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Risk Management Assignment: ERM System In Centrica PLC

Question

Task:
You are required to prepare a detailed report on risk management assignment analyzing an industry with regards to appropriate enterprise risk management practices.

Answer

Executive Summary
ERM framework helps in identifying risks and its prevention process of an organization. It is important in understanding the competition, value-based strategies, risk, and its mitigation process to sustain the operations of the firms from the 'gas supply' industry. The current report will analyze the risk management and measurement process of a British oil and gas company – "Centrica PLC."

1. Overview
Enterprise Risk Management (ERM) framework implements in identifying an organization's opportunities and threats to assess them in understanding the intensity, impact, appropriate response, and monitoring process. It has been identified that the ERM process in a firm helps in achieving an extensive broader 'operational' performance with internal audit and interaction process with the aligned people in the firm (Callahan and Soileau, 2017). The current report will analyze ERM characteristics, measuring, and mitigation processes related to the 'gas supply' industry. As an example, the current report will analyze the ERM system in "Centrica PLC," a British-based multinational company that serves over 25 million customers across the UK, USA, and Europe. The company has revenue of $27.6 billion and a market capital of $3.6 billion (Reiff, 2020). The report will understand its underlying risks, measures, and mitigation process with the help of the ERM framework.

2. Industry Characteristics for Risk Management
The risks related to the ‘oil and gas’ industry under the ‘gas supply’ business are related to the political, environmental, and economic risks. However, it differs among the organizational structure, operational and management process, and the firm's sustainability. The main characteristics of the mentioned industry related to the existing risks can be,

2.1 Risks related to the firm's objectives and goals
The insufficient implementation of the management framework, related to processes, methods, tasks, tools, and resources in achieving various objectives, 'project lifecycle,' and appropriate template can make a drastic difference in a sustainable business approach from an organization.

2.3 IT and communication-related risks, and their impact
The lack of implementation of IT opportunities and inappropriate communication processes makes it difficult for a big organization, such as "Centrica PLC" to conduct an effective operation in different countries. It also affects the competitive nature of different organizations. IT implementation makes operational processes sustainable and impactful, and communication eliminates any gap between the management and employees.

2.4 Operational support in risk management
It has been identified that the governance process in the supply chain and risk management process helps in denoting, analyzing, and mitigate the risks that effects the downstream and upstream of the organization's network (Ahlqvist, Norrman and Jahre, 2020).

2.5 Underlying ‘Risk Management’ technology
Organizations adopt 'risk management' tools and technology to create personalize risk modeling, program scenarios, running processes, and warning on undeniable risks. In the 'gas supply' industry, risk technology maintains the risks related to political factors, economic flows, and operational sustainability to prevent risks.

3. Identification of Inherent Risk at the Mentioned Industry
The risks related to Gas Industry can be consisting of the political scenario of a country in maintaining the permission for its regulatory environment, geological constraints, feasibility in the economic flow at the business, 'operational' costs, and demand and supply process. In the current scenario, various essential industries, especially the gas supply industry are inclined towards incorporating the advanced technologies, like 'blockchain' to improve the management process, risks, development, opportunities, and challenges (Lu et al., 2019).

Inherent Risks

The likelihood for “Centrica PLC”

Description

Supply sustainability at the natural gas

Medium

It has been identified by both industry and “Centrica PLC” that safety and reliability in the ‘gas supply’ industry’s operational process are the most critical (Tchórzewska-Cie?lak and Pietrucha-Urbanik, 2018). Due to the declining demand among the customers in “Centrica PLC” makes it difficult for the firm to make a secure future business.

Geological risks

Medium

It is dependable on the environmental situation in extraction gas and appropriate implementation of the 'unconventional' gas extraction process by an organization.

Operational costs

High

"Centrica PLC" is facing a critical situation in the face of increasing operational debts and a sudden drop in the demand process among Britain.

The political and economic scenario

Medium

Politics can affect the regulation system in the 'oil and gas' industry by imposing business restrictions, different laws in different states, and rules for gas extraction limit and process. Various literature and content related to the 'sourcebook' system can provide information related to the social, political, and economic development and choices of an organization (Cameron and Stanley, 2017). The 'unconventional' extraction of the gas for maintaining the supply can lead to economic constraints.      

