Boustead 3Q net profit down 48% y-o-y

Boustead 3Q net profit down 48% y-o-y
Written by Chong Jin Hun
Monday, 23 November 2009 15:57

KUALA LUMPUR: BOUSTEAD HOLDINGS BHD []'s third quarter (3Q) net profit fell 47.5% year-on-year, dragged down by lower income from its PLANTATION [], heavy industries, real estate and hotel operations.

In a statement to the exchange today, Boustead said net profit declined to RM86.16 million in 3Q ended September from RM164 million, while revenue dropped 27.2% to RM1.42 billion from RM1.95 billion.

Cumulative nine-month net profit dipped 58.6% to RM193.92 million from RM468.2 million while revenue was down 32.6% to RM3.91 billion from RM5.8 billion.

"We are cautiously optimistic that the steady price range of RM2,200 to RM2,400 for crude palm oil (CPO) could sustain until the end of the year on the back of steady overseas demand as world economies recover. A factor that bodes well for the CPO price would be the potential further weakness of the US dollar," Boustead said.

On its heavy industries unit, the company said it would continue developing its defence and commercial businesses, and pursue strategic partnerships with foreign parties to promote the TECHNOLOGY [] transfer.

Meanwhile, Boustead's property division's earnings are expected to be driven by current developments at its Mutiara Damansara and Mutiara Rini townships, besides the company's commercial and retail PROPERTIES [].

The expansion of its hotel operations which now include the five-star Royale Chulan Hotel and Royale Bintang Seremban are anticipated to further boost revenue for the conglomerate's hospitality arm.

Boustead intends to reward its shareholders with a third interim dividend of 7.5 sen per share less 25% income tax.


http://www.theedgemalaysia.com/business-news/154259-boustead-3q-net-profit-down-48-y-o-y.html



Boustead’s 3Q profit down 47% y-o-y
Tags: Affin Group | Boustead | Lodin Wok Kamaruddin

Written by Isabelle Francis
Tuesday, 24 November 2009 10:28

KUALA LUMPUR: BOUSTEAD HOLDINGS BHD [] posted a net profit of RM86.2 million in the third quarter (3Q) ended Sept 30, 2009, down 47% from RM164 million a year earlier but up 84% from the preceding quarter’s earnings of RM63 million.

Revenue dropped 27% year-on-year (y-o-y) to RM1.42 billion from RM1.95 billion but was up 11% from the preceding quarter. Basic earnings per share (EPS) fell to 12.41 sen from 25.48 sen a year earlier.

It declared a third interim dividend of 7.5 sen per share less tax, bringing the total to 17.5 sen or 35% per share less tax for the current financial year ending Dec 31, 2009. The latest dividend is payable on Dec 29, 2009.

For the nine-month period, net profit fell 59% to RM193.92 million from RM468.2 million a year earlier, while revenue dipped 33% to RM3.91 billion from RM5.8 billion.

EPS fell to 16.55 sen from 48.36 sen, partly due to the dilutive effect of a rights issue.

“Clearly the tide and sentiments are turning by virtue of the fact that our earnings are up (quarter-on-quarter). The sectors of the economy we are involved in, namely the consumer and the heavy industries segments bode well for the group while our PLANTATION []s continue to be a steady revenue generator and profit contributor.

“Our balance sheet looks strong given our recent rights issue which generated proceeds in excess of RM700 million. Our paid-up capital has increased to RM456 million and our gearing ratio has dropped significantly to 0.8 from 1.2 times. In essence, our financial strength is strong while our prospects look better,” said group managing director Tan Sri Lodin Wok Kamaruddin in a statement yesterday.

Boustead told Bursa Malaysia yesterday its highest profit earner — the heavy industries division — contributed a pre-tax profit of RM113 million for the nine-month period versus RM233.1 million a year earlier due to slower progress of work and cost escalation.

Its second-largest profit contributor, the plantation division, contributed a pre-tax profit of RM50.7 million versus RM260.8 million.

Boustead said the division achieved an average palm oil price of RM2,172 per tonne versus RM3,103 per tonne previously. Fresh fruit bunch harvest totalling 827,850 tonnes was 5% lower than last year.

