Every organization has some degree of sales and managerial hedging. It is the mental process, knowingly or otherwise, of holding back vital information or funds in reserve for increased probability of producing a successful objective.
What causes hedging within a management team? The obvious answer is expectations, usually very high expectations. Who is responsible for the expectations? Are the expectations part of an overall plan established by the management team that demands obtainment of goals and objectives, or are these expectations placed on the individual by the individual himself? It could be one or the other or a combination of both that causes the hedging to occur.
The setting of yearly goals and objectives is generally standard operating procedure in most companies. The goals and objectives are tied to compensation models that demand if the individual is to make money, the specific objectives that are assigned to him or his department have to be accomplished. Lack of accomplishment means bonus money at the end of the quarter or year won’t be available resulting in less financial growth for the individual. Does the average manager think about this? He wouldn’t be human if he didn’t. So why not reserve or hold back just enough to make sure the objective will get accomplished during the time period allotted? If the objective is accomplished with time to spare, then the opportunity to have a little more in the back pocket will be a good thing for the next bonus period, right? The corporate culture will either support the hedge or it will refuse to allow it. There are several different aspects that should be discussed before deciding if your company’s culture is suspect.
Providing the expectations that are set forth are reasonable and achievable, they can be viewed by a manager as either motivating or non-motivating. Competition from both within the organization and from outside can demand that the expectations be high as well as achievable. No matter the extent of the force that is driving the expectation, it demands a respect and is usually heeded by the manager. Ignoring it doesn’t make it go away, but increases the degree of self-expectation to get results. This may occur at the corporate, departmental, supervisory, or individual level. The largest impact is always at the individual level.
Performance drivers gage the ability of the individual to succeed in a position. Certain areas are more susceptible to hedging. For example, the areas of workload or teamwork require more input from the manager than the individual. The measure of employee throughput can be easily defined. Individual evaluation is created by having specific, quantifiable, realistic and time sensitive objectives in place for the employee. Without these types of objectives in place, not only is hedging available, but monitoring performance as a whole is jeopardized. It is at this level that companies lose huge amounts of productivity.
Setting and attaining goals should be part of every company’s culture. It is the mechanism by which standards are set and the forward progress is measured. Strategic goal setting is the beginning of the internal corporate hedge. No matter what the goal or long-term objective, the measure of success is getting there within a specified time successfully. Is the company any less successful if it arrives at the accomplished goal prior to the specified time? It would seem so because the opportunity to achieve more in the same amount of time is primary to drive both short-term and long-term achievement. It produces excellence within the organization.
By having a set of strategic goals, the ability to get only these objectives accomplished limits the view of the company producing multiple levels of opportunity to hedge the results to assure success. No company can move forward without a firm set of strategic goals at the forefront. Can the aspect of hedging be minimized by strong strategic goals? My opinion is no because strategic goals create a set of cascading objectives throughout the organization.
Objectives are created at the top with the strategic goal accomplishment as a primary success point. These objectives are passed downward from level to level creating a cascading effect on the objectives. Levels of specific accomplishment are needed to provide overall objective success. The responsibility is spread throughout the organization by department. Who then becomes the guarantor of the objective? And to what degree should some “fluff” be interjected to assure complete success? Hedging then becomes a norm and not an exception.
The answer to a solution for hedging lies in multiple areas. If hedging does exist within an organization, it has to be brought to light with a complete knowledge that hedging does occur and the protracted consequences that can come to bear. This responsibility lies with the top executive management team. Corporate awareness is the beginning of dealing with a hedging problem.
Most companies spend little time developing or seeking help to develop a workable compensation model based on their market and culture. By providing a model that allows for strong performance tied to legitimate performance drivers, the compensation model can be used to minimize the hedge as opposed to sponsoring it.
Least used and most effective is the use planning instruments that can link planning, strategic direction, performance, and accountability to the organization. When these are linked correctly, the ability to create a personal or departmental hedge is limited. When a plan is installed that provides responsibility with defined accountability, every part of the organization wins from the CEO to the individual employees.
