The Risk Institute Releases Fourth Annual Survey on Integrated Risk Management

July 17 2018August 26, 2019

Data Reveals Risk Management Funding Growing, Opportunity to Improve Corporate Objectives

Columbus, Ohio – Today The Risk Institute at The Ohio State University Fisher College of Business, a leading risk-management research organization, reveals its Fourth Annual Survey on Integrated Risk Management. The report surveyed more than 500 financial, nonfinancial, public and private firms to understand how U.S. companies view the role of risk management, the influence of governance and culture and how risk impacts business decisions.

The data reveals 70% of firms have an integrated risk management unit and companies are
increasing funding for risk management, but the size of those units continues to decrease. Despite recognizing the need to invest in risk, firms are not investing in people. Among the other 2018 findings:

60% of risk managers believe that artificial intelligence will play a role in risk management in the future.
28% of firms surveyed have been victims of a cyber attack – a risk that continues to grow each year.
55% of respondents do not use predictive analytics, and those that do have been using them for less than two years.
44% expect to outsource some or all of their risk function.

Risk management policies play an increasingly critical role in a firm’s ability to create value and remain competitive. Both financial firms and nonfinancial firms reported that when they integrate risk management into business processes, they are able to improve corporate objectives.

“One of our key objectives at The Risk Institute is to create a greater understanding of how organizations can proactively leverage risk management to create shareholder value,” said Phil Renaud, Executive Director of the Risk Institute. “Volatility in the current economic and political environment, as well as cyber risk becoming a real threat to many firms, lead to a more vulnerable business environment, making the role of risk management more integral.”

To learn more about the Risk Institute and its Fourth Annual Survey on Integrated Risk Management, please visit: http://go.osu.edu/risksurvey

About the Risk Institute

The Risk Institute at The Ohio State University Fisher College of Business is a collection of forward-thinking companies and academics that provide effective risk management strategies to not only protect firms, but position firms to create growth and value. The Risk Institute helps members consider risk from all perspectives: legal, operational, strategic, reputational, talent, financial and many more. The Risk Institute operates at a unique intersection between faculty, students and professionals from a broad cross-section of industries. With a leading-edge approach to risk management, The Risk Institute creates a unique exchange for risk-centered conversations, ideas and strategies that can’t happen anywhere else.

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Risk Institute Seeks Proposals for Research on Risk Management

November 15 2017August 26, 2019

Request for Proposals for Research on Risk Management

The Risk Institute at The Ohio State University’s Fisher College of Business invites area-specific and inter-disciplinary proposals for research covering all areas in risk and risk management. Priority will be given to topics of the Risk Institute’s 2017-2018 risk series:

Fraud & ethics
Protectionism
Macroeconomic consequences of demographic change
Weather and Climate risk
Longevity risk
Digital risk

The main focus of the research proposal should be understanding or managing risks with respect to any of these topics.

Funding will be up to $10,000 cash or research support per person with a maximum of $30,000 per project.

Proposals are due January 31, 2018, and should be limited to five pages plus necessary appendices. Submit proposals to RiskInstitute@fisher.osu.edu

For more details on what to include in your submission and for answers to our most frequently asked questions, visit our website.

You have questions, we have answers. Visit our website for FAQs on the submission process.

Assessing The Quality Risk of Offshore Manufacturing

June 7 2017August 26, 2019

Does offshore production pose an added quality risk relative to domestic production? And if so, what factors influence quality risk? The study, “Quality risk in offshore manufacturing: Evidence from the pharmaceutical industry” by John V. Gray and Michal J. Leiblein at the Fisher College of Business at Ohio State, co-authored with Aleda V. Roth at Clemson University’s College of Business and Behavioral Sciences, attempts to answer these questions by examining a series of invariant quality-risk measurement controls.

Companies are hopeful that offshore plants will become lower-cost “clones” of U.S. operations. While many believe this to be a significant cost-cutting strategy, the study proves that quality risk suffers in offshore manufacturing. The research defines quality risk as the propensity of a manufacturing establishment to fail to comply with good manufacturing practices. It is a proxy for the likelihood that a product shipped from a given establishment will not perform as intended due to manufacturing-related issues.

The researchers focused on U.S. pharmaceutical companies with offshore production in Puerto Rico, where 16 of the top 20 drugs in the United States were produced at the time of the study. To assess quality risk, the authors used inspection data from the Food and Drug Administration, providing a consistent, unbiased, third-party measure of quality risk in the highly regulated industry. To assess quality risk, they examined 30 matched pairs of U.S. and Puerto Rican pharmaceutical manufacturing facilities. The pairs had the same parent companies and produced similar products.

