Risk Management Plan for BHP Billiton - Case Study Example

Risk Management Plan: BHP Billiton Introduction BHP Billiton is a multinational mining, gas and oil company based in Melbourne, Australia and London, United Kingdom. It is one of the world largest mining companies operating in 25 different countries with over 41, 000 employees The company mainly specializes in oil extraction, coal mining, mining and extraction of iron ore, processing of natural gas, aluminum smelting, gold, bauxite and diamond mining (Dick & Merrett 258). Due to the nature of the company’s operations in various countries risks are inevitable. The management of the company believes that the identification and management of risks is one of the key strategies of delivering long-term value to its stakeholder (BHP Billiton 33). A risk can be described as an event that is probable or likely to occur and could have either negative or positive effects to a project. Risk can also be defined as an event that has the ability to enhance, inhibit, cause damage or expose danger to a person, a strategy, mission, core processes or operations (Hopkin 14). Risk management refers to the process of dealing with risks. It involves practices like identifying risks, analyzing risks, developing strategies for responding to risks controlling risks and monitoring the effectiveness of the strategies used to respond to risks (Kerzner 746). This paper seeks to present a risk management plan for BHP Billiton. Foremost, it will discuss the communication and consultation processes that will be undertaken as part of the planning process. Secondly, this paper will explore the components of the proposed risk management plan for BHP Billiton. Some of the aspects that will be incorporated in this risk management plan include; the risk context, the process of risk identification, analysing and prioritisation. Furthermore, the plan will include processes such as risk resolution, risk monitoring and a schedule for risk management activities. In addition, this paper will incorporate a risk registry. Consultation and Communication Process The key stakeholders in BHP Billiton involved in the risk management process include; the Board committee, the CEO, the Risk and Audit Committee, Operation Managers, the Management Committee, the Financial Risk Management Committee and the Investment Committee. Basically, the Board Committees maintains overall accountability to the company’s risk profile by reviewing the risk profile for the entire company. This risk profile incorporates both the strategic and operational risks. The Board then delegates the company’s oversight of risk management to the Risk and Audit Committee. The Board also requires that the CEO executes a system of control that identifies and manages risks. The CEO also oversees and monitors the management the risk management process (BHP Billiton 124). The Risk and Audit Committee reports to the Board so as to enable it to review the company’s risk framework. The Committee also monitors the risk management process. The Management Committees carry out roles pertaining to risk and control. The Financial Risk Management Committee reviews the efficiency of internal controls pertaining to financing risk, insurance currency risk, commodity price risk, counterparty credit risk and interest rate risk. The investment committee works towards ensuring consistent and rigorous investment processes are implemented effectively in order to ensure major opportunities and risks are identified and managed. Operation managers in different countries are also key stakeholders in BHP Billiton risk management process (BHP Billiton 124). Generally, operation managers facilitate the implementation of the company’s risk management strategies. In some cases, employees working in various operation bases in different countries also a play key role in the risk management process. Furthermore in some cases, communities and governance bodies around various operation bases in different countries also act as external stakeholders in the company’s risk management process (Fraser & Simkins 119-120). The effectiveness of any risk management process is highly dependent on communication and consultation process especially in the initial stages. When it comes to risk management, communication should be an interactive and continual process that enables the company to provide, obtain and share information with stakeholders and other involved parties. On the other hand, consultation should be a process of informed communication between the company and its stakeholders before any decision is made on any particular issue (Fraser & Simkins 120). As part of the planning process, relevant, timely and clear communication and consultation will be conducted with the relevant stakeholders to inform them about the risk management plan. This will be conducted so as to provide a forum for review and contribution to the procedure and processes embedded in the risk management plan. Communication with the stakeholders will involve the use of clear and formal lines of communications such as memos, E-mail and written reports. Consultation and communication with the stakeholders will be based on a collaborative approach and will embedded on principles of active participation, advocacy, informed