The expectation of company owners shouldn’t necessarily change to accommodate a management team that incorporates a hedge into the company’s strategy and design. Awareness is critical to monitor the company’s performance at all levels. Managers have the opportunity and responsibility to make businesses profitable and stable. By employing reasonable tools, managers can drive a business at full throttle with a certain amount of comfort that individual and departmental achievements are being accomplished without a created or perceived performance hedge.
The ramifications of hedging are substantial, if not huge. In production, capacity issues are affected. In accounting, the cash flow is affected. In sales, the top line revenue is affected. There is virtually no department within an organization that can’t be dramatically impacted even if the smallest amount of hedging takes place.
If the hedge exists with your company, the impact of viable compensation modeling coupled with a strong planning diagnostic tool will limit the ability of your employees to apply hedging as part of their standard planning process and daily activities. Responsibility demands accountability when performance drivers are part of the process and daily routine. Without these tools in place, you can be assured that the hedge is alive and well within your organization. To what extent may vary, but the inevitable results are the same with all companies. A critical evaluation of your company’s culture and management style is your first step to understanding this intrinsic phenomenon. Your gain, as well as your company’s gain, will be recognized and rewarded.
By: Larry Bauman
Posts Tagged ‘Probability’
Risk management in Project & Planning
December 28th, 2009 RISK MANAGEMENT IN PROJECT & PLANNING
ABSTRACT
In businesses, risk management entails organized activity to manage, uncertainity and threats and involves people following procedures and using tools in order to ensure conformance with risk-management policies. The Risk Management Plan is dependant upon the identification of the projects risks, their criticality, status, strategy and status.The good news is that managers can make project and planning as one of their strengths. The result will be better risk management, more effective management and greater satisfaction from working with people.
INTRODUCTION
Risk management is activity directed towards the assessing, mitigating (to an acceptable level) and monitoring of risks In some cases the acceptable risk may be near zero. Risks can come from accidents, natural causes and disasters as well as deliberate attacks from an adversary. The main ISO standards on risk management .In businesses, risk management entails organized activity to manage,uncertainity and threats and involves people following procedures and using tools in order to ensure conformance with risk-management policies. The strategies include transferring the risk to another party, avoiding the risk, reducing the negative effect of the risk, and accepting some or all of the consequences of a particular.
Project Risk Management
A risk is something that may happen and if it does, will have a positive or negative impact on the project. A few points here. “That may happen” implies a probability of less then 100%. If it has a probability of 100% – in other words it will happen – it is an issue. An issue is managed differently to a risk and we will handle issue management in a later white paper. A risk must also have a probability something above 0%. It must be a chance to happen or it is not a risk. The second thing to consider from the definition is “will have a positive or negative impact”. Most people dive into the negative risks but what if something goes right?
Management Plan
There are four stages to risk management planning. They are: ·
Risk Identification Risk Response Risk Monitoring and Control
Risk Identification
There are different sorts of risks and we need to decide on a project by project basis what to do about each type. Business risks are ongoing risks that are best handled by the business. An example is that if the project cannot meet end of financial year deadline, the business area may need to retain their existing accounting system for another year. The response is likely to be a contingency plan developed by the business, to use the existing system for another year. Generic risks are risks to all projects. For example the risk that business users might not be available and requirements may be incomplete. Each organisation will develop standard responses to generic risks.
Risk Response
There are four things you can do about a risk. The strategies are:
Avoid the risk. Do something to remove it. Use another supplier for example. Transfer the risk. Make someone else responsible. Perhaps a Vendor can be made responsible for a particularly risky part of the project. Mitigate the risk. Take actions to lessen the impact or chance of the risk occurring. If the risk relates to availability of resources, draw up an agreement and get sign-off for the resource to be available. Accept the risk. The risk might be so small the effort to do anything is not worth while.
A risk response plan should include the strategy and action items to address the strategy. The actions should include what needs to be done, who is doing it, and when it should be completed.
Risk Control
The final step is to continually monitor risks to identify any change in the status, or if they turn into an issue. It is best to hold regular risk reviews to identify actions outstanding, risk probability and impact, remove risks that have passed, and identify new risks.
Risk management is not a complex task. If you follow the four steps, you can put together a risk management plan for a project in a short space of time.