It said its property division’s pre-tax profit of RM58.9 million for the period was 44% lower than last year’s. Profit from its hotel operation was lower due to the start-up cost of the recently opened Royale Chulan Hotel. It added that the property development segment profit was also lower, due to the absence of corporate lot sales.

Boustead said its finance and investment division reported an improved pre-tax profit of RM29.6 million.

It noted that BH Insurance posted a 62% higher pre-tax profit of RM24.5 million, mainly due to the increase in underwriting and investment income.

Meanwhile, it said the Affin Group posted a better pre-tax profit of RM383.2 million versus RM288.6 million a year earlier, due to improved net interest and Islamic banking income, while loan provisions were also lower.

Boustead said the trading division, meanwhile, posted a lower profit of RM21.5 million. The division gained profits from its petroleum retail unit Boustead Petroleum Marketing Sdn Bhd (BHPetrol), and from the LCCT Baggage Handling system project.

On its outlook,

• Boustead said its most lucrative business, the heavy industries division, will continue with its effort in developing its defence and commercial businesses. It will also establish more partnerships.

• The company is cautiously optimistic that CPO prices could sustain at the RM2,200 to RM2,400 level till year-end on the back of steady overseas demand as economies around the world recover.

• It said a factor that bodes well for the CPO price would be the potential for further weaknesses in the US dollar.

• It added that the property division’s earnings would be driven by the ongoing developments at Mutiara Damansara and Mutiara Rini townships and the division’s stable of commercial and retail PROPERTIES [].

• The company said that the expansion of the hotel activities, which now include the five-star Royale Chulan Hotel and Royale Bintang Seremban are expected to further increase revenue for the hotel division.

This article appeared in The Edge Financial Daily, November 24, 2009.

Hong Leong raises EPS forecast for UMW

Hong Leong raises EPS forecast for UMW
Written by Chong Jin Hun
Monday, 23 November 2009 14:55

KUALA LUMPUR: Hong Leong Investment Bank Bhd has raised its earnings per share forecast for UMW HOLDINGS BHD [] by up to 6% in financial years ending December 2009 and 2010. This is in anticipation that a recovering economic landscape will result in better car sales for the company.

The franchise holder of Toyota cars in Malaysia is also expected to register better financials against the backdrop of a weakening US dollar, besides lower advertising and promotion expenses.

"Higher consumer spending will lift auto earnings and UMW will see margin expansion from depreciating USD," Hong Leong analyst Jason Saw Koon Khim wrote in a note to clients today.

Saw has also upgraded his recommendation for UMW shares from Sell to Hold with a new target price of RM6.90 based on a higher price to earnings ratio (PER) of 15 times FY10 earnings.

The stock currently trades at a PER of 14 times FY10 earnings compared to FBM KLCI's 15 times, and pure auto stocks's seven times to 12 times.

The valuation premium of UMW compared to pure auto stocks is deemed justified by virtue of UMW's status as a big-cap entity, and the company's diversified operations.

"We think (UMW's) share price has fully priced in the earnings recovery as the stock’s PER valuation has expanded from 11 times to 14 times FY10 earnings."

http://www.theedgemalaysia.com/business-news/154252-hong-leong-raises-eps-forecast-for-umw.html

BAT’s dividends in jeopardy

BAT’s dividends in jeopardy
Tags: BAT

Written by The Edge Financial Daily
Monday, 23 November 2009 11:12

BRITISH AMERICAN TOBACCO (M) [] Bhd (Nov 20, RM44.76)
Maintain hold at RM45.08, target price RM42.50: BAT’s nine-month (9MFY09) net profit of RM573.9 million came in just within our expectations and consensus, constituting 70% of both our FY09 net profit forecast and street estimates. A second interim dividend per share (DPS) of 61 sen tax-exempt was below our expectation.

Double-digit volume contraction continues as illicit trade reaches all-time high of 38.7%. BAT’s 9MFY09 sales volumes contracted by 17.3% year-on-year (y-o-y), steeper than total industry volume (TIV) shrinkage of 14.6% and is the third consecutive quarter that BAT’s volume has decreased more than the TIV’s.

This was due to the acceleration in consumers’ downtrading in response to tough economic conditions and timing of pre-budget trade loading by retailers and distributors.

