Introduction
Understanding risk and risk management in an organisation requires one to understand that risks are varied depending on the type of organization in question. Risk management is the system of strategies, policies and practices that minimize an organization’s exposure to risk, cushioning it against the effects of those risks (Investor Glossary 2011; McNeil, Frey and Embrechts 2005).
To understand the nature of the dynamics of risk requires one to also consider the variety of business interests and business fields such as health, transport, finance and other (Hutter and Power 2005). Thus, risk management in the business environment assumes different perspectives depending n the organization and the risks in question.
However, Hutter and Power (2005) adds that risk management is not something an organization chances to do, but should be a deliberate effort to prepare the organization to deal with future emergencies. Thus proper and effective risk management ensures that the future of the organization is assured.
This does not however mean that organizations understand the nature and type of risks that they will encounter in the present and in the future. It means that organizations must implement the correct strategies to deal with dynamic risks as they arise and minimize their effect (Hutter & Power 2005).
Company outline – Alasia Hotel & Resorts (AHR)
Alasia Hotel & Resorts (AHR) is owned by Alexia Limited which was registered in 1984 as a private limited company. AHR is an exclusively full service establishment with fully owned hotels and resorts in these exceptional cities; Berlin, Frankfurt, Budapest, Copenhagen, Frankfurt, Sydney and Hamburg.
The company has also franchises in London, New York and Florida. It offers a variety off services and products, and caters for individual, group and corporate clients on full board, half board and customized services. AHR has well established restaurants, coffee shops, bars, catering and cocktail lounges with full service personnel.
AHR also offers accommodation services in our main resorts or condominiums with room and personalized services. Condominiums are only for private full board accommodation for small groups or families and guarantees all services offered at the he main hotels. All our large hotels also have exclusive retail shops such as gift shops, boutiques and chemists.
Our hotels and resorts offer other services such as beauty parlors, ballrooms, fitness centers, health amenities, laundry and valet service. Other than these, AHR also has the facilities for exhibit halls, seminars, conferences, private functions such as wedding and other types of meetings. To facilitate easy movement of clients, AHR has secured coaches and saloon cars available upon request.
As Hutter and Power (2005) explains, risk management is a deliberate effort that is part of AHR’s core business; the same can be said of AHR. The nature of AHR’s business, deals with risks every day, therefore risk management is a core function in its daily operations. As such, risk management becomes the culture and therefore in the business practices at the company.
The company has tailored its risk management to suit its business model, nature of business and other factors, such as future expectations (AS/NZS ISO 31000, 2009). The company has thus had to implement risk management strategies as well as processes and a criterion of evaluation to ensure that risk management procedures meet the necessary criteria.
Risk management practices at AHR
The Company has realized the potential danger of the risks that it is exposed to and as such has formed a risk management department whose membership incorporate all the departmental heads under the leadership of the Risk Evaluation And Management Officer whose is assisted by the company’s chief finance officer and chief operations officer.
The mandate of this department is to device and implements best risk management practices. The following are some of the risk management practices implemented by the Risk Evaluation and Management Unit at AHR.
The company’s risk management practices are based on Hubbard’s (2009) theory of calibrating and quantifying risks through actuarial science methods as well as creating a community for risk analysis. This helps to give accurate values of the value and effects of risks to then company and means that risk are quantified in terms of probabilities.
The best alternative for each probability is quantified and recorded ready for implementation in case risk happens. The method is anticipatory and forwarded looking and more effective basis for dealing with respective risks. This theory provides the basis for implementation of the following risk management practices
Human resource risk management
Reducing the human resource risk involves a very comprehensive recruitment and selection exercise for the best employees, which is later accompanied by empowering the employees through comprehensive and continuous training and giving them the authority to solve any problem regarding any client issue.
Training program also includes leadership development; equipping all employees with leadership skills improves accountability (Enz and Siguaw 2010). This greatly improves the employee’s skills and knowledge thus ensures high productivity levels are maintained. It also encourages non-performers to seek career prospects elsewhere thus reduces non-productivity risk that would have arisen.
For long term commitment the company has implemented an attractive compensation for employees who engage on long term basis (Huselid 1995). Compensation for performing employees includes vacation in one of the international hotel for employee and their immediate families, paid leaves, allowances for extra time duties, among other packages.
The objective of this management practice is to improve employee morale and productivity while empowering them to offer satisfactory services to guests and thus ensure that guest are satisfied with AHR’s services.
Financial risk management
Minimizing financial risk involves controlling the company’s revenue and income by calculating the equilibrium pricing and controls. Because the company operates in various countries, its finances rare also exposed to foreign exchange rates fluctuation (Prindl 1978). Managing the forex rate fluctuations, the company has identified a reporting currency, US dollar, in which it converts all its assets.
This decision is based on the concept of the stability of the US dollar and its universality, which makes financing its international operations easier. Alasia transacts its daily international business through a pre-agreed exchange rate that is not affected by any variation in foreign exchange rates.
As such, the company profit margins are insured against any loss. The company and the Risk Evaluation and Management Unit came up with the following equation for hedging;
h=E-1
Where E is equal to the amount of foreign exchange exposure risk and varies from 0 to 1. If total hedging is done, the amount of E will be equal to 0 and thus not sensitive to any fluctuations in foreign exchange (Kroner and Sultan 1993).
