The Importance of Enterprise Risk Management in Target and Jima Construction Company - Case Study Example

THE IMPORTANCE OF ENTERPRISE RISK MANAGEMENT IN TARGET AND JIMA CONSTRUCTION COMPANY By Name Course Instructor Institution City/State Date The Importance of Enterprise Risk Management in Target and Jima Construction Company Introduction Even though the construction industry is project-based, risks at both enterprise and project levels should be covered through risk management since emphasising more on project risk management could result in a number of limitations. As an integrated and holistic approach to management of risks, enterprise risk management (ERM) manages the firm’s entire risk portfolio and is deemed to be beneficial in the construction industry. In the majority of projects, the identification and analysis of risks happen in a brainstorming and random fashion. Normally, this could be fatal to the project success since the likelihood of unforeseen risks to increase is exceedingly high. Since they are not planned for or assessed, they must be handled on an emergency basis, instead of preparing and defending against it in a measured and planned manner. Early in the stage of preparation and planning, it is imperative to identify, evaluate, and categorise potential risks. The ERM is crucial since its success decides on the survival as well as the health of the business enterprise. When a construction company is unsuccessful in identifying risks, it would become ill-prepared to overcome risk events. The objective of this piece is to evaluate how the COSO framework can be used to add value to risk management at Target & Jima Construction Company (T&J). A Review of the State-Of-The-Art in Enterprise Risk Management Recently, the business landscape has changed in ways that companies have started adopting risk management practices, and this has shifted towards a more comprehensive, integrated risk management discipline, commonly referred as ERM. ERM has been defined by COSO as a process adopted by a company’s management, board of directors, as well as other personnel, integrated into the process of setting strategy and across the business with the aim of identifying possible events which could influence the organisation, and making sure that the risk has been managed within its risk appetite, to offer rational guarantee with regard to realisation of the organisational objectives (Renault et al., 2016). With the view to this definition, it is clear that ERM has to be implemented at every level across the enterprise and utilised in the setting of strategy to facilitate the realisation of corporate objectives. ERM have enabled the construction companies to shift their emphasis on the risk management function from mainly defensive into more strategic as well as offensive. As a result, this offers a novel approach for improving project risk management in the construction industry. As mentioned by Quon et al. (2012), the explosive nature of the business world has left many companies exposed to the inadequacy of fragmented risk management approaches. As a result, companies have been forced to adopt ERM because it is an integrated approach to managing and measuring risks. Whereas the performance of business radically changed during the 2008 economic recession and financial crisis, there were only slight increases in risk consequence, risk exposure, or risk management strategies. Target & Jima and other construction companies desire to have higher returns and lower risks. As pointed out by Quon et al. (2012), returns on investment have two key elements, which includes gains (capital loss or gains) and dividends (yields). Therefore, the ability of the company to achieve high dividends depends on the financial performance and conditions. To effectively make an investment decision, the construction company must perform a fundamental analysis, which would enable the investors to see the company performance and conditions as a single decision reference. According to Agustina and Baroroh (2016), the financial performance offers the true evidence regarding the company’s information as well as the management effectiveness and efficiency in the management of the available capital. Therefore, ERM adoption would result in the reduction of financial risk and would result in improved performance. Adoption of ERM adoption has resulted in a series of corporate governance and legal compliance requirements. Many of these requirements are the compulsory regulations and laws, while the others are non-mandatory standards or reports which bring forth public benchmarks and pressures for improved practices in risk management. Besides that, since ERM could improve the value of the construction firm, ERM system has been considered by the main rating agencies as an important factor in their rating methods. Even though corporate governance and compliance requirements have coerced companies to espouse ERM, companies are also performing ERM to achieve benefits. These benefits, according to Zhao et al. (2014), have to be convincing and must surpass the significant costs related to the adoption of the ERM system. Such benefits include reduced costs and losses as well as earnings volatility, improved earning and profitability, improved decision-making, enhanced communication and risk reporting, improved resource allocation, and so forth, such benefits have been the