Risk management of 2012 London Olympic Games

1. Introduction

There are two critical concepts in corporate finance that could help managers to evaluate an alternative selection (Watson, Head 2010). These two concepts are risk and return. Therefore, corporate risk management is increasingly important in corporate finance. With the critical role of risk management, there are more and more researchers to study and investigate risk management in various firms.This paper aims to present the risk management cycle by evaluating the total risk management of 2012 London Olympic Games. In the second section, risk identification is presented. In the third section, this paper evaluates critical and serious risks. The final section is the conclusion of this paper.

 

2. Risk identification

Firstly, it is necessary to understand what risk is and what difference between risk and uncertainty is. Risk means sets of quantified conditions with the probabilities could be distributed. Correspondingly, uncertainty refers condition with the probabilities could not be distributed (Watson and Head, 2010). In regard to the investment appraisal, risk means the business risk rather than financial risk that may grow up with the variability of expected returns. Therefore, risk is apparently different from uncertainty (Watson and Head, 2010). However, interestingly, Grayson (1967) indicates that difference of them doesn’t significant in practical business decisions when managers actually care about the probabilities of future circumstances. Apparently due to this, the difference between risk and uncertainty is regularly ignored in the actual investment appraisal (Watson and Head, 2010).

 

There are plentiful views on the risk management in the existent literature.

Allayannis et al (2007) suggest that corporate governance in risk management is critical for the conversion from the cost-increasing to value-increasing view of risk management requests, because it is principal reason for inadequate risk management incentives. With powerful internal or external governance, firms could conduct meaningful and valuable risk management activities.

 

According to Berk, Loncarski (2011), it is usually that risk management practices are far from academic models. First reason is that some motivations of risk management on the firm level are not extreme convincing. Second reason is that institutional environments in different countries are substantially different. Different corporate taxation structure could lead the tax explanation of risk management significantly irrelevant – for example, non-convex tax functions. Another reason is that in the different countries and different firms, corporate governance codes and practices are not identical and they also move over time. Changes in these codes and practices have impacts on the sensitivity of firm value level to several markets imperfections. For example, in Europe, 30 percents of firms (publicly listed) have multiple huge numbers of owners, making these firms valuation differs from the valuation of widely-held firms (Berk, Loncarski 2011).

 

Moreover, the research of Berk and Loncarski (2011) suggests that because risk management has a positive effect on the value of a firm, risk management should be an essential part of the making financing policy within the firm. Although a great amount of corporate finance literature has demonstrated that in the imperfect real world risk management should have a positive effect on the value within the firm, Modigliani and Miller (1958) highlight that in the perfect world there would be no benefit from managing risk of the firm. Jin and Jorion(2006) and Bartram et al. (2009) also claim that do not find any significant direct effect.

 

The analysis of Mackay and Moeller (2007) also shows that a source of risk management value that has been overlooked. Mackay and Moeller (2007) claim that by adopting an approach that directly relates output and input prices to revenues and costs, they avoid lots of drawbacks related to returns-based analyses of risk factor exposure. Furthermore, the approach provides a tight link between the proposed analytical framework and its estimation. The results of researching how risk factors affect revenues and costs offer more specific guidance for corporate risk managers than past similar studies.

 

The sports and economic projection- Olympic Games could lead increasing amounts of economical growth for the host city. Jin, June (2010) point that after the Olympic Games, the long-term demand triggered by the investment expansion may dramatically decrease and economics will drop sharply without driving force. It is usually called as Post-Olympic (Jin and June, 2010).

 

2.1 Types of risks

According to the risk management cycle, risks of the 2012 London Olympic Games could be arranged into the four kinds including physical, economic, performance and psychological risks.

 

2.1.1 Financial risks

Damster and Tassiopoulos (2000) suggest that financial risk may happen when a bid is unavailable to sustain without adequate sponsorship or when facilities couldn’t be constructed without enough funding.

It can be arranged as four categories as follows:

  • Government risk
  • Sponsorship, Licensing and budget risk
  • Unquantifiable economic benefits
  • Tickets risks
  • Exchange rate risk 
  • Translation risk 
  • Transaction risk (Transaction risk is the risk that the amount of domestic currency may change because of the fluctuation of exchange rate.)

 

2.1.2 Performance risk

Performance risks refer that the performance of event cannot fulfil the expectation with several reasons including terrible weather or unqualified performers. In this case, Olympic Games Organization also suffers huge loss. There are several categories in this kind of risks.

