Managing the risks that matter

Managing the risks that matter

Any venture will be accompanied by some level of uncertainty. Will it be completed on time? Will it meet the budget? Local and international markets can change, presenting new challenges and opportunities for investors and developers. Given the enthusiasm behind a range of new developments across sub-Saharan Africa, raising the subject of risk and risk management may not be the best way to secure one’s place at the boardroom table. It should be. Simply put, risks are uncertainties that matter. They can present opportunities or challenges, but managing both well plays a crucial part in the successful execution of strategy. Too often they are ignored.

Effort is frequently expended on managing uncertainties that do not really matter, often driven by historic projects or bias. For example, a team planning a major infrastructure project in West Africa focussed on trying to eliminate the theft of scrap metal, at the expense of other, potentially more damaging material concerns arising from poor engagement with the community. When projects progress to the construction phase the same is often true: time, effort, and expense are incurred trying to address issues that are of little consequence to the overall development.

In order for these risk management strategies to be effective, they should be integrated into a project as part of everyday activity and ‘business as usual’. This means that uncertainties need to be understood and managed from conception, through feasibility, to design and construction, and ultimately throughout the operational life. The specific mechanisms for doing this in each phase may vary – shifting from qualitative assessment to quantification – but the principle remains constant throughout. It is crucial to ensure that risk management activities are adequately planned for and resourced.

How can one ensure that the focus is carefully directed? Thorough consideration of the project’s objectives should be the starting point. Regardless of the specific project, be it the construction of a port, a real estate development, or a new industrial city, each stage of development will have clear objectives and associated risks. These aren’t static as the involvement of stakeholder groups through each stage can present new issues. For example, the demobilisation of workforces towards the end of construction can, in some cases, create enduring concerns for the operator. Though this can often be anticipated and planned for, projects are never executed in isolation from the wider economy or environment, meaning that external factors like political change can alter significantly while construction is underway. It is for this reason that risk should be an integral part of the processes use to select specific strategies. The dynamic nature of risk is such that the common practice of senior leaders making enquiries about how top risks are being managed is inadequate; it is better to seek evidence that they have genuinely been included in setting strategy.

Understanding objectives and ensuring they are well communicated and clearly understood by all parties is essential to ensure that only the risks that matter are identified. Without it, participants in complex projects might refer only to established practice in that location; irrespective of how ineffective or irrelevant that may be for the task at hand. They might also refer only to what they did on the last project, or neglect to give due consideration to the threats and hazards in the location. Ill-defined or communicated objectives result in time and money being poorly allocated. Investors will invariably be seeking assurance that the objectives that underpin anticipated returns are not being threatened and, that even if contextual factors change, there are robust processes in place to ensure that risk management moves with it.

While some of the technical engineering challenges may be eagerly assessed and plans drawn up to address them, the more prosaic concerns can be omitted. For instance, access to a large facility or development can put a strain on roads and challenge infrastructure in the surrounding area, well beyond a development’s borders. A range of external and largely uncontrollable factors can also play a part: other developments, other projects, and the evolution of economic activity can influence the precise impact of a development. Similarly, the provision of seemingly basic services, like waste management, can have significant secondary impacts on the overall concept for the development.

Maintaining a good understanding of the global business environment with due consideration for how it may affect a development can be a challenge, particularly for developers typically focussed inward on their project. When considering the potential of large new developments in sub-Saharan Africa, apprehension around emerging markets globally may prompt the need to reassess existing plans. Or, when considering operational risk, the persistent terrorist threat in Nigeria could prompt concerns from users, additional regulation from government, or both. Maintaining a nuanced view of the external context is crucial to ensure that objectives are identified and strategy is defined after due consideration of the opportunities and potential downsides.

When risks have been identified, they need to be analysed in order to determine what warrants the greatest attention. An assessment of impact and likelihood is made – on a qualitative basis as a minimum, but quantitative analysis can be performed, even for factors like criminality and political change. This analysis enables the project to determine which factors may have the most significant effect on objectives.

Thorough analysis, focussed on what really matters to the project, simplifies the ultimate step in the overall process: the ‘response’ – meaning what to do about the risks and addressing the uncertainties that matter. A range of options exist for threats, including risk avoidance, transferring, or mitigation. Opportunities can be exploited or even enhanced to make them more likely to occur. Risks can also be shared or accepted. By employing an iterative process, projects can ensure that only uncertainties that genuinely matter get attention and that response options are evaluated, implemented, and directly address the issue at hand.







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Written by African Business Magazine

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