main drivers behind ERM implementation in the construction industry. In construction companies, project risk management (PRM) as well as ERM are considered as suitable approaches to managing risks at various levels. ERM facilitates the management of risks at the firm level and concentrates on the firm’s strategic compliance, reporting, and operations while PRM focuses on the project objectives and risks at the project level. According to Zhao et al. (2014), PRM is very important and must not be perceived as an obstacle to implementation of ERM in the construction company. PRM is important for projects success as well as the survival of the construction companies. Therefore, it is impossible for ERM to replace the PRM role. Actually, PRM is a fundamental part of ERM since risks related to the project are on the construction firm’s entire risk profile; therefore, implementation of ERM should not happen at every level of a firm, particularly the project level. Clearly, the way risk management is viewed by companies has recently changed since the focus has been shifted towards a holistic risk management view. According to Zhao et al. (2015), construction companies can customise the ERM framework to suit characteristics and to make risk management integration more effective and easier. An Introduction to Target & Jima Construction Company Target & Jima Construction Company is a UAE based civil construction company that was launched in 1994 and has branch offices not only in Abu Dhabi (UAE) but also Libya, Jordan, as well as Qatar. Target & Jima has sufficient resources needed to perform infrastructural development in regions it operates. The people are at the very core of Target & Jima since the company has espoused a culture of integrity which has for many years been the foundation of its success and growth. The company is gaining a reputation as one of UAE’s main players in the construction industry. To remain competitive in UAE’s competitive market, Target & Jima has differentiated itself through indefatigable commitment towards safety, efficiency and quality. The company’s completion of projects in a timely manner for its clients like Dubai Metro, Dubai Municipality, Nakheel, and Dubai Electricity and Water Authority demonstrates its commitment to become the best construction company in UAE. Target & Jima can also be attributed to its risk management ability, the UAE’s construction has experienced unparalleled boom considering that the country’s economy is amongst the Middle East’s fastest growing economies. Therefore, this boom has led to oil price surges. The UAE’s oil abundance has been the main driver for the growth of the country’s economy. Therefore, the government has started taking measures to lessen reliance on oil through economy diversification into the industrial, tourism and commercial sectors. For that reason, construction projects have started increasing in complexity and size; thus, resulting in increased number of risks. Normally, most of Target & Jima’s clients demand for the completions of their projects in a timely manner. In consequence, this puts additional pressure on the company which results in high delays’ risk. Even though identifying and managing risks effectively in projects is a daunting task, Target & Jima have continually been successful. With the increase in construction projects’ risks, Target & Jima needs to improve its risk management practices. As mentioned by El-Sayegh (2014), the complexity as well as competition level of new mega construction projects in UAE, increase the normal construction risks. Because of such challenges and risks, Target & Jima have been forced to develop as well as execute risk management processes. Even though Target & Jima apply employs various practices related to risk management, it must enhance certain practices as well as improve the rate of their use. A number of the risk management activities utilised by Target & Jima that can be considered inadequate include the utilisation of decision trees while determining the strategies for risk response, planning risk responses), utilising the risk matrix, which includes project schedule’s risk management practice, and allocating risk response owners. Clearly, Target & Jima’s risk response planning has some deficiency. This would likely result in confusion every time a risk ensues since the team members hardly understand what to do there is no a clear guiding principle and risk response owner. How Target & Jima Has Link Strategy, Core Business Activities, Financial Performance and Risk Management into a Coherent Dynamic Framework In the construction industry, improving the safety of employees, client satisfaction and quality standards are the main strategic objective. Target & Jima projects in UAE demonstrate that the company is not contented by being on par with other best construction companies; instead, it intends to set higher standards. This has been attributed mainly to the company’s innovation strategy, which has facilitated the realisation of the much-touted best practices: generating internal entrepreneurial ventures, dividing research and development practices into decentralised self-governing teams, forming external alliances, and embracing crowdsourcing and open innovation. Besides that, the company normally collaborates with clients. Target & Jima’s innovation capacity is sourced from the innovation system, which