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Murray & Roberts uses @RISK to evaluate a cash flow based approach to enterprise risk management


Murray & Roberts (www.murrob.com), a leading engineering and construction services company in South Africa, is using@RISK from Palisade to evaluate a cash flow based approach to enterprise risk management (ERM).

The engineering and construction industry faces various high risk scenarios including a combination of negative markets, protracted strike action with labour unions unable to reach settlements amicably, loss of life due to poor safety standards, and delays and cost-overruns on major projects.  If these are not well understood and managed, stakeholders could face significant losses.

Taking a quantitative approach to enterprise risks by simulating them with @RISK enables Murray & Roberts to advise on the most effective mitigation strategies and controls.

Following a qualitative assessment of a specific project, the major risks identified are subjected to a quantitative evaluation. Subject matter experts are consulted to determine the cash flow impact, should threats occur.  Opportunities are also included because the ERM process is highly effective at handling the upside of risk as well as the downside

The results are input into @RISK to determine the impact on the baseline value of the company for each risk.  This is undertaken for inherent risk (the maximum risk exposure before considering current controls) and for residual risk (the risk remaining after current controls). Current controls include actions such as the development of more robust strategies to enter northern Africa and consulting with blue-collar workers directly to avoid the increased threat of strike action.

The total impact of inherent risks and the total impact of residual risks are then calculated by ‘shocking’ the baseline company value.  This ascertains the effect that all the risks combined could have on the company’s baseline cash value before and after controls are applied.

Various ‘what-if’ scenarios are tested, such as adding additional threats should the business decide to enter the South American markets, or further diversify its construction activities to include more high tech projects.  The existence of correlation between threats and opportunities are also considered as part of the @RISK model.

Sensitivity analysis is also undertaken to identify which risks posed the greatest variability on company value, both from an inherent and residual risk perspective.

Sean de la Rosa, project and enterprise risk manager of the Power & Water Platform at Murray & Roberts, says: “@RISK offers the powerful simulation capability that is required to model complex risk problems.  Despite this, the simulations are relatively easy to perform and require minimal in-depth mathematical expertise.”

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