Managing insurance premiums
The company has also engaged in insuring all its assets for any loss of value and damage. Depreciating assets such furniture, kitchenware and vehicles have been well insured and thus any loss of value is compensated. Other than this, the nature of the business as well as the international political climate exposes the company to rising insurance premiums.
This affects the company revenues. As such, the company has integrated a training program for all its employees in risk reduction. This is aimed at helping reduce claims and as such has kept the insurance premium rates for the hotel relatively low.
The company entered into agreement with its underwriter for discounted insurance premiums if the company manages its claims. Negotiations are in their final stages and this arrangement is expected to come into force soon (Hill 2004).
Effective risk management practices
Hedging
One of the most effective risk management practices the company is the hedging that incorporates the value and nature of assets. This means that the company incorporates the value of the asset in determining the hedging value. As such, the asset value is part of part of calibrating the hedging ratio (Kroner and Sultan 1993).
Hedging has also seen the group run its international business efficiently without incurring any losses associated with changing forex rates. As such the company has managed to make long term plans for its international business operations (Chowdhry &d Howe 1999).
The company has seen the rise of its hedged assets such as franchises and other outsourced services like chattered flight for its clients. As such, the company has seen its international business operations done at optimal rates and therefore swells the company’s profits margins.
Insurance and its benefits
Hedging may not guarantee the protection of the company’s physical assets, thus the insurance policy against loss of value is a novel idea. It ensures that the company’s loss in the value of its company depreciating assets such as vehicles, furniture and others is easily recovered is recovered during liquidation.
As such, the company’s capital investment is protected against loss as well as guaranteeing better returns in investment. As such, these make the company more fluid in increasing its acquisition and replacement of such assets (Gustavo and Stavros 2011).
Ineffective risk management practices
Some of the practices in the company’s risk management have not been effective and may not necessarily reduce the effects of risks to the company. Such activities as managing the insurance premiums are not sustainable.
This is because the causes of the said rising in insurance premiums are external and outside the group sphere of influence. Such issues as terrorism affect global travel therefore forcing people to stay in their homes and avoid such risk.
In effect of the rising threat, the underwriter automatically appreciates insurance premiums due to the increased threat as such situations are not covered by discounted rate agreement. As such, the hotel industry suffers most damage when such threats are high (Hill 2004).
The group has one of the best recruitment exercises in the market. It helps in establishing the best quality workforce for the company. It guarantees that the company hires the best brains in very field. However, the exercise ignores one of the fundamental aspects of human resource development, which is developing and growing its own human resource through internship and apprenticeship.
Apprenticeship is a very efficient method of grooming potential replacements as well as ensuring a reservoir of workers in a company as well as tapping the best talent while still raw and developing it to fit into a company’s needs (Enz and Siguaw 2010; Huselid 1995). Lastly, the company is not entirely secured by establishing the dollar as the principle currency of trade.
The dollar despite being a relatively stable currency is not immune to fluctuation. Due to the company’s large volumes of trade, even the slightest negative change in the value of the dollar will affect the company’s income (Kroner, and Sultan 1993).
Recommendations
To improve its risk management practices, the company should consider the following recommendations;
Alternative currency
The most viable option to cushion this effect is to establish an alternative currency such as the Euro as its principle currency of trade, which the company will use to conduct business with, should the dollar fluctuate significantly (Prindl 1978; Malevergne & Sornette 2006).
Workplace issues
The company’s human resource risk management practice is very efficient in managing how employees work. However, it does vaguely cover employees’ claims concerning harassment, discrimination as well as other workplace issues. As such, the company should keep a regularly updated company policy on discrimination and train all employees on policies concerning these issues and how to avoid them at the work place (Hill 2004).
Insurance industries research
The insurance industry is also so unpredictable and as such company risk losing their investment when an underwriter is dissolved. To reduce this risk the company should conduct a research on possible insurers based on the highest claims rating. More important, the company should engage insurers who have the best solvency ratings (Hill 2004).
Reference List
AS/NZS ISO 31000., 2009, Risk management – principles and guidelines. Sydney: Standards Australia.
Enz , C., & Siguaw, J., 2010. The human dimension: a review of human resources Management issues in the tourism and hospitality industry Cornell Hotel and Restaurant Administration Quarterly May Web.
Hill, J., 2004. Right this way! Hotels make room for risk management. Web.
Hubbard, D., 2009. The failure of risk management: why it is broken and how to fix it. New Jersey: John Wiley and Sons.
Hutter, B., & Power, M., 2005, Organizational encounters with risk. New York: Cambridge University Press.
Huselid, M., 1995. The Impact of Human Resource Management Practices on Turnover, Productivity, and Corporate Financial Performance. The Academy of Management Journal. Vol. 38, No. 3.
Kroner, K. , & Sultan J., 1993. Time-varying distributions and dynamic hedging with Foreign currency futures. Journal of Financial and Quantitative Analysis, 28.
Malevergne, Y.,& Sornette, D., 2006. Extreme financial risk: From dependence to risk management. New York. Springer Berlin Heidelberg.
McNeil, A. J., Frey, R., & Embrechts, R., 2005, Quantitative risk management. New Jersey: Price Town University Press.
Prindl, A., 1978. Foreign Exchange Risk. The Journal of Risk and Insurance. Vol. 45, No. 4.