Risk Commentary

Due diligence is not the same as risk assessment, but they are complementary. Let’s explore their application in major projects.

Show Notes

SHOW NOTES

Introduction
Due Diligence (defined) and High Quality Risk Assessment: how are they used in a complementary fashion in major projects?

Main points
1. Reflections on financial risk management (Ep 17): quote from L. Burke Files.
2. Definition of due diligence.
3. How due diligence is distinct from yet complementary to risk assessment: order of operations.
3. a. Due diligence in major investment projects: example of detailed schema using a maturity matrix:
- review of firm|  
- management team
- business model
- deal structure

3. b. What are the risks evident in the above due diligence exercise?

The old adage is “high returns = high risk”. Is it strictly accurate?
Example: An investment structure and management team with a relatively low risk profile may have significant returns designed into the product. 
Conversely, a low-ROI product may be subject to uncontrollable conditions, or have sub-standard management, and thus carry high risk. 

With this methodology, risk takes on a comprehensive and properly differentiated character. We want separate views of: 
- level of maturity of the firm, management team, business model and deal structure; 
- the anticipated returns (due to the nature of the investment); and 
- the risk profile affecting execution.

4. Application of Due Diligence and High Quality Risk Assessment in stages of major projects:
 - review of strategic options; procurement process; financing methods - use combination of methods
 - review of major stages (feasibility; approvals; construction phases; commissioning) - risk assessment

Summary
1. Due diligence has to do with checking against pre-set authoritative criteria; risk assessment has to do with investigating the uncertainty associated with plans to execute goals and objectives.
2. The two are complementary methods that help you take your analysis of candidate projects beyond the single dimension of a probability estimate of success (assuming you even have a relevant Risk Rating database).
3. Use criteria arranged in levels of accomplishment to assign a maturity score in one or another aspect.
4. We used the categories of firm, management team, business model and deal structure in a sample due diligence system. You can create the system that is relevant to your business.
5. Check your project management methods to ensure you are using due diligence, as applicable, and risk assessment at all phases of major projects. The risk register helps you not only design contract clauses but also guide the ongoing management.

KEY QUOTE
“The practice of due diligence has evolved into SOX checklists... Best practice awards are given to the weightiest presentations (by the pound) and third part vendors are predominantly selling ‘perfect solutions’ for enterprise risk management that will seriously impede your ability to conduct business.” (L. Burke Files, Due Diligence for the Financial Professional, 2010, p.6)

LINKS 
Robertson, E. Enterprise Risk Management Tools and Templates, 2016. p. 35 - Enterprise Risk Management maturity matrix, based on Carnegie-Mellon methodology.

Mark C. Paulk, Bill Curtis (CAST Research Labs), Mary Beth Chrissis, Charlie Weber Capability Maturity Model for Software (Version 1.1) 
The original article whose methodology has been borrowed and applied to many aspects of business.

What is Risk Commentary?

We see a striking contradiction in all businesses: the sharply increasing need for Enterprise Risk Management, as opposed to risk managers' persistent reports of low perceived value of their own processes. Correctly implemented, High Quality Risk Assessment will not only address uncertainty, but even solve chronic business problems. Join Edward Robertson, successful ERM practitioner and thought leader, to discover a simple process that delivers clear value.