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Some Types of Lightning From Brainstorming

(TNU 2008)

Fire

Work Stoppage/Strikes

Natural Disaster

Loss of Key Employee

Loss of Leader

School Shootings

Crime

Law Suit

Sudden High Turn Over

Economic Crash

Terror

Loss of Income

Employee Problems

Lightning

(by Lana Horton, Linda Saylor, Kelly Simpkins, Herman Hicks UoPhx 2008)

Introduction

Herodotus, a Greek historian, once said, “Great deeds are usually wrought at great risk” (Gary-Larson, 2005). In today’s changing environment strategic business planning can be extremely difficult because risks are inherent to projects. These chance events are described as “Lightning” within the business-planning model refereed to as “The Storms of Chaos” by Craig Stevens (Stevens, 2007). “Lighting Strikes” are the unforeseeable events that can occur and cause drastic changes to our environment. When planning, managers are asked to plan for foreseeable events and risks; however, managers need to focus on the unforeseeable events or “lightning” as well. A few examples of lightning strikes are personal injuries to key employees, fire, criminal activity, or extreme weather events. This paper focuses on the recent lightning events affecting the construction and finance industries, and what measures can be taken to plan and manage lightning.
Construction Industry

Lightning - Lana Horton

Gray and Larson’s Project Management: The Managerial Process mentions strategic management as having two dimensions “responding to changes in the external environment and allocating scarce resources of the firm to improve its competitive position” (p.22, 2005). Therefore, learning from past “lightning” events and their effects on major industries can increase a businesses’ chance of “lightning” survival. This section displays an industry changing “lightning” occurrence and its consequences on the construction industry. “Only by focusing on actual events can potential solutions are made” (Gray, Larson, 2005).

Lightning is an unforeseeable event having the potential to weaken a business entity to the point of non-recovery. Natural disasters can be such a force. The economic onslaught brought by Hurricane Katrina is a recent “lightning” event in the construction industry. Katrina hit the Gulf Coast on August 29, 2005. “The total cost of the devastation is expected to be $125 billion or more, substantially greater than the damage caused by 1992’s Hurricane Andrew, estimated to be $37 billion (adjusted to 2005 dollars)” (Murray, 2005). By size and scope, Katrina ranks as the costliest disaster in U.S. history. The local costs of this cataclysmic “lightning” event are all too apparent. However, this hurricane has not only greatly affected the local area’s construction industry, but also has impacted the U.S. construction industry as a whole. There have been three major areas of “lightning” like impact: building materials, contractor availability, and skilled labor.

Building Materials

The Gulf area is seeing record increases in construction since Katrina. The concentration of construction activity has diminished availability of certain construction materials. Therefore, the increase in demand will raise some material prices. The resulting uncertainty in price and availability means, “the construction industry will continue to adjust to a higher cost structure” (Berry, 2008).

Four major construction material costs have been impacted: wood products, gypsum board, concrete and steel. Lumber is the most impacted construction building material. Most of the country’s lumber supply is located in the South, Katrina’s hardest hit area in the nation. “With Katrina’s fury resonating throughout the construction industry, damaged southern mills and gas hikes have become a construction company’s nemesis” (Berry, 2008). Therefore, this industry will see continuing cost increases between 20-30% (Langdon, 2005). Gypsum board is experiencing a gulf command between 5-7% of the total market resulting in price increases of 15-20% (Langdon, 2005). Concrete demand is relative low compared to lumber and gypsum, but has a 5-6% increase in price (Langdon, 2005). The steel market “shocked the construction industry with its 2004 increases” (Murray, 2005). This is in part because the Gulf “is a major port of entry for steel imports, thus the reduced capacity of the port may have a negative impact on steel prices” (Murray, 2005).