Supply and demand process

Low

Currently, from the past few years, "Centrica PLC" has been experiencing a decline in the demand and supply system among its customers. The main reason behind this can be the increasing competition among the gas supply industry in the UK, the price capitalism, and the decreased price of gas. The internal and external environmental factors of an oil and gas company can influence the firm's sustainable supply practices (Ahmad et al., 2017). 

Table 1: Inherent Risks and Description

4. Suggestion on Risk Management Process: ERM Framework
4.1 Risk Management Process
According to the 'enterprise risk management' (ERM) process, organizational risks can be assessed by implementing different stages from the ERM culture. "Centrica PLC" currently faces problems and risks related to the declining customer demand in Britain's 'gas supply' industry, and increasing competition from other companies. The steps that are important in assessing and managing risks suggesting in the current report can be derived from the ERM framework,

ERM Steps

Usage Description

Coverage

"Centrica PLC" facing problems regarding the political scenario of the country, decreased demand, and growing competition, which is common in the 'gas supply' industry. The implementation of the ERM framework in this industry can improve the firm's performance by adding value to the economic structure, utilizing the allocated resources and economics, and managing risks effectively (Annamalah et al., 2018). 

Risk Appetite

The flexibility of “Centrica PLC” expresses the capability of assessing and mitigating the firm’s potential risks. In the current scenario, the ‘gas supply’ industry is facing risks from the competition, declining costs, geographic and political constraints. Risk appetite will let the organization plan for risk mitigation according to its capacity.

Governance and Politics

The political scenario among the firms in the 'gas supply' industry generates various opportunities in achieving goals. The appropriate governance process in the operations and supply process can provide sustainability.

Infrastructure and Risk Data

It is important to ensure the obtained risks are true to the present operational context of an organization before starting working on its mitigation process. Organizational infrastructure makes the risk assessment process effective and viable.  

Communication, Risk Measurement, and Evaluation

The 'competitive advantage' among various organizations under the ERM framework sustains the financial performance and effective management practice in gaining 'superior’ performance (Yang, Ishtiaq and Anwar, 2018). An effective communication process makes the measurement and evaluation process smooth.

Control Management

After identifying the potential risks, control management will plan for managing those risks according to the intensity.  

Response

The response is related to how an organization is responsive to its risks and plans for mitigating them.

Stress Testing

Understanding the internal interconnection between the identified risks can help in making an appropriate plan for the mitigation. It also enables the organization in assessing the wrong decisions during the test process.

Table 2: ERM steps and processes

4.2 Justification
The mentioned steps and processes from the ERM framework are appropriate for any multinational organization, such as “Centrica PLC” in understanding their current risks and make suitable plans for mitigating them. It will also lead them to understand the working preferences according to the probable impact of those risks. ERM framework is universal and can be adopted by the 'gas supply' industry effectively.

5. Risk Mitigation Measures
5.1 Risk Prevention Measures
After understanding and managing the risks of the firms from the 'gas supply' industry, management will implement various strategic tools and techniques to mitigate those risks and sustain the operational process.

Risk Prevention Measurement Techniques

Likelihood for “Centrica PLC”

Description

‘Value-at-risk’ model

Medium

For long-term planning, the 'gas supply' industry calculates 'value-at-risk' (VaR) by creating various future scenarios to understand the risk areas and probable losses. In the industrial 'gas supply' companies, they tend to optimize their organizational portfolio with an appropriate algorithm and methodology to solve operational problems (Babat, 2017).

Bootstrapping in statistical reporting

High

Bootstrapping in business is related to the customers, its growth, visibility of business models, sustaining cash-flow by implementing the existing organizational resources. "Centrica PLC" uses their savings, data, and documentation from the business operations to proceed with the system in understanding the 'standard' errors, the hypothesis of the performance and testing, and provide statistics samples. It helps in assessing the risks accurately.

‘Model Risk’ management

Medium

The implementation of ‘model risk’ management is increasing significantly because of leading the organizations achieving strategic planning, 'asset-liquidity' management, and pricing process effectively (Crespo, Kumar and Noteboom, 2017). “Centrica PLC” needs to manage ‘model risk’ to avoid any financial and strategic loss.  