is a rational set of co-dependent structures and processes which outline how the firm looks for new problems as well as solutions. The innovation system also synthesises ideas into product designs and business concepts and chooses the projects that should be funded. Thanks to the innovation strategy, Target & Jima has managed to make trade-off decisions as well as select every component of the innovation system. Pisano (2015) asserts that diverse perspectives are important for successful innovation, but when there is no strategy to align as well as integrate these perspectives around the common priorities, the diversity would turn out to be self-defeating. Target & Jima has demonstrated its ambition to become UAE’s leading construction company in terms of quality, profitability as well as sustainability. For that reason, the company has developed a strategy that would facilitate the realisation of this ambition, where expertise and disciplines are bundled from the designing processes to the ongoing maintenance. In this strategy, there is a selective contracting policy which the company pursues with a focus on improving its profitability. Thanks to this strategy, Target & Jima has managed to differentiate itself by means of integral project approach. The company has been able to seize opportunities in the integrated projects; thus, resulting in effective projects results. Still, operational processes must be improved for the company to maintain the pace of this development. These improvements include choosing projects in terms of margin instead of volume, process improvement and cost reduction. At Target & Jima, risk management is a holistic instrument and communication has been improved since it is a crucial factor for sharing information. The current risk management approach at Target & Jima allows for increased communication and embeds quality into the firm. Even though the integration process was started by the current approach, there is an extensive room for improvement. Focus on opportunities over risk is one of such improvements. In the present risk management technique, the majority of the recognised components are naturally negative since it is perceived that engaging in activities that are Target prone to risks would result in additional costs. Therefore, changing this general idea and concentrating on the positive elements of the risk management approach would result in planning and/or financial benefits. However, this depends on the communications between third parties, clients, and the contractor while searching for these opportunities. As mentioned by van Beek (2013), the manager could create double coverage by going back to the experience of risk managers in managing various risks. According to Kinyua et al. (2015), financial performance is the measure of the firm’s operations as well as policies in monetary terms. Target & Jima have continually achieved positive financial by getting rid of waste in benefits services systems and processes. The main factor for the company’s success factor is the level to which it meets its mission and processes effectively, economically, and efficiently. Normally, Value for Money and Financial Performance are utilised to examine whether or not the company has realised a maximum benefit from the services and the goods it provides and/or acquires, within the available resources. Target & Jima have effectively improved their financial performance by decreasing the level of fraud or irregularity by improving its internal financial control systems. The company has continually assured the shareholders that their resources are being utilised effectively and efficiently in offering adequate services. The company normally performs internal audits to improve the financial performance reliability, either indirectly or directly by improving accountability amongst the organisation’s information providers. As pointed out by Kinyua et al. (2015), efficient internal control system correlates unequivocally with firm’s revenue success. Target & Jima’s effective internal control for achieving the targeted revenue level include; reviewing the integrity and reliability of operating and financial information regularly, reviewing the controls utilised to safeguard assets, examining employees' observance to applicable laws and regulations as well as management procedures and policies, and assessing the effectiveness and efficiency with which management How the COSO Framework Could Be Utilised to Add Value to Target & Jima’s Enterprise Risk Management (ERM) As mentioned earlier, the construction business is a challenging and complex process since it is plagued with various risks. Target & Jima, among other things, needs conformance with and interpretation of various codes, laws and regulations, amassing of significant resources, which includes equipment, labour and material, as well as coordination among and communication with multiple parties, like the contractors and design professionals, all of whom could, from time to time, have conflicting goals and purposes. When Target & Jima initiate their projects, many factors are unknowable and unknown. Therefore, risks are part and parcel of the construction projects. Failure to adequately manage the risks could make it challenging for the construction company to work within the budget and deliver the project in a timely manner. Besides that, the company would