The researchers measured and controlled factors influencing quality risk in offshore manufacturing, finding: greater potential for expropriation of assets and intellectual property; political, social, and currency instability; issues related to insufficient worker experience and infrastructure; more pronounced cultural issues, language, and communications incompatibilities.

When these factors were measured in depth, they revealed the following:

The higher the educational level of the local population from which the plant’s employees are hired, the lower a plant’s quality risk
The greater the agglomeration of related plants in the geographic area of the plant, the lower the quality risk of an individual plant in that area
The greater the geographic distance between the plant and company headquarters, the higher the quality risk of the plant
The greater the cultural distance between the firm’s home country and the offshore plant, the greater the increase of quality risk at the offshore plant

In conclusion, the study warns, “Many top-level executives may be easily blindsided by the numerous perceived upsides of offshoring, and may too easily dismiss the downside operational risks beyond the obvious.”

View the full research here.

Absorptive Capacity: Achieving the Ultimate Balance for Effective Knowledge Utilization

May 10 2017August 26, 2019

Rapid changes in industry and technology are making it increasingly daunting for companies to develop new products internally. Often times, firms cannot generate the knowledge they need from internal sources alone. The essential question facing these firms is how can they most effectively assimilate new knowledge from external sources?

To answer this question we must first look at limits on absorptive capacity, the ability to absorb new knowledge, and how those limits can constrain the benefits of seeking alliances according to the study “Unpacking absorptive capacity: A study of Knowledge Utilization from Alliance Portfolios” by Jaideep Anand at The Ohio State University and Gurneeta Vasudeva at the University of Minnesota. The researchers studied data on alliances between firms engaged in fuel cell technology development. They studied the variations in alliance portfolios and the associated knowledge utilization outcomes among 120 publicly traded and private firms in 11 countries.

The study unpacks absorptive capacity into two parts: latitudinal and longitudinal absorptive capacity. Latitudinal absorptive capacity focuses on how companies process and use diverse knowledge, while longitudinal absorptive capacity focuses on distant or unfamiliar knowledge. Anand and Vasudeva found that a moderate burden on firms’ latitudinal absorptive capacity, corresponding to medium diversity in their portfolios, contributes to optimal knowledge utilization. However, increasing the demand on firms’ longitudinal absorptive capacity negatively affects this relationship.

Let’s take a closer look at latitudinal absorptive capacity and how it allows firms to use diverse knowledge to develop technological innovations. According to the study, an alliance between a company that concentrates on automotive technologies and a company that has technological capabilities in hydrogen conversion and storage technologies will aid the automotive company by providing a research alternative for automotive fuel technologies.

In contrast, longitudinal absorptive capacity is utilized by firms seeking knowledge distant from their primary technology. For example, an alliance between a firm that develops a phosphoric acid-based electrolyte and a firm that focuses on a hydrogen storage technology. This alliance provides the knowledge necessary to innovate and compete successfully outside of the firm’s area of expertise.

There are important trade-offs between the extent of learning related to the two types of absorptive capacity. The study found that knowledge utilization is optimized when the demands on firms’ latitudinal absorptive capacity are neither too high nor too low. It also finds that as firms venture into less familiar technological domains, their longitudinal absorptive capacity constraints inhibit knowledge utilization. Consequently, the level of latitudinal absorptive capacity constraint at which knowledge use peaks varies according to the demands on longitudinal absorptive capacity.

In conclusion, a firm’s knowledge can only be effectively expanded within the limits of their absorptive capacity. View the original research below to learn more of the implications of firms’ external knowledge and discover how external alliance portfolio-based capabilities can interact with firms’ absorptive capacity to determine their knowledge utilization.

Unpacking Absorptive Capacity: A study of Knowledge Utilization from Alliance Portfolios

The Risk Institute at The Ohio State University’s Fisher College of Business exists to bridge the gap between academia and corporate America. By combining the latest research with the real-world expertise of America’s most forward-thinking companies, the Risk Institute isn’t just reporting risk management’s current trends — it’s creating tomorrow’s best practices.