Lower sales volumes, particularly in the value segment, caused revenue to decrease by 7% y-o-y. Pall Mall’s retail audit market share slid to 7.8% (-0.6% y-o-y) as consumers bypassed value and extremely low-priced cigarettes (ELPC) for illegal cigarettes. BAT premium brands Dunhill and Kent however both grew market share in 9MFY09 by 1.7%.

The timing of marketing expense and higher finance cost saw 3QFY09 pre-tax profit decrease by 13% q-o-q, steeper than the 6% dip in revenue. Higher advertising and promotion expense for the launch of new compact cigarette product Kent Nanotek, consolidation of distribution network and higher finance cost (for the borrowings overlap as RM150 million medium term notes matured on Nov 2, 2009) caused the decline in pre-tax profit.

3QFY09 net profit slid further by 17% q-o-q, due to a 3% increase in tax rate due to the non-deductibility of interest expense from BAT’s move to single-tier tax system and a one-off adjustment for shortfall in dividend franking credits due to tax refunds.

Dividends are at risk, with the second interim DPS of 61 sen being 20% lower than 3QFY08’s 76 sen. While BAT will continue to pay out at least 90% of net profit in dividends, the practice of increasing absolute DPS y-o-y is under review. We have lowered FY09 net DPS estimate to RM2.53 (compared to FY08’s RM2.65). That translates to FY09 dividend yield of 6%.

We have revised FY09 and FY10 net profit forecast downwards by 2% and 3% respectively. We have raised our FY09 BAT volume contraction assumption to -10% (from -5%).

We maintain a hold recommendation with lower target price of RM42.50 predicated on a discounted cash flow (DCF) valuation with the weighted average cost of capital (WACC) at 6.3% and terminal growth rate of 2% from RM45 previously. — Kenanga Research, Nov 20





This article appeared in The Edge Financial Daily, November 23, 2009

Hai-O hits five-week low

Hai-O hits five-week low
Tags: Hai-O

Written by Joseph Chin
Friday, 20 November 2009 15:44

KUALA LUMPUR: Shares of Hai-O Enterprise extended their losses in late afternoon trade on Friday, Nov 20, falling to a five-week low of RM6.93.

At 3.23pm, the shares were down 27 sen to RM6.93, the lowest since Oct 15.

On Thursday, the shares fell 46 sen, the biggest one-day loss in recent weeks, as investors started taking profit after the run-up in the share price.

Hai-O is a manufacturer and wholesaler of traditional herbal and pharmaceutical products.

In late October, a local research house increased the indicative fair value for Hai-O to RM8.80 from RM6.80, based on higher price-to-earnings ratio (PER) of nine times CY2010 earnings per share (versus eight times CY2010 earnings per share previously).

This is a 38% discount to the research house's target PER for the consumer sector of 14.5 times due to its smaller market capitalisation as well as low liquidity.

The higher PER target, the research house said, was to reflect increased investor participation in mid-cap stocks,a lower risk premium and improved market sentiment.

http://www.theedgemalaysia.com/business-news/154142-hai-o-hits-5-week-low.html

Coastal Contracts profit doubles

Coastal Contracts profit doubles
Tags: Coastal Contracts

Written by Joy Lee
Tuesday, 24 November 2009 10:33

KUALA LUMPUR: COASTAL CONTRACTS BHD []’s net profit more than doubled for the third quarter ended Sept 30, 2009 on the back of a strong performance from its shipbuilding and ship repairs division.

Its net profit surged to RM47.95 million from RM22.52 million a year earlier while revenue jumped 113% to RM140.08 million from RM65.93 million previously. Subsequently, earnings per share rose to 13.31 sen from 6.39 sen. No dividend was declared for the quarter under review.

The shipbuilding and ship repairs division booked a higher revenue of RM132.8 million in the current quarter compared with RM60.4 million in the corresponding quarter a year earlier, an increase of 120%, due to more vessel deliveries in the current quarter. Its vessel chartering division recorded a 33% rise in revenue to RM7.3 million from RM5.5 million a year earlier.

“The improved performance was attributed to a combination of greater tonnage transported and higher fleet utilisation,” it said.

Year-to-date, the group said its net profit of RM108.69 million, which rose 66.3% year-on-year, has already surpassed 2008’s full-year profits of RM96.8 million. Its revenue for the cumulative nine months increased 33.5% to RM315.18 million from RM236.15 million previously.