hardly realise the needed operational and quality requirements. All construction projects are naturally unique and they offer a multitude of diverse risks. Therefore, adopting the ERM framework would not only allow the construction company to realise the project’s objectives but also manage risks. Some of the risks that could affect Target & Jim’s project schedule and cost include: natural disasters (flood, earthquake, and fire); physical risks (structure and equipment damage, labour injuries, material theft, and so forth); financial and economic risks (fluctuation of exchange rate, subcontractor’s financial default, inflation, and so forth); and political and environmental risks (social disorder, wars, changes in laws and regulations, and rules related to pollution and employee safety). Other risks include design related risks such as defective or incomplete design, omission or errors, and poor specifications. As mentioned by Zhao (2016), risk management has to be aligned to the firm’s risk tolerance and business strategy. Although the process of risk management is important, an organisational culture and a participative workforce which has espoused an enterprise-wide opportunity and integrated risk management could result in organisational success. As pointed out by Renault et al. (2016), ERM enables the construction companies to shift the focus of risk management function from a mainly defensive approach towards a more strategic as well as offensive approach. More importantly, ERM provides a novel approach to improve PRM. Understanding the ERM implementation drivers would enable Target & Jima’s management to get hold of the needed support for the ERM program as well as strengthen the drivers’ positive influence. Besides that, identifying the obstacles would allow the company’s management to understand the challenges associated with the ERM program and take measures to lessen their adverse effects. According to Mustapha and Adnan (2015), ERM is an important component of the internal control process for companies. ERM would help Target & Jima to adequately manage risks in their everyday operation. Implementing ERM is undoubtedly the more practical solution for various risks that affect Target & Jima day-to-day operations considering that the company’s operational diversity is wider and more complex in scope. Therefore, ERM implementation in the company would help improve the process of identifying, reviewing and monitoring risks. ERM main goal, according to Tavakoli and Talib (2014) is the managing all the risks facing the firm in a synchronised manner, whether the risk is related to supply chains, auditing, corporate governance, IT, distribution systems, or human resources. ERM is different from the traditional silo-based risk management since it adds a methodical knowledge regarding the connections as well as interdependencies among risks. The ERM’s basic idea is gathering the risks into portfolios and afterwards limiting the residual risk, which is worth boosting and more proficient as compared to managing each risk separately. In view of the portfolio theory, ERM could improve the firm value considering that the total portfolio risk is below entire individual risks in case the risks are not completely related, especially if regular hedges are present. The ERM’s basic concept is that a company must reduce risk exposure in areas lacking comparative information advantage and taking advantage of risks in areas having the advantage; that is to say, the total risk could probably increase under risk allocation of ERM. For that reason, the corporate managers have to ensure that the activities related to risk management are coordinated by limiting exposure to activities where they are unlikely to achieve homogeneous risks (economic rents), like investing in resourceful markets, while improving the core business activities’ exposure where it is possible to enjoy the comparative information advantages. The COSO ERM Framework is widely accepted and popular ERM framework, which recommends a common language, defines important components and offers a clear guidance and direction for managing firm’s risks. This model categorises the organisation objectives into four groups; strategic, operations, reporting as well as compliance (see figure one). Besides that, the COSO ERM Framework considers the activities of the organisation in every level which includes enterprise-level, processes, business unit and division. The ERM needs the company to take an interrelated and portfolio view towards the individual risks. The ERM framework offers a guideline regarding ways through which manager can create a holistic and portfolio view in identifying and managing risks in both organisational level and business unit levels. The framework has eight core components as shown in figure one, where one of these components only influence the next component. Almost all components could influence another in an iterative and a multidirectional process. Figure one: COSO ERM Framework (Opgenorth, 2017) There is a positive relationship between firm performance and ERM adoption. By effectively adopting ERM, Target & Jima would be able to improve and support the risk awareness at all levels, from operative to strategic, as well as from the senior management to employees. Adoption of the new governance mindset would enable Target & Jima to move towards the application of risk-based