Comparative Analysis of Risk Management Strategies Used by BP and Holcim Limited

Risk Management is the distinguishing, analyzing, and afterward responding to any risk that arises during the lifecycle of a project to keep it on course ensure the attainment of set objectives. Risk management should not only be reactive but also planning process to determine and control potential risks when they occur. Risk management may have different strategies depending on the types of project; on a large scale, a risk management plan includes extensive, comprehensive, detailed planning for each risk to ensure mitigation strategies are in place in case the threat arises (Peppard, Joe, and Ward 57). For small projects, risk management is a simple, prioritized list of low, medium to the high priority of risks. Some projects may have had the ideal policies for risk management while others have implemented risk management strategies were a failure. This paper will provide a comparative analysis of the risk management strategies used by BP Oil Company and Holcim’s limited.

When in 2007 Tony Hayward became the chief executive officer of BP, he assured the company that he would prioritize safety concerns and introduced several rules to that effect. However, three years later under his tenure, the company faced arguably one of the most prominent crises in the oil industry which with the leakage and explosion of the Horizon oil rig in the Mexican Gulf. According to Chang (89), the incident remains one of the worst human-made calamity in history (Chang 89). Subsequent investigations into the incident attributed managerial failure the cause of the disaster. It was established that the management body’s inability to consider, evaluate, and communicate the entire scope of potential risks rendered them unable to address the risks adequately. Tony’s situation is the atypical case of project failures. Risk management is in most cases treated as an issue of compliance that can be solved by the introduction standard rules which management expects staff to follow. Although regulations are mostly sensible and in most cases limit risks, they are not adequately mitigative as was the case with BP’s deep-water horizon crisis. The same way it does not prevent the collapse of many financial institutions during the credit crisis.

Companies can suffer dramatic losses even if they have a first tracking risk management strategy. However, most of the circumstances may be caused by the measure and accuracy of data upon which the risk management practices rely as a co-factor with of the level of risk. Risk management is difficult to get right most of the times (Kim, Chan, and Renee 108). This insight opens an exploratory path that could assist in understanding BP’s failure in risk management. It is indeed plausible that BP relied intensively on historical data. Risk management entails extrapolating from the past to predict the probability of occurrence of any given risk. However, relying on previous correlations among data renders the decision-makers susceptible to misinformed decisions. Besides, relationships between data are not usually constants since they may increase during the risk period. Merkley, Brian, and Jerry (23) therefore notes that it is advisable to develop a model of the probability distribution of all the correlations in appreciation of the reality that history is an imperfect guide for risk management.

In most cases, risk managers differentiate the operational, credit and market risks and measure each in isolation (Bromiley et al. 162). However, BP’s management did not go beyond these measures since it failed to perform an organization-wide risk assessment. It instead engaged the general risk management practice of using risk boxes. Their approach was indeed inappropriate given the reality that the oil industry is prone to unique risks of which other conventional businesses are not exposed. Also, they inadvertently ignored the threat of potential leakage by not including it the risk boxes since it was outside the regular risk class (Bromiley et al. 165). The deducible lesson is that it is essential to measure risks in a way that considers all the organizational structures and entails all the material risk to which the firm is exposed.

The failure was also attributed to the management’s oversight of the less apparent risks. The risk managers worked their level best to measure and capture risks, but eventually, risk management failed since the parties aware of the threat did not advise management (Chang 168). Their lack of prudence was detrimental since the unreported danger resulted in a massive explosion in the Gulf of Mexico. Also, the risk could have been underreported because the risk-takers decided to conceal the hazards during the construction of the oil rig (Chang 175). The senior management was partly responsible for keeping the failure after secret after its discovery. The company had built a risk management system to aggregate risks across all the operations because one of the computers was different from the other in the rest of the firm. However, the top management decided to let the company continue operations instead of effecting the change. The effect was that it ignored the risk in the aggregate group and overlooked its inclusion into BP’s management system.

