Higher education institutions are assuming more risks than ever before as they face the challenges associated with protecting their reputation, profitability, and ability to stay competitive. Around the country, colleges and universities are taking a renewed look at their operational and strategic planning processes in order to assure continued long-term viability and stability. At the same time, trustees of higher education institutions have greater expectations of administrators and faculty, and in some cases are implementing business practices that run counter to the long-standing traditions of academia.

These dynamics are forcing colleges and universities to look at their world in a very different way. Many are finding they need a fresh approach to risk assessment and risk management --. one that uses a more contemporary set of risk management principles, such as the following:

• Risk management is a systematic and comprehensive activity, which must be integrated into all of the institution's activities and decision-making processes.
• Risk is quantified in order to make better and more informed decisions.
• Risk is not avoided but instead weighed against opportunity and optimized to ensure appropriate return.
• Economic decisions must take into consideration potential risks as well as implementation costs
• Risk mitigation and financing ensure a minimum total cash flow for strategic investments.

Key to this way of looking at risk and risk management is understanding risk from multiple perspectives. Traditional risk assessments for colleges and universities have concentrated on hazard risks alone, with little or no attention paid to financial, operational, and/or strategic risks. A campus-wide risk assessment takes into account risks from all four of these perspectives and quantifies them to provide a more comprehensive understanding of the institution's risk profile.

The goals of a campus-wide risk assessment include:

• Development of a comprehensive risk profile for the institution;
• Identification of risks that may have been previously overlooked;
• Assessment of the potential frequency and severity of identified risks;
• Development of a tool to advise administrators and trustees regarding unprotected risks, and illustrate the impact of those risks on finances;
• Compilation of the information necessary to refine the risk management program; and
• Development of a tool for identifying and refining existing risk control practices.

What is involved in a campus-wide risk assessment?

First, the risk assessment process requires the support and involvement of the highest levels of the institution's administration. After establishing the administration's support, a "project sponsor" from within the institution is appointed. The sponsor is responsible for on-campus coordination of the project and must be in a position to garner cooperation and commitment from academic and administrative departments within the institution.

The risk assessment process encompasses the following:

• Development of project scope;
• Interviews of key administrators and faculty;
• Analysis of interview results;
• Quantification of risks;
• A risk assessment workshop; and
• A final report.

At the end of the process, an institution should have:

• A well-thought-out, holistic approach to managing risks;
• One easy-to-read document for senior administrators and managers outlining the institution's major risks and how they are being managed;
• Information on how to improve the risk management program, including guidance related to risk financing and risk transfer techniques;
• Greater cross-functional/departmental teamwork; and
• Best practices for operating units to follow in managing their risks.

RISK DEFINITIONS

Strategic Risk - The risk of an enterprise's value collapsing, stagnating, or migrating as a result of the institution's failure to adapt to changing revenue patterns. These risks include:

• Changes in academic and business priorities;
• Threats from traditional and emerging competitors;
• Shifts in relative brand power;
• Changes in access to financial capital;
• New uses of technology;
• Evolving distribution channels and networks;
• Global economic and geo-political movements; and
• Legal and regulatory changes.

Operational Risk - Includes risks related to

• Key people and succession planning;
• Board composition and governance
• Human resources and employment;
• Information technology systems;
• Accounting, audit and control systems;
• Compliance; and
• Purchasing and supply chain interruptions.

Financial Risk - Includes risk related to:

• Volatility in interest rates;
• Exchange rates, commodity, equity and other prices, credit risk; and
• Liquidity/funding risks.

Hazard Risk - Includes risks that result in non-financial asset impairment. These risks include:

• Natural hazards;
• Physical damage to tangible assets
• Employee actions;
• Events resulting in legal liability; and
• Business interruption.

For more information, please contact Marsh's Higher Education Practice.

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