process framework for classifying, assessing, evaluating, monitoring and mitigating risks in all business processes. The COSO ERM framework would offer improved insights into strategy as well as the role of ERM in setting and implanting strategy; improves alignment between ERM and organisational performance; accommodates governance expectations; and accommodates the evolving technologies. Difficulties Associated With Collating and Acting Upon Risk Intelligence as a Means for Value Creation in Organisations As mentioned by Wu and Birge (2016), risk analytics have turned out to be very important in industrial systems like operations management systems, which plays a crucial role in the process of capturing, extracting as well as analysing data as well as delivering risk intelligence which improves the performance, operations, and decision-making strategy. ERM is a new analytics approach which has emerged as an integrated and systematic approach for managing risks that face the company. Without a doubt, ERM is the most efficient ways of handling risks in the operations and financial systems. Despite the constant monitoring through reports and dashboards, organisations are still facing unexpected issues. The general attitude towards mitigation of risks is considered as the main cause of risk management shortfalls. Even though companies are well-prepared to manage risks, they normally experience difficulties in promoting a sense of risk intelligence, responsibility and awareness into and across the organisation fabric, which lead to deficiencies and gaps. Undoubtedly, all the construction firms understand the importance of risk intelligence, but they normally experience difficulties in the early stage of their transition. Risk culture development is normally considered as a mere requirement that must be met instead of something which could add value to the business. Lack of clear agenda has made many construction companies find it impractical to promote risk-taking capabilities amongst their employees. Importantly, risk intelligence requires all individuals in the organisation to be responsible for the firm’s risk management. The company’s top management have to assess all the existing risk management strategies and measure their efficiency in reducing risks and creating awareness all through the organisational structure. Some of the obstacles to ERM implementation include the board’s inadequate knowledge with regard to risk management and its compromising attitude; lack of management’s priorities; and uncertainty regarding how ERM adds value to the company. Recommendations To successfully manage risks in the UAE construction industry, Target & Jima should make sure that the ERM is underpinned by a foreseeable and unchanging reporting structure, where risk responsibilities are clearly defined and assigned to suitable personnel. ERM success can be achieved if the executive management becomes responsible for risk management practices such as supervising the process. This would facilitate continuity of risk management actions and application consistency. The ERM must be aligned to the management teams in various organisational units considering that this alignment facilitates the improvement of their understanding with regard to business functions. The risk management strategy should be aligned with the company’s overall business strategy and risk management should be integrated into organisational processes (Barrese & Scordis, 2003). The risk management capabilities, applications, and concepts have to be imbedded into the company’s training program. The company should create a common risk definition which addresses both value creation as well as value preservation. This common definition must be utilised across your organisation in a consistent manner. The company would likely make greatest strides through strong governance. To embrace ERM successfully, Target & Jima should select the components of risk management based on their stage in ERM implementation. To ensure that the risk management approach is functioning adequately, Target & Jima should ensure that outsourcing has been avoided; therefore, all users bear the responsibility of performing risk management. Conclusion In conclusion, this piece has evaluated how the COSO framework can be used to add value to risk management at Target & Jima Construction Company. As demonstrated in this piece, ERM is important for construction companies because it institutionalises procedures for risk management through standardisation of methodology, tools and people processes in monitoring risks within the individual project. Without a doubt, this is imperative since it reduces the risk of project failures. Implementation of ERM in different industries is attributed to corporate governance requirements and a series of legal compliance. The main reason for implementing ERM is because of regulatory and legal compliance requirements, like the corporate governance rules set forth by mandatory as well as the non-mandatory standards or reports which resulted in public benchmarks and pressures for improved management practices, like the COSO ERM framework. Without a doubt, embracing ERM is an effective strategy to adhere to such new requirements for risk-based governance since it improves the firms’ value. References Agustina, L. & Baroroh, N., 2016. 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