By Dr. Vishnu Kanhere, Chartered Accountant
Preamble:Case studies have been an excellent teaching and learning tool, especially in a live setting. Thus, even though formal academic training relies primarily on texts, lectures and tests, in a less formal setting, especially for continuing education, the case study method is preferred.
In fact the tales of the Pancliatanira and Hitopadesha are excellent examples of how this method can transform people, making them smart, intelligent, successful, wise and knowledgeable.
I personally prefer case studies, as a case study cannot and does not have one right answer. In fact no answer given with enough understanding and application of mind can ever be wrong.
The case gives a situation, often a problem and seeks responses from the reader. The approach is to study the case, develop the situation, fill in the facts and suggest a solution.
Depending on the approach and perspective the solutions will differ but they all lead to a likely feasible solution. Ideally a case study is left to the imagination of the reader, as the possibilities are Immense.
Readers’ inputs and solutions on the case are invited and will be shared with others in the next issue. A suggested solution from the author’s personal viewpoint has also been provided for guidance.
Overview:
Event risk is a contingent risk as it depends on and materialises on the happening of an external event that is often calamitous having far reaching consequences. It being an external risk on which the organisation has little/minimal control it is a high-level risk that is difficult to predict, prepare for and handle.
Such events generally create a shakeout and destabilise / change the business, economic, social and cultural environment. Examples of such events in the recent past range from the tsunami, which was caused by nature, to man made events like the terrorist attack on 26/11 in Mumbai.
Event risks can also be classified in different ways as can be seen from the figure below:
External events by their impact on different dimensions and functional areas of the business pose a threat as well as present opportunities for growth of business and development of new lines of business. Post-tsunami, agencies involved in disaster management and relief work and those connected with insurance got a substantial boost.
Similarly, post 26/11, businesses dealing with security — physical, information security, etc. as well as those providing security cover and selling security devices and equipments are also witnessing a substantial boost.
In terms of stock market analysis, event risk can be described as a risk that comes from unexpected and unpredictable events such as a negative industry report, a competitor reporting unexpected poor financial results, or a ratings downgrade by an analyst or by a rating agency. (reference www.yourdictionary.com/event-risk).
Event risk can then be summarised as risks due to unforeseen events partaken by or associated with the company. These are extreme portfolio risks marked by substantial changes in market price. The example picked up for this month’s case study is that of a company employed in conducting corporate training programmes.
Capable Corporate Trainers Limited has been in the business of corporate training for over fifteen years now. It operates in major metros — Mumbai, Kolkata, Delhi and Chennai as well as in Bangalore and Pune.
The business model of the company consists of identifying training needs, developing programmes tailored to suit existing as well as emerging topics and delivering these through own (in-house) and outsourced faculty. Currently the company has two in-house trainers. All others are taken on contract basis as and when required.
The company has managed to hold its own against growing competition due to its good marketing, strong faculty, winning programmes, training ideas, etc.
The recent series of events and incidents have however, adversely affected the company.
1. The terrorist attack incident in Mumbai in November, has depressed the training market in Mumbai, the commercial capital.
2. The economic slowdown, meltdown and downturn, coupled with the stock market crash have been severe events with far reaching impact on the economy as a whole and on the training space in particular.
3. Changed policy of hotels regarding bookings and security measures in light of the fallout of the terrorist attacks on 26/11 have also been affecting the programmes.
Thus although currently the training calendar is set for the months of January to March 2009, sustaining the programme schedules and numbers of participants may prove difficult with cancellations and dropouts being the order of the day.
The top management has decided to have a Board meeting to sort out these issues and address the event risk faced by the company. The consultant to the company has compiled and furnished following further information for our reference.
The likelihood of another terrorist attack in any of the metros, larger cities and sensitive states is quite high. According to analysts, the financial downturn, economic meltdown and stock market crash are likely to adversely affect business till the end of 2009 and depress corporate training demand.
These various aspects and issues reflect a strong event-risk in operation.
As a risk manager, you are expected to identify and analyse these risks and advise the company on the best course of action, and come up with a ‘contingency plan’.
The Solution: The suggested strategy is outlined and implemented as below:
After identifying the risks, the company must put in place safeguards to eliminate or minimise the associated risks to the company based on the level of the risk.
For example, terrorist attacks pose a dual risk to the company. Firstly there is an inherent risk from where the buildings that the company is operating may be at risk of terrorist attack. The company must look at their insurance plan to see that it covers such risks. Secondly, the company must consider alternative storage for critical documents, training records, etc. The other risk is that of the possibility of harm to the faculty of the organisation while traveling to corporate clients’ offices to conduct training programmes. This can be addressed by a specific insurance plan for the faculty, which will not only take care of any company liability but also reassure the faculty with regards to the financial safety of their families. In addition to this, the company must also consider commencing security awareness and training programmes, particularly aimed at the staff of hotels and corporate offices. The demand for such programmes will naturally be high, given civic concerns.
The economic slowdown is the single biggest risk to the company’s business. With this in mind, the company must concentrate on those training programmes and clients which are the most profitable. The company may consider offering benefits in the form of discounts to loyal clients who generate a minimum guaranteed amount of business in a particular year. The company may also start looking at the business of training videos in CDs (DVDs), computer based programs, etc. This will reduce the risk to the company’s faculty and the cost to the client, while at the same time generating a new source of revenue.
Changes in hotel policies and booking arrangements can be addressed by tying up with chain of hotels (to be identified via enquiries through travel agents) that will reduce the formalities for bookings by identifying standardised documents, and other procedures to be followed. Further, the company may consider asking local clients to arrange for the booking themselves to be paid for by either the client or the company itself.
The risk of subsequent terrorist attacks may be minimised by considering online interactive training programmes at a subsidised cost, that will not only mini mise travel inconveniences and risks, but also the associated costs for the company.
To meet the dual risk of economic slow down (cost) and another attack (safety) the risk advisor also suggested:
- Change of venue from star hotels to other comparable facilities available in the town.
Many of these suggestions may require investment by the company in technology, particularly information technology. However, sound marketing of these new training measures coupled with judicious use of money and other company resources may lead to sustenance and higher profits in the long term.