Material Cost Increases*
Key Material Gulf Demand on Total Market % Increase Since Katrina
Wood 5-7% (1) 20-30%(1)
Gypsum Board 5-7%(1) 15-20%(1)
Concrete - 12.7%(2)
Steel - +- 20%(1)

Karl F. Almstead, Vice President of Turner Construction comments, “From the materials perspective, commodity prices have eased slightly over the past quarter, but global demand, especially from the emerging economies, continues to drive an upward trend in prices” (Turner, 2008). These steady increases in building material costs have “owners seeking construction management firms with top-notch estimating and engineering divisions to effectively value-engineer upcoming projects to get the highest-quality facility for their dollar” (Berry, 2008). However, contracting firms’ resources are tight because of the large volume of work over various markets and regions. The next section, contractor availability, will discuss the shortages within the construction market regarding general contracting firms.

Contractor Availability

The industry contractor availability was stretched thin by the housing boom and the soaring demand for new construction in many markets. This demand is made worse by the gulf’s massive reconstruction and recovery effort. The shortage of qualified contractors allows for higher profit margins. However, these higher profits come with greater uncertainty. Turner Construction, the nation’s leading general contractor, is monitoring building costs and their increases every quarter.

As mentioned in the last section, the industry is impacted because of record price increases of necessary building resources because of Katrina. General contractors “are now unwilling to absorb these risks to the same degree, and as a result are including greater risk premiums in their bids” (Langdon, 2005). Not surprising the construction industry experiences bid increases in the 10 – 20% range since Katrina.

Construction Labor

“Dale Scott of SIKON Construction in Boca Raton, FL said, ‘I personally feel the real problem we face is the drain on an already stretched-thin workforce. When the rebuilding of the Gulf Coast starts, it will probably deplete the labor force throughout the entire eastern half of the country’” (Berry, 2008). The most serious shortages resulting because of Katrina is the skilled construction industry. Construction labor was “already in short supply even before the onslaught of two major hurricanes in the Florida area in previous years, and now from Katrina” (Langdon, 2005). This has resulted in significant increases in construction labor wages.

Katrina brought significant rises in costs and scarcity of building materials, contractor bids, and skilled labor. These high demands and price increases will continue to affect the U.S. construction industry and the economy for years to come. The actual life of a “lightning” event, such as Hurricane Katrina, is longer than the immediate response to the event. In some cases, as in the case of Katrina, the life sequence overheads of a “lightning” event can be sustained 10 or more years. Therefore, “if decision makers are left only with knowledge about short-term economic costs and benefits, they could be misled into making suboptimal choices, especially if the bulk of the costs are incurred in the short term and the benefits accrue over a much longer period of time” (Greenberg, Lahr, Mantell, 2007). Understandably, no amount of planning can control all risk. Nevertheless, attempting to identify and manage as many “lightning” events as possible in the early stages of business planning can minimize the impact. “The cost impact of a risk event in the project is less if the event occurs earlier rather than later” (Gray, Larson, 2005). The figure above is a graphic model of the cost impact on a “lightning” event during a project. The next section identifies how a company can prepare for key “lightning” events associated with the construction industry.

Planning and Managing for Lighting - Kelly Simpkins

The construction industry is subjected to several types of lightning strikes. Weather, cost increases, and losses of key employees are only a few of the risks that project managers face when attempting to complete a project. In order to help reduce these unforeseen events from occurring construction companies are starting to implement detailed risk management into their planning process. We are going to discuss three areas of planning and managing for lighting; risk management, insurance, and weather derivatives.

Risk Management

Gray and Larson define risk management as, “attempts to recognize and manage potential and unforeseen trouble spots that may occur when the project is implemented. Risk management identifies as many risk events as possible, minimizes their impact, manages responses to those events that do materialize, and provides contingency funds to cover risk events that actually materialize.”

In the construction industry, risks are an innate part of project management that materializes at the very start of the project (Schieg). Even though all construction projects are different, they still have a reoccurring process that prevails and this reoccurring process that allows for risk management (Schieg). Without risk management, construction can become a nightmare and what started out as a profitable job can end up costing the company money. However, with careful and detailed risk management, the actual cost of realization can be reduced and the amount of time needed to complete the project could be reduced as displayed in the graphic below.