The Risk Institute Provides Research and Tools for OSU Student Project with Abbott Nutrition

May 3 2017August 26, 2019

During my junior year I was enrolled in the Healthcare Industry Cluster at the Fisher College of Business. As part of this program I was assigned to a group that would work on a semester long project with Abbott Nutrition. Our project scope was very broad. We were tasked with finding the best tools and practices in the healthcare industry for identifying, mitigating and communicating operational risk. My teammates, Alex and John, and I had very limited exposure to risk management. Alex was taking a Risk Management class during that semester, John was the risk officer for his fraternity, and I had done projects in sovereign risk management in a previous internship. We felt pretty under-qualified for the task at hand.

From the very beginning of this program our instructor told us that the network each of us had developed at Ohio State would be of value to the companies we worked with. With this in mind, we decided to begin our research at The Risk Institute at OSU. Our approach was simple, Abbott wanted us to find the best software that other companies were using to assess risk. So we would meet with The Risk Institute, ask them for some software recommendations and walk out with a list of tools to show our Abbott project leaders. We were surprised to find that conversations about culture would shape our research and project much more than conversations about technical tools. Phil and Denita, of The Risk Institute, shared with us the results of their annual survey and it was evident that integrated Risk Management had become a necessary tool for growth, not just a reactionary strategy. It was through our conversations with The Risk Institute that we first learned that an advanced risk software is ineffective if the inputs are flawed or shaped by a culture that doesn’t value risk management.

The expertise and vast amount of research housed within The Risk Institute allowed us to learn from other cases of poor and effective risk management cultures. It also validated our arguments when we went back to the Abbott team and told them that we should be focusing more on risk culture. It’s difficult to quantify cultural risk and easy to dismiss it as just “buzz words” so it was important to us that we had The Risk Institute’s research to back us up.

In the end of the semester we were able to offer Abbott a recommendation for a software that we thought would meet their desire for an automated, streamlined tool to analyze risk. We also focused on tools and strategies that would allow them to take a deeper look into aspects of their culture that were perhaps enabling risky behavior to go without mitigation. The Risk Institute directed us towards a group called the Barrett Values Centre who sells a product called the Cultural Values Assessment. This tool identifies gaps between employees’ personal values, their perceived company values, and their optimal company values. We recommend this to the Abbott team and they agreed that it seemed like a great tool to quantify their cultural risk. Driven by what we learned with The Risk Institute, we also encouraged them to engage in more cross-functional benchmarking across Abbott. Our project was within the Quality team at Abbott. At one of our presentations there was an employee from a different department. We were discussing a specific risk analysis tool that our team in Quality thought was brand new. However, according to that outsider who attended the meeting, that tool was already being used elsewhere in the company. Through this experience, we identified that Abbott has a somewhat “silo’ed” structured and could really benefit from more cross functional integration. We are confident that our partnership with The Risk Institute throughout that semester enabled us to elevate the discourse on cultural risk to the forefront of risk discussions at Abbott Nutrition.

The Art of Balancing Your Eggs Between Baskets

April 13 2017August 26, 2019

Strategizing your portfolio of real options for the win.

What factors make your real options portfolio valuable? How do you analyze the nature of the interactions among real options and their effects on portfolio value? Ultimately, how can your firm be most strategic in managing this in your industry’s unique market?

To begin, firms must consider growth and switching options in developing a portfolio of strategic options. Growth and switching options represent the trade-off between flexibility and commitment, according to the study, “Managing a Portfolio of Real Options” co-authored by Ohio State researcher Jaideep Anand and with researchers Raffaele Oriani in Italy and Roberto S. Vassolo in Argentina. While growth options relate to early commitment in growth opportunities, switching options give firms essential forms of flexibility to handle different sources of uncertainty. Too much commitment could create vulnerability; too little could hinder competitive advantages.

So how do you determine the right balance for your unique market? Let’s consider the sources of uncertainty within growth opportunities and switching opportunities. Some sources generate growth opportunities while others might induce switching opportunities, according to the study. For example, when market demand is the main source of uncertainty, growth opportunities may dominate the strategic decision. These elements are applied to different strategic situations of technological and market uncertainty. Managers must consider what is unique about their portfolio and how they can incorporate that when assessing its value. They must first understand how market and technological uncertainty can have different effects on the value of switching and growth options.

When the market has inconsistencies between demand and the need for new products, it affects the market size and ultimately, sales. In this case, growth options could limit firms’ losses to their initial investments. However, potential gains from future growth opportunities are unlimited.

When the market has technological uncertainty, firms must choose the “right” technology. Here firms can apply switching options that allow them to hedge against the risk of being locked out of the market because they have not invested in the right technology.