The group said the steady resurgence of crude oil prices had caused previously shelved exploration and production projects to return on the back of revival in capital expenditures by oil companies.

The International Energy Agency has recently revised up its forecast for oil demand for 2010. As at 8.20pm yesterday, crude oil added 91 cents or 1.2% to US$78.38 (RM264.92) per barrel.

“In the light of these positive developments, the near-term outlook for demand of offshore support vessels (OSVs) is expected to improve, although a full-blown recovery may still be far from the horizon. In any event, Coastal group’s revenue and earnings will continue to benefit from the strength of its vessel sales order book, providing visibility for close to two years ahead. Coupled with a healthy balance sheet with low level of borrowings, Coastal group will continue to operate from a position of strength,” it said.

Moving forward, it said the group had increased optimism of securing new contracts to add to its vessel sales order book, especially in the OSVs category, as well as reaping recurrent returns from its chartering division through optimal deployment of the group’s fleet in energy transportation and in various oil and gas support services.



This article appeared in The Edge Financial Daily, November 24, 2009.

Every mistake is an opportunity to learn

Error is defined as an unintentional deviation from a goal, caused by an act or omission that is in principle avoidable.

Errors happen when we make decisions. 

• By improving the way we make decisions, we can try to prevent errors, or minimise their probability. 
• By improving the way we respond when things go wrong, we can try to manage errors, or minimise their impact. 
• We can also try to create positive impacts in negative situations, by taking the opportunities for learning that mistakes provide. 

Warren Buffett's Midas touch

The decisions that have made Buffett the second wealthiest man in the world have included investments in Coca-Cola, American Express, Gillette, The Washington Post and Wells Fargo, plus some major acquisitions in the fields of insurance, house building and building materials, clothing and furniture.  During 2003 Buffett, contrary to some market expectations, engaged in currency speculation against the dollar.  By the end of the year his company held some $12 billion in foreign currency.

Buffett's success is founded on information.  When, during the 1990s, undervalued stocks were becoming more difficult to find, Buffett turned his attention to corporate acquisitions.  His next field of operation, in 2002, was junk bonds - until prices rose.  The subsequent foreign currency operation built on the US trade deficit when foreign investors were flooded with dollars.

Buffett takes a long-term view and typically shuns debt.  During the dot-com boom he preferred to steer clear of high-tech stocks, his attitude appearing old-fashioned to many.  In the event, his preference for more traditional and easily understood firms and products bore fruit.  He had correctly gauged the low probability of dotcom stocks rising.  He likes to ask 'discomforting questions' to avoid biased decision making.

Buffett also understands the need to avoid fatal downsides.  He has said that he has 'never believed in risking what my family and friends have and need in order to pursue what they don't have and don't need'.

Responding to risks: Summary

There are several possible responses to risk, ranging from tolerating to eliminating.

The right response to risk depends on the specific situation and also our calculations of probability and impact.

Transferring and insuring against risk involve others in risks, to the benefit of the business; the trade-off is increased costs.

Managing risks well depends on sharing information, clear responsibilities and consistency of approach.

Responding to risks: Insuring risks

Insuring risks is similar to transferring them, but rather than asking another company to tkae action if a risk occurs, you ask them to financially compensate you for its occurrence.

As with transferring, the company will want payment for taking on the risk in this way.  This is familair concept from everyday life, where we have to insure our household goods, cars and mortgage repayments against a number of downside risks, from theft and accident to death.

Business also invest in many types of insurance, including public liability, employer's liability and so on.

Insurance is often a good response to operational risks.  It is particualrly appropriate for low-probability downsides with hugely significant impacts, such as a fire at the workplace.

Responding to risks: Transferring risks

Transferring is the concept of placing risks with those outside the business who are best placed to manage them. 

Typically, this means using another company to take on a business process that you do not wish to carry out in-house, or are unable to do yourself.  There are benefits in terms of reducing the probability and impact of downsides and also in-house effort in managing the risk, but there will be a cost - people will want paying for taking on risks.

Risks can be transferred in different ways:

• formally:  on a contractual basis (e.g. IT service agreement), or through some other written agreement
• informally:  through discussions and meetings, on a basis of trust
• tacitly:  through assumption, perhaps based on precedent or simply beliefs.