According to Martin Schieg, these are the six main parts to risk management for construction:

1. Identifying Risks
2. Analyzing Risks
3. Assessing Risks
4. Controlling Risks
5. Monitoring Risks
6. Controlling Goals

Each step must be done in a forward-looking manor in order to optimize the results of the planning. Risk management is also useful when applied within the phases of the project life itself, start-up, manage, and close. This is because different risks occur at different times within the project life cycle and if caught early enough they can be kept from snowballing into major setbacks (Schieg).

Insurance

Insurance is another major part of planning for the unexpected and is sometimes considered the most important part of planning. Because in the case of a major loss during a major project insurance may be the only way the construction company can repay the financiers of the project. Insurance may be the only way to put the project back on track as well (Baartz).

Several types of insurance are available to the construction industry; however, not every project will require all or any of the types available. We will discuss some of the major types of insurance available below.

Contract Works (Baartz)

This insurance is a combined package consisting of two parts, damaged material, and lawful accountability. Material damage covers things such as physical damage to the work that is being constructed, damage to materials for the project, temporary structures, and plants and equipment. The second part covers any damage to property or the people working on the project.

Industrial Special Risk (Baartz)

This can be shortened to “ISR” or called Property Damage and Business Interruption. This policy will cover property damage; covering material loss or harm to all physical assets. The other part of the policy will cover for consequential or pure economic losses that were caused the by the physical damage.

Professional Indemnity

Baartz says PI, “indemnifies and insured for amounts which the insured becomes legally liable to pay as a result of any actual of alleged negligent act, error, or omission in the conduct of its business of profession.” PI will also cover the expenses for the investigation and settlement/defense of the claim.

Public and Product Liability (Baartz)

This can also be referred to as “Combined Liability” or “General Liability” insurance. This policy is broken down into two parts, public liability, and product liability.

Workers’ Compensation (Baartz)

This covers any employees who may be injured while working on the project. Most states will require this insurance.

Marine Cargo or Transit (Baartz)

This policy will cover any losses or damage to product that is being moved from country to country. It covers transportation by ocean, road, railroad, and plane.

Weather Derivatives

When reviewing risk in the construction industry, unpredictable weather is one of the biggest risks. Weather is a foreseeable risk in the industry; however, the amount of weather and damages caused by weather is not. Take the hurricane season of 2004, when four hurricanes struck Florida. To help make up for losses caused by unpredictable weather construction companies can take out weather derivatives policies (Swift).

Weather derivatives policies pay the company money for time loss due to inclement weather. The packages vary in size and can be built to suit each project. Derivatives can cover any kind of weather such as snow, rain, or extreme temperatures, anything that will cause a delay of action in the progress of the project (Swift). The dealer of the derivatives will customize the package so that each time the covered weather event occurs, the company will receive claim payment.

In conclusion, with the use of risk management, insurance, and weather derivatives project managers can better plan and manage lighting.

Finance Industry

Lighting - Herman Hicks

The economic sector has been subject to suffering from lightning events; such as terrorist attacks, natural disasters, and the recent crisis in the housing industry to name some examples.

September 11, 2001

The tragic events of September 11, 2001 let do multi-million dollar losses in the finance industry, “September 11 closed the stock market, induced the U.S. Federal Reserve Band to reduce interest rates again, purportedly nudged the developing recession and sparked a massive military response” (Doherty, Tennant, and Starks, 2002). Many studies revealed that the economic impacts of the attacks stretched across various sectors within the finance industry. Among those heaviest hit were the restaurant, retail, and tourism sectors.

Hurricane Katrina

Similar to terrorist attacks of September 11, 2001, Hurricane Katrina also had a negative impact. The disaster caused severe damage to the overall economy; effects were noticeable in the prices of oil due to the interruption of supply, and in the inability to use many major ports for import and export.

