Leidos: Risk Management

Subject: Risk Management
Pages: 5
Words: 1429
Reading time:
6 min
Study level: PhD

Abstract

Risks cannot be avoided within a firm, but they can be managed to minimize their impact. One way of doing this is to transfer the risk to other parties such as an insurer. Leidos must understand the risks that should be transferred, and those that should be retained. Risk factors that have a high impact on the firm such as fire outbreaks, terrorist attacks, or inflation should be transferred. For example, when Leidos has major projects, the risks that the projects face such as inflation should be insured. It would be important to clarify that when insuring such major projects, the insurance contract shall be signed when the project is approved, and it shall expire once the project is completed. Risk factors that have a negligible impact when they occur should be retained to avoid the cost of the transfer.

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The concept of risk transfer has become popular in the current management strategies. This is so because when a firm focuses a lot on managing risks associated with its operations, it may fail to achieve the perfection that is desired in the market. According to Hauger (2006), in the current competitive world, firms are struggling to achieve perfection in various activities as a way of gaining an edge over other market rivals. Leidos has been very successful in the market over the last several decades because of the management strategies employed by its leadership. However, the firm is currently faced with stiff competition from other technology firms operating in the local and international markets. It must find a way of improving its efficiency in various areas of operations. To achieve this, it would be important to identify risks that should be transferred to other agencies and those that can be retained within the firm. The paper will focus on risk transfer options that Leidos has as a way of improving its efficiency.

Risk transfer is beneficial in covering a firm from possible unforeseen risks that may take place in various ways. Leidos faces numerous risks that have the potential of bringing the entire operation of the firm to a halt. Some of these risks may be handled internally through the quality assurance department or within each of the departments of the firm. However, some risks may be handled better by another party at a given fee. This would be under the concept of insurance. The decision of choosing whether the risk would be managed internally or through insurance companies would be based on the magnitude of the effect of the risks. Some risks may have a devastating effect on this firm that it may not be able to recover if it were to manage such them internally. For instance, given that this is a technological firm, the risk of fire outbreaks is always high. When such risks occur, the impact can be so distressing that Leidos may be forced out of operations. This risk should, therefore, be transferred to another party through an insurance policy. The insurance company would be in a position to compensate this firm for all the losses caused by fire, averting the possible need to shut down its operations.

Leidos has been working with the United States Department of Defense, the United States Department of Homeland Security, the United States Intelligence Community, and the National Security Agency (Culp, 2013). These are institutions that have come out strongly to fight terrorism within the country and in various parts of the world. These government agencies have been contracting Leidos to develop various programs and equipment that they use in the fight against terrorism. The terrorists have come out to fight the United States government, specifically these agencies. This was demonstrated in the September 11th attack and other minor attacks that have been witnessed in the country. This means that this firm cannot rule out the possibility of terrorist attacks in its various plants (Anderson, 2006). Leidos is viewed by these terrorists as a party in the fight against terrorism. If their attempt against Pentagon was a success, then if this firm were to be targeted, the impact can be devastating. This risk should be transferred to insurance companies. The risk of destruction of the firm’s properties, possible loss of life, and the injuries caused by such attacks should be insured. This is necessary because of the increasing attacks by the terrorists that have been experienced in the recent past.

Another risk that confronts Leidos which should be transferred to other parties is inflation. According to Chance (2013), this is one of the most ignored risks that various firms face in the current market. Leidos is always contracted by government agencies named above and many others for various projects. Most of these projects are very costly and they take a long period to accomplish. For example, the Trailblazer Project awarded to this company in 2002 was a contract that was worth $280 million. Recently, the firm won a ten-year contract with United Power to implement an additional 20,000 meters supporting the utilities advanced metering infrastructure (AMI) project (Shaw, 2005). These major projects are costly, and in cases where the economy is hit by inflation, the cost of the project can increase threefold. For instance, when Leidos was applying for the Trailblazer Project, it had done its research and confirmed that it would be profitable to conduct the project at $ 280 million. If the economy were to be hit by serious inflation, this cost may increase to $ 400 million or even more. This firm would be legally bound to complete the project for $ 280 million unless the issue of inflation was addressed in the contract. In such cases, Leidos would be forced to use its resources to complete the project. This can be very costly to the firm. It would be appropriate to transfer such risks to the insurer once the contract is signed.

According to Cummins and Mahul (2009), transferring risks to other parties come at a cost to the company. For Leidos, it would be necessary to pay the insurance company some fee in form of premiums to be covered of the risks that have been delineated above. Several risks exist that may or may not need to be transferred. The more this firm transfers the possible risks in the firm, the higher the cost of transferring the risks would be. It would, therefore, be prudent to identify these costs and classify them based on those that may need to be transferred, and those that may not need to be transferred to other parties. A risk register would be important in doing this. The table below is a register that identifies risks confronting this firm and its classifications.

Risk Register
Risk ID# Risk Statement (Description) Probability of Occurrence Impact Risk Trigger Risk Owner Planned Response
1 Fire outbreak: this may be caused by arsons, faulty electric wires or other such unforeseen circumstances Low Very high Arson, electric faults, negligence Insurer Report the incident and wait for the insurer to compensate for the loss.
2 Terrorism: this may occur when terrorists attack the firm because of its closeness with security agencies Low Very high Close Association with security agencies Insurer Report the incident and wait for the insurer to compensate for the loss.
3 Inflation: caused by changing economic environment Low High Economic changes Insurer Report the incident and wait for the insurer to compensate for the loss.
4 Pilferage: this happens when employees steal from the firm Medium Low Poor security measures, lack of ethics Leidos Tighten security. Promote ethical practice
5 Copyright infringement: this occurs when rival firms steal intellectual property of the firm Medium Medium The desire to share new inventions Leidos Engage lawyers and other copyright agencies to engage in court battles.
6 Employees’ injury: any injury to the employee while on duty High Low Negligence Leidos Promote responsible work ethics. Discourage negligence

The above risk register identifies six risks confronting Leidos, their likelihood of occurrence, the impact, and planned responses. This firm cannot transfer all the possible risk factors because this may be very costly. As shown in the above table, three of the risk factors would be transferred, while the other three will be handled by the firm. The three risk factors that would be transferred have low possibility of occurrence. However, their occurrence may be overwhelming to the firm, hence the need for their transfer. On the other hand, the other three risk factors have medium or high probability of occurrence, but their impact is very manageable. That is why they are not transferred from the firm.

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References

Anderson, B. (2006). Public-Private Partnerships, Government Guarantees, and Fiscal Risk. Washington: International Monetary Fund.

Chance, D. M. (2013). Essays in derivatives: Risk-transfer tools and topics made easy. Hoboken: Wiley.

Culp, C. L. (2013). Risk transfer: Derivatives in theory and practice. Hoboken: Wiley.

Cummins, J. D., & Mahul, O. (2009). Catastrophe risk financing in developing countries: Principles for public intervention. Washington: World Bank.

Hauger, P. (2006). An analysis of transfer risk in comparison to sovereign risk. Munich: GRIN Verlag für Akademische Texte.

Shaw, M. (2005). The new Western way of war: Risk transfer and its crisis in Iraq. Cambridge: Polity Press.