agreement, discussions and review. Subsequently, the communication and consultations processes will be documented so as to provide evidence that proper communication and consultation occurred in the course of risk management planning. The risk context BHP Billiton specialises in mining, gas and oil. The company has a diverse portfolio since it specialises in oil and gas extraction and processing and a wide range of mining activities ranging from gold, bauxite, aluminum and diamond mining. Thus the company’s businesses fall under the mining industry, the gas industry and the oil industry. Moreover, the company has operation bases in over 25 countries based in Africa, North America, South American, Australia and Asia (Dick & Merrett 258). As a result of the scope of the company’s operations, nature of business and the number of industries it operates in; the risk context of BHP Billiton entails both strategic and operational risks. These risks may be influenced by economic, socio-political and environmental factors. Economic factors may include; Increasing operational costs and pressures, fluctuations in currency exchange rates, additional taxes and failure to recover investments in oil, gas and mining projects due to impacts of the global financial crisis. Socio-political risks factors may include; inadequate talent pool, changes in government regulations and political instability in operation bases. On the other hand, environmental risk factors include climate change and greenhouse effects and the impact of the company’s operations to the environment and the health and safety of its workers and surrounding communities. Risk Identification Risk identification refers to the process of detecting potential risks in the strategic and operational aspects of an organisation. The key objective of this process is to identify and categories risks that could negatively impact on BHP Billiton’s operations, competitive edge in the market and profitability (Molenaar, Anderson & Schexnayder, 45). In the case of BHP Billiton, the Risk and Audit Committee will play a key role in this process through the help of other stakeholders. The risk identification process will commence with the review of any risks that were identified in the course of the previous risk management process or the risk profile of the company in previous years. Any potential risks identified based on this review will be recorded. Subsequently, the Risk and Audit Committee will facilitate the process of risk identification through the use of approaches such as; scenario-based risk identification, objective-based risk identification, risk charting, taxonomy-based risk identification and Hazard and Operability analysis. Scenario based risk identification will involve scenario analysis in different created situations. In this case, different scenarios will be created to show how different forces interact. For instance, scenarios such as political instability, fluctuations in currency exchange rates and additional taxes may be created to analyse the risk that BHP Billiton may face in such scenarios. Objective-based risk identification, using this approach each department of BHP Billiton will be asked to analyse and submit a report on any event that is bound to inhibit them from achieving their objectives. Taxonomy-based risk identification, will involve the breakdown or classification of possible risk sources. With reference to this taxonomy, a questionnaire will be compiled and administered to relevant stakeholders in the organisation in order to identify possible risks. Risk charting, this approach will involve the use of the approaches outlined above by listing resources facing possible risk and identifying threats to these resources. Hazard and Operability Analysis, this method will entail the use of a structured brainstorming approach that is designed to identify any conceivable divergence from normal practice. It will be particularly suitable for identifying economic and environmental risk factors (Kane 79). Risk analysis and prioritisation After the potential risks have been identified, a risk analysis and prioritisation process will be conducted in order to establish the probability of occurrence and severity of each risk factor. Furthermore, this process will be conducted so as to compare the identified risk and the level of each risk factor. The process of risk analysis will incorporate activities such as assessment of the identified risk events, establishment of potential outcomes brought about these risk events, recognition of critical variances from well-known best practices, determining the probability of occurrence and clear descriptions of the consequences brought about by these risk events. In order to effectively evaluate the risks, a program criterion will be used. The program will in incorporate low, moderate and high rating criteria. See the figure below; When establishing the critical variance of each risk event, the team involve in the analysis process will establish the variance of the risk event from best practices and rate the variance based on five levels (1 to 5). Following the risk analysis process, the output of this analysis process will be used in the prioritisation of risks. The event with the highest risk level, probability of occurrence and