Tacit risk transfer is generally not beneficial - it often represents a situation where one party has wrongly assumed that the other one will take an action or respond to a situation.  To prevent problems like this, you need share all information on the risk with the potential transferee:  its nature, probability and likely impact (on both parties); what you will pay them to take it on, why you want to transfer it and so on.

Payment for taking on risks will be more realistic when there is frank and realistic discussion of probabilities, impacts and costs.  Lack of communication may prompt the party taking on the risk to overcharge in order to cover themselves against the unexpected, or factors tha have not been clarified.

Responding to risks: Hedging risks

Hedging means taking additional risks that offset other risks, so that if the downside impact of one risk occurs, it is (in theory) balanced by the upside impact of the other risk. 

An example would be betting an equal sum on both sides in a sporting fixture - whatever the outcome, you cannot lose.  In investment or business, a 'perfect' hedge (one where the different outcomes are perfectly balanced) is practically impossible. A contractor can partially hedge his material cost prices of his contract with an advance order with the manufacturer for future delivery.

Hedging isn'tjust an approach to business or investment risk.  We engage in many trivial hedging behaviours all the time in our everyday lives - in any situation where we wish to avoid the risk of commitment.  When we hedge in everyday life, we set up alternatives for ourselves that will minimise the negative impact on us if things don't work out.  Consider the planning of a Friday night out.  We might make tentative plans to go out with one group of friends, but remain open to other offers.  After all, a better offer might come along - with a higher probability of positive impact (more enjoyment).  We are 'hedging our bets'.

Responding to risks: Concentrating risks

Concentrating risks is the opposite of diversifying - it means deliberately 'putting all your eggs in one basket'.  The effect is opposite too:  it increases the severity of potential impacts, but reduces management overheads, variables, unknown factors and dependencies.

An example of concentrating risk would be assigning a single person to a project full time, rather than assigning a small team part time. 
The time and cost of running the project might well be reduced, and the project might well be reduced, and the project may be run in a more coherent way, but there is a risk that the key individual will move on, damaging the chances of delivery.

The equivalent in financial terms is investing heavily in one or two stocks or products that you believe are sound, rather than spreading risk around because you are less sure of your market knowledge.

Concentrating risk depends for its success on the skill and knowledge of decision makers.  With fewer chances to correct mistakes, people need to get it right first time.

Responding to risks: Diversifying risks

Diversifying is about 'spreading risk around' - reducing your potential exposure by not having all eggs in one basket.  It reduces potential negative impact, but this normally results in extra costs.

Diversification can be a good tactic where there are problems in keeping the risk 'in one place', perhaps because there is a big potential downside.  For example, printers are dependent on paper suppliers to keep their operations running.  By setting up many suppliers for this commodity, they make it more likely that they will be able to get cover from another supplier if one can't delviver, thus reducing the potential downside risk of running out of paper.  (They also reap a number of side benefits, such as the opportunity to benchmark the prices of different suppliers, gain information about suppliers, find out about different ways of handling their orders and transactions and so on.)

However, there's always a downside.  There will be more administrative work in handling a large number of suppliers, and more management decisions to be made about which one will be used in each case; is price the only factor, or is the commercial relationship important too?

Diversification is also a good strategy for managing financial risk.  Investment vehicles that give investors the chance to invest in a range of companies offer those with little stock market knowledge a way to invest with reduced risk of exposure to market volatility in comparison with direct investment in a singloe company.

The key to diversification is keeping the different risks as separate from each other as possible, or reducing interdependencies between them.  No amount of diversification will protect against a worldwide recession, but investing in different economies around the world will offset the risk of a downturn in any particular one of them.

In a project contex, diversification can improve the chances of success.  Suppose a project has a 0.8 (80%) probability of failure.  It follows that the probability of success is 0.2 920%) - not particularly good.  Perhaps it is a speculative research and development project aimed at creating a new product.

But what if we ran two such projects?  The probability of both failing is 0.8 x 0.8 = 0.64 (64%) .  And if we ran three, the probability of ALL THREE  failing would be 0.8 x 0.8 x0.8 = 0.512 (51.2%), making the probability of having at LEAST ONE success nearly 50% (0.488 or 48.8%).  As we add more and more projects, the chances of success in at least one case steadily increases.  With 20 projects, our chances of having one success are 0.99 (99%) - we would be almost certain to succeed in one of the 20 projects. 