Mortgage Crisis

Moreover, the mortgage crisis had a dramatic impact on the overall economy by forcing banks and other financial institutions to cut back their lending tremendously. A Chief US economist conveyed the estimated credit losses on outstand mortgages totals $400 billion. In response to dramatic decreases in interest rates, the mortgage companies, such as Countrywide and Wells Fargo, were able to increase their market share by taking advantage of the dropping rates. The common methodology of the mortgage industry consisted of the development of a strategy, which focused on the Adjustable Rate Mortgage (ARM). Essentially, the ARMS are tied to the prime rate set forth by the Federal Reserve, and it fluctuates with the prime rate in upward or downward trends. The prime rate reached a low of 4.25%. Historically, these ARMS, were offered to tier I customers. Typically, the tier I customers have exceptionally high beacon/FICO scores, and large amounts of disposable income. However, recently the customers, some of which are on fixed incomes, that are not considered tier 1, were offered this product. These customers do not have large amounts of disposable income, and the credit reports have past delinquencies. The mortgage companies identified the opportunity and began establishing loans to “unqualified” customers and making a profit. At the time, it was a win-win situation of the mortgage companies, and the customers who ordinarily could not afford to purchase a home.

Unfortunately, the rates started to rise and the lower tiered customers were able to service the debt. The industry went into a downward spiral and the results were catastrophic. Home foreclosures began to rise at a rapid rate, jobs were lost, and ultimately the economy weakened with talks of a recession. Lightening struck the mortgage industry, which in turn affected several areas of the economy including banks, the stock market, and the unemployment rate.

Piracy

Another form of lightning that affected the global economy is the use of Piracy in music and entertainment. Technology has provided an effective way to “download” music as well as movies, circumventing the use of copyright infringement. “A new study by the Institute of Policy Innovation (IPI) finds that global music piracy costs the U.S. economy $12.5 billion in losses and 71,060 jobs annually” (Groc). The study vividly magnifies the serious economic harm caused by the illegal internet use.

Supremely, the impact of lightning events severely cripples the economy and affects millions of Americans. Prices increase, restrictions are tightened, and ultimately money is loss due to lightning events.

Planning and Managing Lightning - Linda Saylor

Senior management often complains "fighting fires all day" enables them to focus on critical issues. However, "fighting fires" is an important investment that a company has to do in its organization. Managers have to realize that disregarding everyday problems and neglecting to manage unanticipated events will lead to more severe issues that ultimately explode into a pricey disaster (Weick and Sutcliffe, 2008). In recent and past news, there have been many stories about businesses that have publicized unexpected earning deficits, layoffs, merchandise letdowns, and management wrongdoings. A well-known example of this is the Enron case, which spun-out from their supreme standing as the country’s principle energy dealer to economic failure in just a few months. Many companies that have “hit the business equivalent of a partially submerged iceberg, causing them to sink faster than the titanic” (Weick and Sutcliffe, 2008). Examples of these include the automotive industry, pharmaceuticals, toys, advertising, telecommunications, and technology. Companies have numerous ways to avoid upset by unpleasant shocks and maintain their business.

High-reliability organizations (HRO’s) are companies that are very successful in perfecting their capabilities to grip misfortune and perform dependably (Weick and Sutcliffe, 2008). An example of an HRO is a firefighting crew. They are constantly providing high performance in extremely hazardous conditions where the possibility for mistakes is vast. Everyday companies are not faced with life threatening situations of the same degree; however, they are able to gain knowledge of what HRO’s do to manage their business successfully under difficult circumstances so that disaster is prevented.

In order to prevent crisis, organizations must prepare in advance. This means, they have to observe their day-by-day activities frequently, expect troubles before they occur, and react quickly to undesirable happenings in a conforming way instead of an inflexible way. Things will go wrong eventually and when they do, businesses have to recognize and authorize those who have the capability to control or reduce the condition. They then will be relying upon managerial buoyancy to jump back rapidly after a slip-up. Businesses will be more prepared to handle the unforeseen in a highly aggressive and demanding atmosphere as long as they function mindfully and formulate decisive conclusions in an appropriate way (Taylor, 2003).

A frequent drawback for companies is that they are constantly hurrying to make a judgment prior to a circumstance even being understood. A great deal of businesses are so lost in thought with making a decision that they do not look closely at previous actions that have led up to that point. They take action for the event based on their first impressions and do not adjust their plan and anticipation as fresh information is discovered. They continue to search for confirmation that holds up, instead of disproves, their actions (Marshall and Alexander, 2005).

