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I.

BACKGROUND The Risk Metrics Group (RMG) was an in-house division of J.P.Morgan. Their job description is to deliver accurate and clear measurement of exposure to market volatility on daily basis by using a tool called VaR (Value at Risk). In October 1994, Morgan made their Risk Metrics database available free for their clients. Morgan reasons were they wanted to make market risks more obvious and apparent to investors and managers, Morgan sought to make risk management tools available to users who lacked the resources to develop their own system, and Morgan wanted to establish their vaR system as the industry standard. In the mid 1990s, many other investment banks were closing down their risk-management group because of concern over liability. JP Morgan also considers this thing. They didnt want the Company to commit to an advisory role. Ethan Berman saw an entrepreneurial opportunity. He thought the group could

a. Company Profile

benefit from an independent relationship to Morgan for several reasons. The financial software business would have more room to grow because client (i.e., other financial firms) would feel more secure in their transactions. The RMG also could pursue small companies, financial institutions, and fund managers more effectively by being outside the Morgan umbrella. RMG spun out from J.P. Morgan in October 1998. Morgan retained 22.5% stake in the company, with Reuters as the second major outside interest. By the mid-1990s, RMG faced heightened global competition, increased financial risk exposure, and individuals managed their own assets through online brokerages, banking services, and financial planning tools. The many players in the risk management software industry differentiated themselves with a variety of approaches to account for and measure risk exposure. As the firm acquired its independence from Morgan, they faced the unique difficulty of starting a new firm with roots in the strong Morgan culture. Start-up culture in this company was friendly staff and flat organization structure. They use consensus to make decision making. The culture was clearly defined but the daily operations were not. In the first year, RMG had six working departments (research, product management, software development, data, sales and administration) with total 70 people based in three offices (New York, London and Oklahoma) The companys business philosophy was to provide high-quality service to build longlasting client relation. Their business model was based on short-term software leasing. After one year operations, the firm offered three major products: Risk Manager, Credit

Metrics and Corporate Metrics. Educating their clients was a second key facet of the firms business model. The last business strategy was product innovation and improvement. Company had several strategic plans for 2000. First, company could continue to market their risk management software to medium-sized firms and develop new products for their institutional clients. Alternatively, company could enter the burgeoning retail market to provide their clients with simple measurement tools. Pairing with a strong industry player would solve the problem of how to gain access to the board market of individual online investors; by not having focus on sales and marketing; firm could focus on research and development. By creating simple package of financial planning tools, the group could appeal to a large market of very small companies responsible for their own accounting and asset management. A move into the retail market raised numerous cultural and strategic issues for the Group, for example did the Group understand retail well enough. Berman realized his management style and the lack of a formal structure was hindering the firms long term growth and revenue. With all the aggressive strategy to grow quickly, Berman considered raising more capital through an outside investor or another corporation. Berman main concerns were about the company culture, product and its commitment to clients with aggressive growth. He also considered hiring a new senior, but he did not know yet would it be help or hurt the company. During 1999, the Group had net loss amounting to $2,510 thousand with 31% of total expenses was research and development cost. b. Objectives To identify riks related with current company condition, its strategic decision to expand and alternative to hire new senior. II. ANALYSIS First, it has been noted that there are some risks that RiskMetrics Group faces. Identification of risk: Type of no Risk Revenue below target (loss) risk Business risk Possible Cause inadequate employee 1 no daily sop high R&D cost

slow growth

Business risk Business

lack of formal hierarchy slow decision making competitors have online brokers suffering bigger loss (can't generate cash internally)

Lose market share

risk Credit risk

must have more leverage

(financial risk)

CEO can't handle a lot of 5 things and possible to make a lot of mistakes Business 6 High Employee turnover risk people risk

limitation of CEO (Ethan Berman)

No clear career path

Table 2.1 Risk Identification After risks already identified, we have to make severity and probability for that risks. Severity Score 5 4 3 2 1 Indicator Bankruptcy Bigger Loss Decreasing Market Share Instable performance Not growing Table 2.2 Severity of Risks Probability Score 5 4 3 2 1 Indicator <=weekly monthly quarterly semi-annually >= annually

Table 2.3 Probability of Risks After that, we can make scoring for each identified risk and classification of risk based on their score

no 1 2 3 4 5 6

Risk Revenue below target (loss) slow growth Lose market share must have more leverage CEO can't handle a lot of things and possible to make a lot of mistakes High Employee turnover Table 2.4 Risk Scoring Score 0-5 6-10 11-15 16-25 Classification Low risk medium risk high risk very high risk (urgent)

Severity Probability Score 4 4 3 5 4 3 3 1 16 12 9 5

2 2

5 4

10 8

Table 2.5 Classification of Risks After we identify and measure risks, we can map and build strategy to mitigate them. Several strategies can be applied to mitigate risks such as hire new executive officer and make a formal hierarchy, go to online system and long term contract, make customer relationship management system, recruitment, and also provide clear career path and competence based with industry (competitors) and make

benchmarking

differentiation. a. Original Risks Map

Figure 2.1 Original Risk Map

b. Risks map with hire new executive officer strategy

Figure 2.2 Risk Map with senior hire strategy c. Risks map with go to online system and long term contract strategy

Figure 2.3 Risk Map with online strategy d. Risks map with clear career path and competence based recruitment strategy

Figure 2.4 Risk Map with career path strategy

e. Risks map with benchmarking with industry (competitors) and make differentiation strategy

Figure 2.5 Risk Map with benchmarking strategy f. Risks map with benchmarking with customers relationship management (CRM) strategy

Figure 2.6 Risk Map with CRM strategy g. Risk map after all mitigation action

Figure 2.7 Risk Map after mitigation actions

III.

CONCLUSION and RECOMMENDATION a. Conclusion 1. Identification of risk is a systematic effort to determine the threat to the project plan. Identification of risk accurately and completely is vital in risk management. The goal is to avoid risks whenever possible, and avoid it at any time necessary. One important aspect in the identification of risk is a list of possible risks as much as possible. 2. Effective investment activity oversight requires accurate risk measurement. Without periodic assessments, management cannot determine the success of its investment strategies. Risk measurement should be tailored to the cash flow characteristics of each particular instrument type while the determination of the probability of occurrence of an event is more subjective and based on reason and experience. Some risk is easy to measure, but it is difficult to ascertain the probability of an event is extremely rare. 3. Risk mitigation is a systematic reduction in the extent of exposure to a risk and/or the likelihood of its occurrence also called risk reduction. 4. Risk mitigation is usually carried out in compliance with the lowest cost approach (least-cost approach) and implement the control or the most appropriate control (the most Appropriate controls) so as to reduce the risk to the acceptable level with the most minimal risk (minimal adverse impact) on resources and organizational objectives. b. Recommendation 1. Risk Metrics or Ethan Berman especially, should identify, measure, and mitigate their risks in order to achieve their aggressive goals (growth). 2. Risk Metrics could apply several strategies such as hire new executive officer and make a formal hierarchy, go to online system and long term contract, make customer relationship management system, provide clear career path and competence based recruitment, and also benchmarking with industry (competitors) and make differentiation. 3. Risk Metrics could consider integrated corporate strategy using balance scorecard method.

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