Based on your industry’s unique market and focusing on the opportunities available, these are important considerations to keep in mind in a world of quickly advancing technologies and ever shifting markets. To dig deeper into this topic, view the original research and its translation here.

Show me the money

December 9 2016December 9, 2016

Are private equity investments worth the risk?

Question: Do private equity returns and diversification benefits adequately compensate investors?

This is the debate swirling in investment circles, and it’s the question that researchers Berk A. Sensoy from The Ohio State University Fisher College of Business and Nicholas P.B. Bollen from Vanderbilt University work toward answering in their paper, “How much for a haircut? Illiquidity, secondary markets and the value of private equity.”

Private equity investments have illiquidity and market risks related to the timing of capital flows and require management fees that are usually two percent of investors’ capital commitments per year, plus performance fees typically equal to 20 percent of the profits. According to the researchers, the returns and diversification benefits do justify the risks and costs borne by investors.

The drawback is that secondary sales could result in discounts from fund net asset values of as much as 50 percent during financial crises. During other times, the discount could be 20 percent. Despite these discounts, the study finds that the historical performance and diversification benefits of venture capital and buyout funds, the main types of private equity firms, are sufficient to justify their risks and fees. For example, buyout funds have on average outperformed public equities by about 3% per year.

So what percentage of your portfolio should you allocate to private equity?

If you’re an extremely conservative investor with an extreme risk aversion, the researchers recommend that you should allocate no more than about 10 percent of your portfolio to private equity investments.

If you’re an investor with low to moderate risk aversion, you can comfortably allocate up to 40 percent of your portfolio.

To set yourself up for the best chance of success, the study notes that you should be particularly willing to take the risk of private equity investments if you can access average-performing funds.

While this study will certainly not end the debate, Bollen and Sensoy’s study shows that the returns and diversification benefits of private equity appear sufficient to compensate for the risks and costs for limited partners who have a broad range of risk preferences at portfolio allocations typically observed in practice. The findings offer limited partners a guide in making their portfolio allocation decisions.

If you want to dig deeper into this (and other) of the latest risk research, the full paper and accompanying translation are available on our website.

Area Companies Learn to Navigate Political Risk

November 18 2016

Whether an organization is a multinational player or just starting to explore expansion into the global market, political risk cannot be ignored or underestimated. Political risk is taking on new forms, both real and perceived, and may be at its highest level since the Cold War.

In order to succeed, companies must elevate their awareness of inherent challenges of everything from political violence to currency inconvertibility.

On November 15, The Risk Institute at The Ohio State University Fisher College of Business welcomed dozens of area and regional professionals to Navigating Political Risk in Uncertain Times (part of this year’s Risk Series) — an executive education session that explored effective ways to manage political risk and gain insight on how to navigate the landscape and find potential for competitive advantage.

The Risk Institute is thankful for the informed leadership of our session experts: Les Brorsen, Americas Vice Chair Public Policy at EY; Professor Richard Herrmann, Professor & Political Science Department Char at The Ohio State University; Roger Schwartz, Senior Vice President at Aon Risk Solutions; and Sarah Brooks, Associate Professor of Political Science at The Ohio State University.

The session centered around three concepts:

Learning to identify, measure, and manage political risk
Examining the macro-level political risks that could affect business interests
Exploring the relationship between the state and market in social and economic relations

The session’s thought provoking ideas and dialogues advanced The Risk Institute’s unique role in uniting industry thought leaders, academics and highly respected practitioners in an ongoing dialog to advance the understanding and evolution of risk management. The Risk Institute’s conversation about risk management is open and collaborative and relevant across all industries.

Start the New Year off right — registration is now open for our next Risk Series on supply chain resilience on January 24, 2017. We’ll see you there!

From Risk to Resilience: Find (& Overcome) Your Company’s Weakest Link

August 3 2016

Don’t fall through the cracks — grow through them.

In an interconnected, volatile, global economy, supply chains have become increasingly vulnerable. Disruptions — even minor shipment delays — can cause significant financial losses for companies and substantially impact shareholder value. Globalization has made anticipating disruptions and managing them when they do occur more challenging. The potential risks of disruptions are often hidden, and the potential impacts may not be understood, which often results in black swan events – events that can only be fully understood after the fact.

Over the last seven years, researchers at The Ohio State University have been exploring the concept of enterprise resilience, i.e. how companies can prosper in the face of turbulent change by being able to recognize, understand, and compensate for vulnerabilities.