Companies can look for many signs to see if what they are doing is heading towards disaster. A few of these being the following:

1. Lacking or missing deadlines
2. Changing requirements
3. Final decisions not being made
4. Project completion is stalled at 90%
5. No problems being reported
6. Lack of key project deliverables
7. Interpersonal problems
8. Excessive quality problems
9. Unknown factors
10. Lack of management reporting tools

Companies have to have a procedure in place so that these issues are noticed and can help prevent a potential crisis (Zucchero, 2005).

An immense challenge many businesses face is the unexpected and how to deal with it. Conventional management practices like preparation are designed to manage unexpected threats;however, they tend to create even worse situations. “A leading manufacturer of integrated circuits expects to boost competitiveness by dramatically improving quality and doubling capacity, but it unexpectedly finds its share price falling as customers switch to the new products being offered by its competitors. The responsible manager of the largest corporate division of a consumer products firm suddenly realizes that his market has been conquered by a certain competitor - -a development that his subordinates suspected had been building steadily for several years” (Weick and Sutcliffe, 2001). These cases show that the unexpected is caused by a straightforward succession in the business existence, not by a major crisis. For instance, “a person or unit has an intention, takes action, misunderstands the world; actual events fail to coincide with the intended sequence; and there is an unexpected outcome” (Weick and Sutcliffe, 2001). People have aversion to situations they cannot control or are unexpected. This is what tends to make the situations worse.

Conclusion

“Lightning” is a metaphorical reference to the unexpected future events that can threaten the integrity of the “ship” or corporate organization. These events can be internal or external. These events could also be particular to an organization, such as the premature death of a key partner; or extensive, such as an event that has jeopardized an industry, location, or one that has worldwide implications. In this paper, we reviewed lightning events within the construction and finance industries along with practical ways to plan and manage these particular types of lightning events. Over all, industries some factors in planning and managing for lightning remain the same. These include risk management, training, security, and insurance, along with emergency and contingency plans. These factors within an organization must be strong if the company is going to absorb the impact and continue as a successful business.

References

1. Baade, Robert A., Baumann, Robert & Matheson, Victor (2007). Estimating the Economic Impact of Natural and Social Disasters, with an Application to Hurricane Katrina. Urban Studies, 44 (11), 2061-2076. Retrieved January 22, 2008, from http://www.informaworld.com/10.1080/00420980701518917.
2. Bank Shot. New Republic, ESCO Host. February 12, 2008; 237(14):1-1. Available
   from: Academic Search Premier, Ipswich, MA. Assessed February 12, 2008.
3. Berry.com. (2008). Hurricane Katrina Effects Cost of Labor and Building Materials. Retrieved January 22, 2008 from www.berry.com.
4. Doherty, Neil. Tennant, Joan. And Starks, Laura. Insuring September 11th: Market Recovery and Transparency. July 2002. Retrieved February 6, 2008.
5. Gray, C.F., Larson, E.W. (2006). Project Management: The Managerial Process, 3e. New York: McGraw-Hill.
6. Greenberg, M., Lahr, M., Mantell, N. (2006). Understanding the Economic Costs and Benefits of Catastrophes and Their Aftermath: A Review and Suggestions for the U.S. Federal Government Risk Analysis 27 (1), 83–96. Retrieved January 22, 2008 from www.blackwell-synergy.com.
7. Groc I. The Price of Piracy. PC Magazine, EBSCO Host. November 6, 2007; 26
   (21/22): 21-21. Available from: Academic Search Premier, Ipswich, MA.
   Accessed February 10, 2008.
8. Goliath. Mortgage Banking. November 1, 2006. Retrieved on February 6, 2008. www.goliath.ecnext.com.
9. Jaffee, Dwight, and Russell, Thomas. February 2002. Extreme Events and the Market for Terrorist Insurance. Retrieved February 6, 2008.
10. Langdon, D. (September 2005). Impact of Katrina on the Construction Market. Retrieved January 22, 2008 from www.rics.org.
11. Mandel M. How Real was the Prosperity? Business Week, EBSCO Host. February 4,
    2008; 4069: 24-27. Available from: Academic Search Premier, Ipswich, MA.
    Accessed February 12, 2008.
12. Marshall, Maria and Alexander, Corrine. (2005). Planning for the Unexpected: Human Resource Risk and Contingency Planning. Retrieved on February 10, 2008 from
    www.ces.purdue.edu
13. Murray, R. (2005). Hurricane Katrina: Implications for the Construction Industry. Retrieved January 22, 2008 from www.rms.com.
14. Taylor, Ben. (2003). “The Big Picture.” Disaster Resource Guide. Retrieved on February 10, 2008 from www. disaster-resource.com
15. TurnerConstruction.com. (2008). Turner Construction Fourth Quarter Building Cost Index. Retrieved February 11, 2008 from www.turnerconstruction.com.
16. Veiga A. Countrywide to Aid More Borrowers. AP. February 11, 2008.
    www.yahoofinance.com.  Accessed February 11, 2008.
17. Wagner C. U.S. Competitiveness Shows Weakness. The Futurist, 42(2)8. ABI/INFORM Global Database. (Document ID: 1423350241).
18. Weick, Karl and Sutcliffe, Kathleen. Managing the Unexpected: Assuring High Performance in an Age of Complexity, Vol. 1. The CEO Refresher. 2001. Retrieved on February 12, 2008 from www.refresher.com
19. Weick, Karl and Sutcliffe, Kathleen. Managing the Unexpected. Michigan Ross School of Business. Retrieved on February 5, 2008. www.bus.umich.edu
20. Zucchero, Joseph. (February 2005). Project Up in Flames. Project Management. Retrieved on February 4, 2008. www.fedtechmagazine.com