Poor communication between the CEO and the board also led to the failure. Ideally, BP’s CEO should have consulted the board in line with the traditional best practices of involving critical stakeholders on matters pertinent to the running of an organization. The firm had the state of the art risk management systems, but the CEO and the board did not understand them better because the risk manager could not explain correctly the technically complex report to the non-experts (Bromiley, Philip, et al. 216). The miscommunication had a more detrimental effect since it inspired overconfidence in their capabilities while the intermediaries distorted the information. In most cases, the hierarchical structures served as filters when data was sent to the top management chain. This practice delayed the relay of essential data to the senior-most management. The key takeaway from this scenario is that risk managers should not rely entirely on risk management systems that may prove costly but otherwise unreliable. On the contrary, they should develop a risk culture that understands and accepts the limitations involved to improve the strategic value of risk management.

Holcim Limited is arguably one of the companies with exemplary risk management strategy. The company sustains and refines its business management process using two proven tools - a risk map and a risk driver which are provide a critical holistic view of risk. Holcim’s business risk management strategy also consists of six steps. The fundamental steps involve the identification, sourcing, and measurement of risks. The phases in the second stage include the evaluation, management, and monitoring of risks. According to Merkley, Brian, and Jerry (187), Holcim’s practice of integrating risk management into the business strategy has impacted positively on the company’s ability to avoid losing much of its efficacy. The company’s risk management is defined by a systemic and proactive approach to addressing risks and opportunities. The responsibility of the risk manager was ensuring that all the elements and tools for risk management were in place. The risk management features comprised a methodology for implementation and execution, the maintenance of the database risk, training, and the compilation and preparation of co-operating risk report. In the view of Merkley, Brian, and Jerry (187), a changing business environment was the critical motivation for the company’s decision to embark on reconstitute its business risk management strategy. The benefits of the Holcim’s business risk management included both soft and hard results.

Two tools have helped to sustain the success and momentum of Holcim’s business risk management strategy. The first is the risk map has four segments which visualize the firm’s risk profile. On the map, the likelihood of risk or opportunity is depicted on the x-axis. The y-axis represents its potential significance or impact. It is used in the development of the actual and targeted risks profiles during the process of planning the business (Peppard, Joe, and Ward 265). The second tool is the business driver mind map which visualizes the various sources of risks and their interrelationship. The risk driver map enables the risk management team to analyze the risk thoroughly. It also facilitates the means of sourcing risks to determine the location and reason for the existence of risks. The hard benefits included the issue of quantification.

These two tools have further helped the company in the management of risk that most of the companies have failed to address and this is the problem of quantization. Some of the groups in the company go into detail in the quantification of risks while others do it to a lesser extent. The company does not evoke any simulation model such as the Monte Carlo methodology but merely conducts a customized, simplified measurement (Merkley, Brian, and Jerry 197). This method has assisted the company to prioritize risks according to what it deems essential and the relative position of the risk on the risk map. Holcim’s could formulate an appropriate risk response. The soft results were increased awareness, a faster learning curve, better change management and improved communications upward.

From the risk strategies derived from the two companies, it is evident that conventional approaches to risk management present many challenges. For a company to manage risk efficiently, risk managers should make outstanding judgments by considering relevant and accurate metrics and data. This practice enables them to develop a concise sense of how all the integral parts work together to ensure there is excellent communication (Peppard, Joe, and Ward 276). In the worst case scenario, risk management may fail, and the effect of correlation among data may compound without warning. At this point, it becomes critical to seek solutions outside the scope of the traditional outside risk management frameworks. Rather than assume a minimal likelihood of occurrence of catastrophic hazards, risk managers ought to model scenarios for such events. This precautionary measure aids the development of sustainable risk management policies.

Works Cited

Bromiley, Philip, et al. “Enterprise risk management: Review, critique, and research directions.” Long range planning 48.4 (2015): 265-276.

Chang, James F. Business process management systems: strategy and implementation. CRC Press, 2016.

Kim, W. Chan, and Renee A. Mauborgne. Blue ocean strategy, expanded edition: How to create uncontested market space and make the competition irrelevant. Harvard business review Press, 2014.

Merkley, Brian W., and Jerry A. Miccolis. ”Getting left behind.” Risk Management 49.4 (2002): 28.

Peppard, Joe, and John Ward. The strategic management of information systems: Building a digital strategy. John Wiley & Sons, 2016.