RISK PROFILE: RISK MAP AND ACTION PLANS
As explained earlier, the investee company's risk profile includes its risk map and set of assessments and action plans for each key risk. As shown in Exhibit 35.8, AOL's risk map is represented using a 4 x 4 matrix of impact versus likelihood/probability, with scales ranging from 1 to 4, "4" representing the highest probability or impact. When two risks are symmetrically placed in the matrix vis- a-vis it's diagonal, for instance, one with ratings of probability "2" and impact "3" and the other with ratings of probability "3" and impact "2," a higher priority is given to the risk with the higher impact.
Exhibit 35.9 illustrates how AOL tracks its summary risk profile on risk maps, identifying the inherent or gross risk rating (the level of risk that would prevail in the absence of treatments), the residual or net risk rating (the actual level of risk given the existing treatments in place), and the target risk rating (the appetite for that risk, which will be achieved through the execution of the key action plans).
To give these concepts more concrete meaning, consider a hypothetical investee company of AOL, Trex Radio, operating in the Socialist Republic of Vietnam. To simplify matters, let's assume it focuses on six key risks, as displayed on the summary risk map of Exhibit 35.10, where risks are displayed on a net basis (residual risks).
As can be seen from Exhibit 35.10, AOL uses a numbering system whereby the first number represents the likelihood (or probability), and the second one the potential impact if the risk materializes. This map shows simply the existing risks, but as the legend at the bottom of the chart indicates, AOL can also highlight existing risks that have been redefined and/or reranked, as well as new/emerging risks.
For illustration purposes only, Exhibit 35.11 shows what this means concretely for one hypothetical yet realistic key risk, that of R2, the ability to develop creative and compelling content.
Exhibit 35.9 Risk Map Displaying Inherent/Gross, Residual/Net, and Target Risk Ratings
Exhibit 35.10 Risk Map of Trex Radio, Vietnam, a Hypothetical AOL Investee Company
Exhibit 35.11 Detail of Risk Profile – R2
This example considers a typical key risk that any media company faces, which is the ability to develop creative and compelling content that attracts and retains a target audience. In this illustration, we consider the radio programming of the hypothetical Vietnam subsidiary, Trex Radio. To better understand the following considerations, the reader should note that the key radio period for listenership in Vietnam is the morning breakfast time period.
As can be seen from the Risk Explanation section, Trex Radio needs to acquire/develop and protect unique quality content that will differentiate itself from the competition and sustain or increase listenership and advertising revenues. One of the potential causes that may put this ability at risk has been identified as "Changing listeners' trends and preferences" that would not be matched by the company. Without any risk treatment, Trex Radio has determined that the gross risk rating is "4,3," which means probability 4, impact 3, which lies in the "red zone" (upper right area in chart).
The existing treatments/controls are also explained: Trex Radio commissions traditional market research and online surveys, and it nurtures its own talent to differentiate itself. With these treatments in place, the current net risk rating is "4,2," which means that the existing treatments do not reduce the probability that the risk will occur, but will reduce its impact if it does occur – yet not sufficiently to move it from the "red zone."
The appetite for that risk, the target risk rating, is "2,2" (which would bring the risk in the "green zone," lower left area in chart). Some key action plans have been identified and selected to bring the probability down two notches, and they
Exhibit 35.12 Detailed Action Plan – R5
are listed in the exhibit. One of them is: "Key shift producers to be migrated into employment contracts and away from vendor relationship." How would this action reduce the probability of the risk that changing listeners' preferences creates a mismatch between their needs and the company's programming? The answer is that by enticing key shift producers to become employees as opposed to freelancers (for instance, by revising their pay and reward upward – see next key action in the list of the exhibit), the company will be in a better position than its competitors to quickly anticipate the programming changes necessary to keep in line with potential shifts in its audience's needs. Also, another action plan geared toward increasing emotional attachment of the producers to the station is: "Introduce a KPI for producers to track the increase in audience listenership by 100 percent from current standing through direct engagement over radio, social media, mobile apps, and phone listenership." This action plan is geared toward building loyalty, and producers are rewarded accordingly for meeting the set targets.
Of course, all of these treatments and action plans have a cost. As explained previously, a cost/benefit analysis of these actions must be performed and a budget justified and approved.
Exhibit 35.12 illustrates a hypothetical yet realistic action plan for another typical risk for a radio company, Trex Radio's R5 risk: the ability to expand and improve broadcast coverage.
As explained previously, action plans are broken down into key action steps featuring "Action by," "Target date," "Status," and "Remarks" columns. In this case, key action number 1 to reduce the risk R5 (ability to expand and improve broadcast coverage) is to contract the telecom company Vietnam Telecom to upgrade and improve Trex Radio's transmission in key markets for 10 years. It has been broken down into six action steps, from a) Liaise with General Counsel to f) Commissioning and handover. The Status column has four possible states: (1) a check mark when the action step has been completed, (2) a green circle when it is on target, (3) a yellow circle when it is at risk of delay, and (4) a red circle when it is overdue. This is to ensure that the agreed action plan is project-managed and delivered on a timely basis. Note: Since the exhibit is printed in grayscale, green appears as the lightest shade in the exhibit, yellow as the middle shade, and red as the darkest shade.