2011) there have been increased numbers of organizations that have implemented or considering enterprise risk management programs. Step one of the implementation process is understanding the importance of the risk management before laying the foundation. Hoyt (2011) state profit maximizing organizations should start to consider implementing an enterprise risk management program only if it increases the shareholder’s wealth.
As next identifying the risk can help to determine the “what if” scenarios. Once the company identified the risks, it can develop risk response plan for the identified risk. Even though the enterprise risk management have been known for few decades, many companies still did not implement the program due to lack of commitment of the board and senior management, not perceived as a priority by management, lack of a clear implementation plan, inability to coordinate with other departments, and so on. (Zhao et al., 2014).
Currently aluminum and steel industries are facing a risk due to political changes. President Trump imposed the tariffs on aluminum and steel industries. This change would hurt PERI financially. Like any other major formwork companies, PERI manufacture its’ products in Germany. If the tariff impose would apply to PERI, the company is forced to increase its’ material price. This will make the customers not be happy and they may decide to go with other companies who are less expensive. There are many unknown risks associated with the change but none knows exactly how this change could affect the company.
Arena et al (2010) suggest hiring a chief risk officer, whose responsibility is to act as an advisor who supports mangers in taking responsibility for risks. This might be a big investment since creating brand new position could cost lots of money. However, with this upcoming changes it might be worth to invest the money in a department that would help the company to save millions of dollars.
Next possible step would be hiring internal auditors. Internal auditors are there to assess the any internal risks that company could face and even help out with the entire risk management process (Arena et al. 2010).
Application by other organization
Since all organization could face any risks, many companies are motivated to learn to manage risks in order to stay in business. As stated above, many companies have started to implement the enterprise risk management process to their daily business. According to Proviti website, many major financial and insurance firms apply enterprise risk management. Firms that currently apply enterprise risk management are DENTSPLY International, Harrah’s Entertainment, Golcim, Alliant Energy and so on.
The reason why these organizations chose to implement enterprise risk management is due to expansion. As the firms get larger, the lesser the executives have clear view of any risks. Godson and Werner (2016) mention that many organizations experienced financial disaster due to poor risk management. These organizations had less focus on identifying, assessing, and managing the emerging risks. For that reason, the authors stress the importance of successful and steady risk management during organizations expansion.
Plan for implementation
PERI Formwork Systems should start look through their risk management policies and procedures. Certain policies and guidelines need to be updated and implemented. For example, the sales engineers cause the daily risk by agreeing on uncertain contracts. Often times the problem of the company is that the sales engineers do no follow the guideline regards the material and pay. For example, a recent problem that the company faced was that a sales engineer agreed to work with a joint venture company. This already puts the company a risk by working with two companies, as each company have its own rules and guidelines.
When project managers were identifying the risk of the above-mentioned contract, few things stood out immediately that could cause a big problem. The problem was that the sales engineer agreed to send already pre-rented equipment to the joint company straight from the other company. This puts the company in big risk because who will determine who is responsible for any damages? What if the material that was send directly from other company was damaged, and cause any injury or damage during the rental period? PERI has to make sure all their rental equipment meet the quality standards before sending the material to the customers.
Even though the company plans thoroughly its financial and management goals for the next few years, risk management seems to be not taken as a priority during the development of the strategy. It is important to feel and predict risks the company could face, and create a plan to take care of bad situations on timely manner or even prevent them from happening. When the executives agree on implementing the enterprise risk management, managers should be encouraged to set short and long term goals, and list risks that they could face while reaching their goals and how the company could overcome the obstacles successfully as a team.
The PERI company is growing rapidly, therefore, it is not a bad idea to create a new department for enterprise risk management and hire a chief risk officer. This department will be responsible to manage policies, monitoring, reporting, and integrating risks. This should not be a big investment problem since the company is creating new departments and positions to work more efficiently. Rogachev (2007) specify the role of the enterprise risk manager in his article. Enterprise risk management function is to report regularly about the risk and exposures, develop and implement and successfully maintain risk management policies, support an effective way of sharing information within the organization, and develop an overall risk management function. The author stress the importance of staying up to date with any development in order to successfully use enterprise risk management.
The company should also improve their communication method. If people are not sharing information with each other, important details can be overlooked. Not all information is important, but communicating with each other and sharing information will make some people’s work much easier. PERI puts high value in customer satisfaction. When a delivery is promised to reach a customer at certain time, it is important to communicate with the affected departments to ensure that they are all in same page and keep track of each other’s work. Sales engineers need to communicate and consult with the yard manager before setting up delivery dates to ensure if the yard has capacity to fulfill the order. If customer is not satisfied with PERI’s service due to delay, they might not consider the company for their next project and PERI would lose its reputation. As one can see, all department work together therefore it is important to improve the communication method internally.
It is understood that utilizing the framework and implementation will be challenging and there will be internal hindrance such as reorganization and getting everyone on board with the organizational change. The bigger picture is that the enterprise risk management improves the communication of project risk information, so the management can make better-informed decisions and deal with the risks more effectively and efficiently (Zhao et al. 2014).
Overall, PERI Formwork Systems will benefit from implementing the enterprise risk management. The framework will aid the company to achieve more success. This contemporary management technique will make the monitoring process easier for executives and management. PERI plans to expand furthermore, therefore, it is crucial for the company to switch from traditional risk management to enterprise risk management in order to protect the company from any negative risks.
Implementing process might be challenging but change is never easy and wanted. It is important to inform everyone the benefits of the process and how it could affect the company as a whole positively. Of course it is also important to mention the internal and external factors that could discourage the change and hinder the process but once everyone is on board the company should just proceed with the change.
Arena, M., Arnaboldi, M, & Azzone, G. (2010). the organizational dynamics of enterprise risk management. Account, Organizations and Society, 35 (7). 659-675. DOI: 10.1016/j.aos.2010.07.003
Beasley, S. M. (2016). What is enterprise risk management? Retrieved from https://erm.ncsu.edu/library/article/what-is-enterprise-risk-management
Blocher, E.j., Stout, D.E., Juras, P. E., & Cokins, G. (2013). Cost management: A strategic emphasis (6th ed.). Boston, MA: McGraw-Hill Irwin Publishing.
Godson, K. M. & Werner, D. G. (2016). Enterprise risk management: factors associated with effective implementation. Risk Governance & Control: Financial Markets & Institutions, 6 (4), 175-206. DOI: 10.22495/rcgv6i4c1art9
Hoyt, R. E., (2011). The value of enterprise risk management. The Journal of Risk and Insurance, 78 (4), 795-822. DOI: 10.1111/j.1539-6975.2011.01413.x
Rogachev, Y. A. (2007). Enterprise risk management and its practical implementation. Journal of Operational Risk, 2(3). DOI: 10.21314/JOP.2007.033
Zhao, X., Hwang, B. & Pheng, L, S. (2014). Enterprise risk management implementation in construction firms. Management Decision, 52 (5), 814-833. DOI: 10.1108/MD-02-2014- 0082
Guide to Enterprise Risk Management: Frequently asked Questions. Retrieved from https://www.ucop.edu/enterprise-risk-management/_files/protiviti_faqguide.pdf
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