impact will be given the highest priority and vice versa. In this case, a risk index will be used to track, categories and priorities risks based on their impact on safety, the company’s operations and their probability of occurrence among many other factors. Risk Resolution After the risks have been identified, analysed and prioritized, the risk resolution process will follow. This process will involve the use of different techniques to manage the risk. For each risk identified, a suitable risk response technique will be used. The techniques that will be used will either be geared towards, risk avoidance, risk reduction, risk transfer, risk retention or acceptance. Risk Avoidance, this approach will involve carrying out any activity that will help to avoid risk events. It may also involve not carrying out any activity so as to avoid risk. For instance, the company may consider retracting from mining projects that may not return or reward their investments due to factors such as political instability, strict government regulation or market fluctuations. Risk Reduction this approach will involve the use techniques geared towards minimizing risk events. It will be suitable for addressing environmental risk events. For instance, the company can minimise the environmental and health risks brought about by its mining, oil and gas operations by using equipments and materials that prevent pollution and employing sustainable approaches such managing water use, enhancing land management and biodiversity. Risk transfer, This approach will involve shifting the risk to third parties like subcontractors involved in mining projects. Risk retention / acceptance, Some risks events may be difficult to avoid, transfer or reduce. For instance, increasing operational costs, fluctuations in currency exchange rates, additional taxes and impacts of the global financial crisis. In such a case, it will be essential for the company to accept that it is a risk and respond by planning in advance. For instance, the company can budget in advance in order to operate effectively in the event that there are increasing operational costs, fluctuations in currency exchange rates and additional taxes. Risk Monitoring Once various risk responses are implemented, risk events and factors will be monitored in order to establish whether the risk can be a reality, if trigger events occur. Based on the trigger events that were documented in the course of the risk analysis process, the Risk and Audit Committee will propose various contingency plans that can be implemented in a day to day basis in order to mitigate and address risk events and factors. The contingency plans proposed by the committee will be communicated to various stakeholders and once the plans are approved, they will be incorporated in the company’s activities for risk mitigation. Risk monitoring is ongoing processes that will be include conducting risk assessments, developing new strategies to avert risks and risk reporting on a regular basis. Risk Management Schedule Identified Risk Classification Impact Risk Response Stakeholders Involved Timeline 1 Increased operational costs, increased taxation and fluctuations in exchange rate currencies Economic Risk Increased expenditure Risk Retention: planning and budgeting / risk transfer to subcontractors Risk and Audit committee Financial Risk Management Committee 2-3 months 2 Political Instability and government regulation Socio-political Risk Disruption of operations, financial Loses Risk avoidance: withdrawal from unstable bases Risk and Audit committee 1 month 3. Climate change and Green house effects Environmental Risk Environmental degradation and depletion of resources Risk Reduction: minimise pollution, promote biodiversity, effective land use and water use Operation mangers 3-6months 4. Health and safety risk Environmental risk Health complications among workers and surrounding communities Risk avoidance: use of safety and protective equipments, evacuation Operation managers 2-3 months 5. Inadequate talent pool Socio-political Risk Operation Inefficiencies Risk avoidance: succession planning and implementation of training and career development programs CEO Management Committee 3-5 months Works Cited BHP Billiton. Annual Report 2011. Retrieved on July 9, 2011 from Dick, Howard & Merrett, David. The internationalisation Strategies of Small-Country Firms: The Australian Experience of Globalisation. Cheltenham, UK: Elgar Publishing 2007, p. 258. Fraser, John & Simkins, Betty. Enterprise Risk Management: Today’s leading Research and Best Practices for Tomorrow’s Executives. New York: John Wiley & Sons. 2010, p. 119-120. Hopkin, Paul. Fundamentals of Risk Management: Understanding, Evaluating and Implementing Effective Risk Management. London: Kogan Page 2012, p. 14. Kane, Gareth. The three secrets of Green Business: Unlocking Competitive Advantage in Low Carbon Economy. London: Earthscan, 2010, p.79. Kerzner, Harold. Project Management: A system Approach to Planning, Scheduling and Controlling. New York: John Wiley & Sons. 2009, p. 746. Molenaar, Keith. Anderson, Stuart & Schexnayder, Cliff. Guidebook to Risk Analysis Tools and Management Practices to Control Transportation Project Costs. New York: Transportation Research Board. 2010, p. 45. Read More