Lightning in Relation to the Storms of Chaos Model

Walt Kaper

University of Phoenix

MBA/590

October 8^th 2007

Editor, Craig A. Stevens

            Storms of Chaos Model Summary

 “Lightning,” is one of the elements of the storms of chaos model.  The Storms of Chaos model puts into a metaphorical parameter how a business is affected by, internal or external forces.  In the model, a “ship” is a metaphorical reference to the corporate organization.   Buoyancy” refers to the supporting market, societal and political events that are positive to the organization.  “Waves” are foreseeable future events. The “Storm” refers to threats from the competition, political and societal pressures that negatively effect the organization.  Finally, “Lightning” refers to unforeseen future events.   

This paper will define lightning, as it relates to the Storms of Chaos Model and show some examples where lightning may be a destructive force, but also a catalyst for organizational change.  Finally, this paper will discuss a couple of both internal and external risk aversion techniques.

Define Lightning

Excellent managers focus not only on the foreseeable events, but also act as excellent leaders who prepare for the unforeseen.  How well prepared and how well a company reacts to these unforeseen events can mean the difference between growth, stagnation, and total demise of the organizations.

Defining the Elements of Lightning

Organizational risks can be either real or reputational. (Childers).   According to Childers, the majority of these unforeseen events can be compiled into five separate categories.  These categories include: 

1.     financial reporting risks,

2.     credit/market risks,

3.     compliance risks,

4.     strategic risks and

5.     human capital and labor risks. 

There are certainly other risks that can befall organizations.  History gives us many examples as follows although they will not be discussed in this paper. 

1.     Natural Disasters

2.     Terrorist Attacks

3.     Fire

4.     Criminal Activity

5.     Death

   Financial Reporting Risks

Financial reporting risks befall companies in many ways.  Employees embezzle money or in one of the larger cases in history, the official financial reports of a company are altered as in the Enron incident.

Credit or Market Risks

Credit or market risk includes things like the stock market crash of 1939 or the mortgage squeeze of September 2007.

Strategic Risks

Strategic risks include the failure of a new product like the Edsell or a venture into an overseas market like the GE venture into call centers in India.

Human Capital or Labor Risks

 Human capital or labor risks include a new company moving to town and luring your employees away or employees unionizing unexpectedly.