Diversifying risk through multiple projects:

Probabiltiy of total failure -----  Probability of single success                          
Run a single project
80% (0.8) ---- 20% (0.2)
Run two projects
64% (0.8x0.8) ---- 36% (0.36)
Run three projects
51.2% (0.8x0.8x0.8) ---- 48.8% (0.488)
Run 20 projects
1% (0.8^20) ---- 99% (0.99)

This illustrates how diversification can improve the chances of success, although at a price.  Running 20 projects will be much more expensive than running one.  But it may be that 20 modest projects, each researching a different potential product, are a better way forward than a single 'all or nothing' project puttting lots of resource into a single product.

An important point to remember is that the 'winners' must pay for the 'losers' if you choose to go for diversification.  The business must be able to afford to take all these risks, with all their respective potential downsides, and be confident that there is no risk of bankruptcy as a result.

Responding to risks: Minimising risks

If you choose to minimise a risk, you accept that it can't be eliminated, but take action to reduce its probability or negative impact (or both).  Minimising probability means taking actions so that a negative outcome is less likely to occur; minimising impact means taking actions so that the consequences will be less severe if a negative outcome does occur. 

We can see this in action by considering our own lifestyle choices.  By choosing a healthy diet and exercising well, we minimise the probability of health problems in later life.  By taking out health insurance, we hope to minimise the impact if they do occur.  Clearly, we could do both these things - minimising both probability and impact as a result.  How much action we take to minimise a risk, and the kind of actions we favour, depends on our own priorities, plus (as always) our assessment of probability and impact.  If our past medical history suggested we were more at risk from health problems, we might be more motivated to take action.

A parallel from business would be typical responses to operational risks.  Employees should be protected from physical harm wherever possible (minimising probability), but the employer is also obliged to have systems in place to deal with injuries should they occur (minimising impact).

Another example of minimising impact is double redundancy in computer systems.  Here an entire duplicate system is created and maintained, so that it can take over in the event of malfunction.  This hugely reduces the potential impact (though not the probability) of crucial data systems going offline; there is of course a trade-off in terms of cost.  This is often the case: in general, the more you reduce impact, the more cost is involved.  The business might choose to instate a repair contract with an IT service company instead, but this would not provide the same reduction of impact as the double-redundancy system.

Responding to risks: Tolerating risks

Your assessment of probability and/or impact may lead you to the conclusion that is is acceptable to tolerate a risk.  Such a decision is likely to be based on one (or both) of these two perceptions:

• the probability of the downside is so low that it can be ignored
• the impact of the downside would be so insignificant that it can be ignored.

If you are satisfied that one or both of these is true, a decision to tolerate the risk may well be the right one.

By making the choice to tolerate a risk, you are basically saying that you will do whatever is necessary to recover from a downside when it occurs, but nothing to prepare for it in advance.  However, this decision clearly rests on your understanding of probability and impact.  If you cannot be certain of probability, you may not be on safe ground tolerating the risk of a downside.

We have seen how impacts can often be quantified in financial terms, so that they can be compared to each other.  If you tolerate a risk, the business needs to be financially prepared to sustain the impact of its occurrence.

For example, if there is a risk that one in every hundred units made in a factory will be defective, but changing the manufacturing process is prohibitively expensive, the risk may be tolerated.  But the business needs to be sure that the waste resulting  from this decision to tolerate a risk will not damage its profits.  A decision might be taken to increase the selling price of the item, or sacrifice some profit margin, to offset the cost of the risk occurring.

Responding to risks: Eliminating risks

Clearly, if a risk has potentially negative consequences, then eliminating it is the best alternative. Given the choice, we would like to live without the potential for downsides to occur.

In business terms, this is clearly the most desirable action to take - it reduces management effort both now and in the future if you don't have to worry about a particular risk any more.  However, this is seldom possible - few risks can be eliminated completely, and some risk is going to be present in nearly every business situation.,

The key to considering elimination is the risk profile.  As we've seen, any risk that involves a fatal downside is a strong candidate for elimination, since the occurrence of the downside, however low its probability, is totally unacceptable. 