ERM tools and techniques

Medium

ERM techniques and tools from the framework make it easier for organizations to measure the internal and external risks by assessing the organizational operations within few steps. The 'risk governance' system under various firms is responsible for assessing the risks identified by the management system (Viscelli, Beasley and Hermanson, 2016).

‘Credit risk’ management

Low

This measurement technique helps in practicing the risk mitigation in the organization's capital and debt processes by understanding the capacity of the investors to avoid any financial loss. In the 'gas supply' industry, multinational companies acquire loans to spread the business. It is important to maintain the return rate to not face a significant amount of debt, which is currently one of the main concerns of "Centrica PLC."

Table 3: Risk Prevention Measure Tools

5.2 Justification and Effectiveness of the Mitigation Measures
The mentioned mitigation measures are effective in the modern scenario for understanding and assessing the potential risks in the ‘gas supply’ industry. “Centrica PLC” can use measurement tools related to the financial operation, such as ‘credit risk’ and ‘model risk’ management, and ‘value-at-risk’ model to understand their current situation regarding financial sustainability and economic feasibility. Other tools will ensure the management process in adjusting the risks and provide strategic planning to increase the firm's revenue.

6. Conclusion
Risk assessment and management process is the most crucial aspect of any organization regardless of the industry. The increasing competition, diversity at the demand and supply, and decreased gas price make the business environment of the 'gas supply' industry weak. The appropriate implementation of the ERM framework and risk measurement tools will provide a sustainability plan to "Centrica PLC" in strengthening the market position.

7. References
Ahlqvist, V., Norrman, A. and Jahre, M. (2020) ‘Supply chain risk governance: towards a conceptual multi-level framework’, Operations and Supply Chain Management: An International Journal, 13(4), pp. 382–395.

Ahmad, N.K.W., de Brito, M.P., Rezaei, J. and Tavasszy, L.A., 2017. An integrative framework for sustainable supply chain management practices in the oil and gas industry. Journal of Environmental Planning and Management, 60(4), pp.577-601.

de Almeida, A.T., Alencar, M.H., Garcez, T.V. and Ferreira, R.J.P., 2017. A systematic literature review of multicriteria and multi-objective models applied in risk management. IMA Journal of Management Mathematics, 28(2), pp.153-184.

Annamalah, S., Raman, M., Marthandan, G. and Logeswaran, A.K., 2018. Implementation of enterprise risk management (ERM) framework in enhancing business performances in oil and gas sector. Economies, 6(1), p.4.

Babat, O. (2017) ‘Essays on risk management in portfolio optimization and gas supply networks’.

Callahan, C. and Soileau, J. (2017) ‘Does enterprise risk management enhance operating performance?’, Advances in accounting, 37, pp. 122–139.

Cameron, P. D. and Stanley, M. C. (2017) Oil, gas, and mining: a sourcebook for understanding the extractive industries. The World Bank.

Crespo, I., Kumar, P. and Noteboom, P. (2017) The evolution of model risk management. McKinsey Global Institute.

Lu, H., Huang, K., Azimi, M. and Guo, L., 2019. Blockchain technology in the oil and gas industry: A review of applications, opportunities, challenges, and risks. Ieee Access, 7, pp.41426-41444.

Reiff, N., 2020. 10 Biggest Utility Companies. [Online] Available at: https://www.investopedia.com/articles/investing/022516/worlds-top-10-utility-companies.asp [Accessed 28th Sepetember 2020].

Tchórzewska-Cie?lak, B. and Pietrucha-Urbanik, K. (2018) ‘Approaches to Methods of Risk Analysis and Assessment Regarding the Gas Supply to a City’, Energies, 11(12), p. 3304.

Viscelli, T. R., Beasley, M. S. and Hermanson, D. R. (2016) ‘Research insights about risk governance: Implications from a review of ERM research’, Sage Open, 6(4), p. 2158244016680230.

Yang, S., Ishtiaq, M. and Anwar, M. (2018) ‘Enterprise risk management practices and firm performance, the mediating role of competitive advantage and the moderating role of financial literacy’, Journal of Risk and Financial Management, 11(3), p. 35.

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