The result is the SCRAM (supply chain resilience assessment and management) framework, which enables a business to identify and prioritize the supply chain vulnerabilities it faces, as well as the capabilities it should strengthen to offset those vulnerabilities.

Six Vulnerabilities You Need to Know About

Every business has its vulnerabilities, and most of the time those vulnerabilities are inherent to the business and difficult to avoid, but by recognizing them, you’ll be better equipped to deal with disruptions as they happen.

1. Turbulence

Definition: Environment characterized by frequent changes in external factors beyond the company’s control

Examples: Unpredictability in demand, fluctuations in currencies and prices, geopolitical disruptions, natural disasters, technology failures, pandemics

2. Deliberate threats

Definition: Intentional attacks aimed at disrupting operations or causing human or financial harm

Examples: Terrorism and sabotage, piracy and theft, labor disputes, special interest groups, industrial espionage, product liability

3. External pressures

Definition: Influences, not specifically targeting the company, that create business constraints or barriers

Examples: Competitive innovation, government regulations, price pressures, corporate responsibility, social/cultural issues, environmental, health and safety concerns

4. Resource limits

Definition: Constraints on output based upon availability of the factors of production

Examples: Raw material availability, utilities availability, human resources, natural resources

5. Sensitivity

Definition: Importance of carefully controlled conditions for product and process integrity

Examples: Restricted Materials, supply purity, stringency of manufacturing, fragility of handling, complexity of operations, reliability of equipment, safety hazards, visibility of disruption to stakeholders, symbolic profile of brand, customer requirements for quality

6. Connectivity

Definition: Degree of interdependence and reliance on outside entities

Examples: Scale and extent of supply network, import/export channels, reliance on specialty sources, reliance on information flow, degree of outsourcing

So in the face of all these disruptions, what’s the answer?

Answer: resilience.

Resilience is the capacity of an enterprise to survive, adapt and grow in the face of turbulent change.

Resilience means improving the adaptability of global supply chains, collaborating with stakeholders and leveraging information technology to assure continuity, even in the face of catastrophic disruptions.

Resilience goes beyond mitigating risk; it enables a business to gain competitive advantage by learning how to deal with disruptions more effectively than its competitors and possibly even using those disruptions to its advantage.

Resilient systems don’t fail in the face of disturbances; rather, they adapt.

Article adapted from “From Risk to Resilience: Learning to Deal with Disruption,” by Joseph Fiksel, Mikaella Polyviou, Keely L. Croxton, and Timothy J. Pettit.

Bridging the Gap Between Research and Practice

June 9 2016June 9, 2016

Isil Erel
Academic Director, The Risk Institute
Professor of Finance
The Ohio State University Fisher College of Business

One of the primary functions of The Risk Institute at The Ohio State University Fisher College of Business is to serve as a conduit between academic research and practitioners of risk management. New research insights, the advancement of theory, and top-tier empirical studies are at the foundation of our mission, but we also want to see the utilization and implementation of our research findings.

We often reference that The Risk Institute exists at the intersection of academia and practice of risk management. It is at this intersection where we facilitate the translation of academic research into practical application. The challenge most busy industry practitioners face is that high level research is written in the unique language of academia and their busy schedules don’t afford them the discretionary time to tackle a lengthy thesis of academic research on the off chance it might contain a relevant insight or two.

The Risk Institute is meeting the need by bridging the gap with The Risk Institute Research Translation Series – a curated collection of insightful one-page practitioner focused translations of relevant research topics. Written from the perspective of a practitioner for a practitioner this one page overview goes beyond an executive summary and focuses on the substantive insight of the research in a concise and efficient manner. A practitioner can supplement their knowledge of the latest research in a matter of minutes. Should a topic resonate, the opportunity exists for more in depth reading as well as engaging the researchers through The Risk Institute.

New translations will be coming online and I encourage you to frequently consult our digital library for new offerings. Of particular note will be the translations from each of our academic grants for research from last year, which will be available later this summer.

Risk is an ever-evolving field and we are confident that The Risk Institute can play a vital role with these translations in advancing the knowledge base and practice of enterprise risk management.

The Risk Institute at The Ohio State University Fisher College of Business brings together practitioners and researchers to engage in risk – centered conversations and to exchange ideas and strategies on integrated risk management. Through the collaboration of faculty, students and risk management professionals, The Risk Institute addresses risk at a broad cross section of industries and is dedicated to developing leading – edge approaches to risk management.