We would not choose to play a dice game that might bankrupt us.  In business terms this might equate to changing manufacturing processes that endangered people's lives in some wqay.  However unlikely the outcome, it would not be acceptable simply to tolerate the risk. 

Eliminating a risk may involve doing things in completely new ways.  If significant business change is involved in getting rid of a risk, you may need to consider what new risks will be created as a result.

Responding to risks

Responding to risks - the actions you can take once you've identified a risk and understood its probability and impact.

There are usually risks that cannot be avoided in business, no matter what alternative we choose.  Our decisions therefore focus on how we will respond to them, rather than trying to avoid them.   Responses to risk will vary from business to business and from risk to risk, but they tend to fall into one of these categories:

• eliminating
• tolerating
• minimising
• diversifying
• concentrating
• hedging
• transferring
• insuring

Deciding which of these responses is appropriate in any given situation requires careful analysis of the risk in terms of probability, impact and potential outcomes (expected values).

Getting it right

Whatever approach you choose to the risks you face, there are central themes to risk management that have to be in place for it to be successful.

Effective decision making and risk management are based on understanding, information and consistency.  It is vital that everyone involved is working from a shared idea of the significance of the risks facing the business, the probability of them occurring and the actions that they need to take in order to minimise downsides (or maximise upsides).

Here are some questions to ask in key areas to assess your risk management capabilities:

understanding operational risk:

• are the risks that can arise in key business process understood?
• are the implications of choosing or creating particular new processes understood?
• are the impacts of operational risk understood, in terms of their immediate impact and also any potential impacts at higher levels?

understanding strategic risk:

• are decision makers aware of the strategic risks facing the business?
• are the implications of 'doing nothing' or continuing along the present course understood?
• has 'business as usual' been examined in the same way as a 'risky' new direction would be?
• have the risks implied simply by entering or remaining in a particular market been examined?

understanding probability:

• have probabilities been quantified in a consistent way, that allows for comparison?
• what evidence is there to support estimates of probability?
• where there is uncertainty, has this been understood and acknowledged by decision makers?
• is there shared understanding of the subjectivity involved in probability calculations?

understanding impact:

• have impacts been quantified wherever possible, to allow for comparison?
• is it clear where risks might impact on more than one area of the business?
• is there the potential for risks to have interdependencies, making the occurrence of two or more risks together more significant?
• are the different levels of impact understood (operations, strategy, financial, cultural)?

information:

• documenting:  how will risks, responses and results be documented?  what proceducres will be used for recording the actions taken to manage risks and their results?
• sharing:  how will information on risks and the success (or otherwise) of particular response be disseminated throughout the business, to avoid duplication of effort?
• communicating:  who owns key information? who does it need to reach in order to support decisions on risk? what are the best media, formats and techniques for communicating?

clear roles and responsibilities:

• whose responsibility is each risk? who 'owns' it by default?
• who has enough authority and/or information to take a decision on how risks will be managed?
• who will take action to manage the risk?  who will become its new 'owner'?

reporting and monitoring:

• who needs to know what, and when?
• what is the best medium or channel to provide information on risks, such that those who need to take decisions have the information they need in a format they will find conducive?

consistency of approach:

• if similar risks occur in different parts of the business, is the response the same?
• could risks easily be aggregated across the business if this kind of concentration brought benefits?

consistency of analysis:

• where possible, are risks assessed using standard, objective criteria, or at least those that are agreed by all within the business?

consistency of tools and techniques:

• where decision-making tools are used, are they used in a consistent way across departments and teams?
• is there a genuine shared perspective on risks that affect different groups?

consistency of terminology:

• are risks described in terms that allow meaningful comparison and evaluation across the business?
• are common terms used with the same sense throught the business?
• are there any aspects that need to be quantified, or made less subjective, to allow for more focused discussion between those involved?

Understanding Risk and Decision Making

Key ideas:

Probability is the likelihood of an outcome.  Probabilities are expressed numerically, but are often subjective.

Impact is the effect that a particular outcome will have.

Decision trees help us get a grip on our alternatives.

The concept of expected value helps us compare alternatives based on probability and impact.

Risk profies take us beyond expected value to consider unacceptable or fatal downsides.

Getting more information to reduce subjectivity in decision making takes time and costs money


Ref:
Risk:  How to make decisions in an uncertain world
Editor:  Zeger Degraeve

It's important to remember that people are the real decision makers.