Figure 1

Oversight Systems conducted a survey in 2006 of 230 corporate finance executives, seen in figure 1 above.  According to the survey 85% of executives were prepared to handle financial reporting risks, 84% credit/market risks, 80% compliance risks, 77% strategic risks, and only 58% risks.  In addition, according to the same survey only 33% of these executives felt their company had front-line managers trained to assess risks. Only 41% said that their companies had a widely communicated definition of risk.

 Effects of Lightning

So, what happens when lightning strikes the ship?  There are essentially three outcomes available.  If the ship is prepared to handle the lightning strike, then the ship will continue to ride out the storm until calmer times.  If the ship is ill prepared for the lighting strike, it will suffer worse consequences and maybe even not be able to right itself and sink.  If the ship is prepared to handle the lighting strike, it will likely absorbs the impact and continue on with fewer catastrophic effects.   

Likewise an organization with policies to handle risk should be able to absorb the risk and make changes within the organization to make it stronger.  In this instance, the lighting may even be a catalyst for positive change within the organization. The alternative is that the organization is not prepared for risk, and suffers major losses or goes out of business completely.  Which risk mitigating strategies an organization has in place in large part determines the outcome?

How Companies are Handling Risk in the Market Place Today?

According to Eric Krell, things moved at a slower pace in the past, companies could more easily wait for disaster to strike and then react as… “Why did that happen.”  Today more companies are facilitating collaboration between departments and asking the question “What if it happens?”  For companies today integration of corporate Governance, Risk management, and Compliance (GRC) is becoming a way of life.  Brian Reilly, CFO of Allied Building Products Corp, believes that the passage of the Sarbanes-Oxley Act and the difficulties that many organizations experienced in responding to unexpected interruptions---such as Hurricane Katrina-have sparked a widespread reexamination of GRC procedures and oversight within US companies. 

Companies create assessments that strengthen GRC decision making.  These organizations ask the right questions like: 

1.     What are the risks and what will it cost to mitigate them?

2.     How can the organization ensure adherence to our risk management strategy at the operational level?

According to Martin Klimek and Gerry Images, companies are trying to create a holistic approach to risk management, in effect demolishing silos between departments. A fragmented approach to risk management adds to cost and increases the complexity to manage these unforeseen risks. Fragmented approaches can hide inefficiencies in operations and create overlap and duplication of effort in the realm of risk management. Companies that are using the holistic approach are being termed risk-intelligent.  This holistic approach runs counter to the current state of risk management, which is “fragmented, manual, and not sufficiently integrated with performance management, reporting, and analysis” (Dittmar).  A holistic vision of risk management helps to reduce the transparency of possible risks, and forces board members to evaluate the broader issues and potential risks.

 So what is the answer for an organization looking to minimize the threat or results of lightning strikes?  Childer says a more proactive approach is necessary.  “Organizations must be integrated to support the alignment of people processes and technology. If this effort is successful then there will be an overall reduction in risk, cost, and complexity as well as the delivery of tangible ROI to the organizations GRC efforts” (Childer). 

 The other benefit in attempting to manage issues, i.e. lightning, is improvements in processes.  Ultimately that is why lighting can be a catalyst of change.  If managers only react to lightning and only “put out fires” then do nothing there will be no learning experience. What managers must do is to:

·       Absorb the impact of the lightning

·       Repair the damage from the strike

·       Then change the organization or the processes of the organization so that the organization is better prepared for the next lightning strike.

Summary

Managers need to be finely in tuned to many things within their own organizations.  These items may be predictable or they may be totally unforeseen.  The best managers prepare their organizations to react to the “lightning” and respond in ways that solve the problems created by the lightning, but better their organizations in the process.  Managers that proactively manage “lightning strikes” keep their ships afloat in a sea of storms

References

Childers, David, Optimizing Issue Management, Retrieved from Ebsco Host, October 4^th 2007.

Dittmar, Lee, First Steps on a Long Journey Toward an Architected GRC System, Retrieved from Ebsco Host October 2^nd 2007.

Krell, Eric, The Risk-Intelligent Company, Retrieved from Ebsco Host, October 2^nd 2007.

Klimek, Martin and Images, Getty, Is ERM GRC?, Retrieved from Ebsco Host, October 4^th 2007.

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