Risk Management Plan
1. Purpose
The purpose of the risk management plan is to document the process and methods that the project team will employ to monitor identified risk, identify and evaluate potential trigger events (indicated an imminent risk event), implement and monitor risk containment strategies and assess on an ongoing basis project progress and activities to identify potential risk events not identified during project plan development.
2. Team Roles & Responsibilities
The project team will review/manage risks in the weekly project status meeting. See the risk log for a listing of identified risk and risk owners.
3. Risk Change Review & Approval Process
As new risks are identified or existing risks expire, the Risk Management Plan will be updated. Risks will be reviewed on a weekly basis in the project status meeting. The plan will be maintained in the project’s SharePoint site.
What is a Risk Management Plan?
A Risk Management Plan summarizes the proposed risk management approach for the project and is usually included as a section in the business plan. The Risk Management Plan is dependant upon the identification of the projects risks, their criticality, status, strategy and status. The risk Management Plan describes:
the process which will be used to identify, analyze and manage risks both initially and throughout the life of the project; how often risks will be reviewed, the process for review and who will be involved; who will be responsible for which aspects of risk management; how Risk Status will be reported and to whom; and the initial snapshot of the major risks, current grading, planned strategies for reducing occurrence and Severity of each risk (mitigation strategies) and who will be responsible for implementing them .
Why would you develop a Risk Management Plan and Risk Management Table?
A Risk Management Plan and Risk Management Table are developed to:
provide a useful tool for managing and reducing the risks identified before and during the project; document risk mitigation strategies being pursued in response to the identified risks and their grading in terms of occurrence and Severity; provide the Executive Sponsor, Steering Committee/senior management with a documented framework from which risk status can be reported upon; ensure the communication of risk management issues to key stakeholders; provide a mechanism for seeking and acting on feedback to encourage the involvement of the key stakeholders; and identify the mitigation actions required for implementation.
How do you develop a Risk Management Plan?
The following is one way to develop your plan. It consists of a series of steps that become iterative throughout the life of your project. Firstly:
Step 1: Identify the risks
Before risks can be properly managed, they need to be identified. One useful way of doing this is defining categories under which risks might be identified. For example, categories might include Corporate Risks, Business Risks, Project Risks and System Risks. These can be broken down even further into categories such as environmental, economic, human, etc. Another way is to categorize in terms of risks external to the project and those that are internal. For a medium to large project, start by conducting a number of meetings or brainstorming sessions involving (as a minimum) the Project Manager, Project Team members, Steering Committee members, external key stakeholders. It is often advisable to use an outside facilitator for this. Preparation may include an environmental scan, seeking views of key stakeholders etc. One of the most difficult things is ensuring that all major risks are identified. For a small project, the Project Manager may develop the Risk Management Table perhaps with input from the Executive Sponsor/Senior Manager and colleagues, or a small group of key stakeholders.
Step 2: Analyze and evaluate the Risks
Once you have identified your risks you should analyze them by determining how they might affect the success of your project.Risks can result in four types of consequences:
1.benefits are delayed or reduced;
2.timeframes are extended;
3.outlays are advanced or increased; and/or
4.output quality (fitness for purpose) is reduced.
Risks should be analyzed and evaluated in terms of occurrence of occurring and Severity of impact if they do occur. Firstly, assess the occurrence of the risk occurring and give this a rating of Low (L), Medium (M) or High (H) occurrence. Once you have rated the occurrence, assess the Severity of the impact of the risk if it did occur and rate at Low (L), Medium (M) or High (H) Severity.
RISK MANGEMENT ASSESSMENT IN PROJECT
Risk assessment validates that your project will succeed. Software development experts evaluate and test the software-based technical and business risks as they relate to your business, market, and service plans. The significant risks are identified and detailed in comprehensive Risk Event Descriptions. You are also provided with a quantification of each risk’s impact on cost, revenue, and schedule.
CONCLUSION
People and risk are as integral to farming as are weather, prices and technology. Project and planning must have careful attention if managers are to have a full understanding of their sources of risks and their alternatives for handling risk. Managers’ paradigms, understanding of project and planning resource skills determine the success they will have with people. . The good news is that managers can make project and planning as one of their strengths. The result will be better risk management, more effective management and greater satisfaction from working with people.
By: U.Archana