Tools and techniques for decision making:  Means, not ends

However you go about making decisions, it's important to remember that people are the real decision makers.  Tools and techniques such as decision tress help to generate insight into a problem, stimulate communication and build a shared understanding of it, but they cannot take the decision for you.  In the last analysis, business decisions are about people - in every sense. 

Our favoured courses of action often flow more from our own values than from what is objectively 'right' in a situation.  Our estimates of probability are similarly subjective.  And in assessing impact, we are likely to be highly subjective too, perhaps concentrating on those areas of downside or upside that affect us most directly. 
The danger of using models such as those discussed in the previous postings is that they can give the illusion of objectivity.  Writing things down and analysing them is important, but the main benefit of doing so is to bring clarity to a decision, rather than precision.

We have to remember that tools and techniques are only as good as the information we put into them.  They are dependent on the extent and accuracy of information available at the time the decision is taken.  No matter how we present or analyse the information we have, we cannot add to it or make it any more reliable than it already is.  All we can do is aim for a shared sense of what we know and what we don't know, to build an informed consensus for particular courses of action.

Only people can build a bridge from the information that is available to a decision that can be taken forward.


Tools for risk assessement: and decisions making:
Probability
Subjective probabilities
Impact: hard and soft
Decision trees
Expected value
Fatal downsides
Life decisions
A business decision
Break-even analysis
Risk profiles
Probability/Impact matrix

The Information Trade-Off

Obtaining more information can help improve the quality of decisions by providing more detail about impacts and reducing subjectivity over probabilities.  It also helps to build up awareness of other alternatives that could be taken.  In general, it is a given that seeking more information will be beneficial to decision makers, having the general effect of reducing the level of uncertainty involved in a decision, and making it more likely that the outcomes of particular decisions will provide opportunities for learning.

However, there is a trade-off to be made.  Decisions usually have to be taken within a particular timeframe, and getting more information takes time.  It can also cost moneuy.

Both of these have implications for the level of extra effort that goes into facilitating more informed decision making.

The decision makers can reduce subjectivity by researching what is going on in various areas.  As they learn more and more, the probability that they are assessing becomes less and less subjective.  In the end (in theory at least), they can arrive at an objective probability.  However, there are some important issues facing them:

• getting information takes time:  the report must be submitted at a given deadline, even if they havent't pinned down the probability of the event occuring.
• gettting information costs money:  doing research will use up the resources of the business; you have to decide how much investment in information to support decision making is appropriate; this means assessing how sure you can be of the information you do have, and how much more certainty can be achieved for a reasonable cost
• situations change over time:  as you collect information to help you make a decision, the context or nature of the decision may be changing; there may be a limit to the accuracy you can achieve.

Inevitably, decisions have to be made with limited information.  Before you make a decision, you have to decide whether the information at your disposal is sufficient to make the decision, or whether you are going to make an investment (in terms of time or money, or both) in getting more information - and how this might affect the nature of the decision itself.  (You also need to guard against certain psychological traps.)

Management actions feed into decisions and affect their outcomes, whether this is in the form of considering decisions for longer, obtaining more information or just bringing different personal perspectives and experience to bear on the decision.  There will always be uncertainty involved, but by putting time and effort into decision making, its negative effects can be minimised.  In many decision situations, there is a 'third way' - the choice not to follow one of the branches on the tree, but to invest more effort in refining the picture of the decision before it is taken.

This poses interesting questions:

• how much is your time worth?
• what potential downside of this decision would you be prepared to accept if you could spend the time thinking about another issue instead?
• what potential upside do you regard as being a good 'purchase' to make with your time?

Up to this stage, you have acquired the knowledge you need to assess whether simple games of chance are worth playing.  Business decisions are much more complex and subltle than this, and you will never reach a point where you 'know everything', as in the dice game.  The issue is how much time to put into making a decision, and whether to put additional resource in obtaining more information before making the decision. 

In the end, this is likely to be a judgement call.  While time can be quantified and given a nominal cost,k the benefit to be obtained from it is likely to be very difficult to quantify.  In fact, until you actually invest the time, you cannot know how beneficial the information you gain will be.  We have to deal with this contradiction every time we take a business decision.