Murray & Roberts uses @RISK to evaluate a cash flow based approach to enterprise risk management (ERM)
In a sector that faces many risks, engineering and construction services company Murray & Roberts takes a cash flow based approach to enterprise risk management (ERM). Using @RISK from Palisade enables it to simulate the risk scenarios identified in order to advise on the most effective mitigation strategies and controls. Murray & Roberts (http://www.murrob.com ) is a leading engineering and construction services company in South Africa and is recognised as an international engineering and construction group.
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 risks are not understood and managed, stakeholders could face significant losses.
Most organisations in the industry undertake some form of ERM, based on best practices such as the ISO31000 framework. However, many still only take a qualitative approach. This is for a variety of reasons including a lack of the required level of technical knowledge, the belief that intuition provides adequate insight, and a tendency to avoid complex mathematical issues.
To combat this, Murray & Roberts is evaluating a more quantitative approach that links risk exposures to company value by way of cash flows. The company uses enterprise discounted cash flow (DCF) and discounted economic profit (EVA) as the valuation technique for company value. This measurement approach was selected as it relies exclusively on the flow of cash in and out of the organisation, the method preferred by investment houses and analysts, rather than on accounting-based contributions.
The risk problem is simulated using @RISK, which allows the simulation to be adjusted to account for interdependencies and correlations between risks.
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.”
A full version of the case study can be found here: http://www.palisade.com/cases/MurrayRoberts.asp