  • ‘Acts of god’ risks 
  • ‘Best Games Ever’ risk 
  • Protection and promotion of the Olympic Brand
  • Public reputational risk
  • Transport and infrastructure system risks
  • Operating loss risk 

 

2.1.3 Psychological risks

Attendance also could be decreased by the poor image of venue and environment. It is not ignorable risk in Olympic Games Projection.

  • Hangover risks. 
  • Environmental risks
  • Risks of fluctuation in foreign exchange rates

 

2.1.4 Physical risks

Physical risks may happen to athletes, adjudicators and audiences because of the disease, crime and inadequate safety arrangements.

  • Security and geopolitics risk
  • Terrorism risk.  
  • Technological problem

 

2.2 risk table

 

 Service Area Risk Register

Risk ref No.

Risk description

Likelihood rating

(1-5)

Consequence rating

(1-5)

Level of risk

1

Licensing, sponsorship and budget risk

3

5

15

2

Government risk

3

4

12

3

Ticket risk

4

1

4

4

Unquantifiable economic benefits

2

3

6

5

Transport and infrastructure risks

5

5

25

6

“Best Games Ever” risk

2

3

6

7

operating loss risk

3

5

15

8

Protection and promotion of the Olympic brand

1

1

1

9

Public opinion and reputational risk

3

1

3

10

“Acts of god” risk

2

5

10

11

“Hangover risks”

1

1

1

12

“White elephant” risk

2

2

4

13

Environmental risk

5

1

5

14

Risk of fluctuation in foreign exchange rates

2

1

2

15

Terrorism risk

4

5

20

16

Security and geopolitics risk

4

4

16

17

Contingencies

5

2

10

18

Technological problem

3

5

15

 

3 Evaluation of critical risks

Risk management could be divided into internal risk management and external risk management (Watson and Head, 2010). As the result, managers decide which risks are more important and which are less important.

 

Diers (2009) points the advantages of internal risk models.

First advantage of internal risk model is that the individual risk condition of the insurer could be modelled much more precisely than the standard formula. The second advantage is that it could offer sufficient view of the return and risk circumstance. Furthermore, competitive decisions in risk management are based on the internal risk model. Moreover, internal model could provide more accurate risk margins for premium pricing.

 

3.1 ranking of critical risks

In practical, risk map is utilized to identify and evaluate sets of risks that may have harmful impact on an organization or a project. With relevant information, risk map can be modelled.

 

The Risk Map locates each risk in the following four quadrants:

Risk map

 

  • Ref NO.10
  • Ref NO.1

 

 

 

  • Ref NO.2

 

 

 

  • Ref NO.6
  • Ref NO.4

 

  • Ref NO.7         ●Ref NO.5

 

  • Ref NO.18
  • Ref NO.15

 

 

 

  • Ref NO.16

 

 

 

 

 

 

 

  • Ref NO.12

 

 

 

  • Ref NO.14

 

  • Ref NO.11
  • Ref NO.8

 

 

 

  • Ref NO.17

 

  • Ref NO.13

 

 

  • Ref NO.3
  • Ref NO.9

 

 

 

 

FIGURE 2: Risk Map

Quadrant I: “high” possibility to happen.

Quadrant II: second possibility or less likely to happen.

Quadrant III: less significant, but higher probability of occurring.

Quadrant IV: not significant and unlikely to happen.

 

3.2 identification of risk ranking

3.2.1 Licensing, sponsorship and budget risk

Financial risk may occur when the suppliers or customers do not fulfil the agreement and the organization committee income cannot be obtained. For more detailed, in the  2012 Olympic Games organization, if some committed sponsors cancel or delay some agreement for particular reasons, there will be huge risks happen to the organizers.

 

According to Brunet (1995), during 1992 Barcelona Olympic Games, official sponsors own 10% share compared with 75% share at the 2000 Sydney Olympic Games. This comparison is apparently due to the increasing role of official sponsors.

 

Moreover, there is a strong link between financial risk and budget management. It means that financial risk may occur when budget is not well managed. For example, Montreal (Canada) is suffered from over 1 billion dollars budget deficit running 1976 Olympic Games. It is considered that predetermined total expenditure of 2012 Olympic Games increase sharply from 2.4 billion dollars to 9.35 billion dollars. Not surprisingly, its budget grows up with 2.7 billion dollars contingencies.

3.2.2. operating loss risk

 

The operating loss risk could be huge risk for Olympic Games Organization with the whole goal of Olympic Games that the entire sport events can be carried successfully.

 

This kind of risk will occur if some sport events are disturbed or cancelled. In addition, ticket income is critical revenue source for Olympic Games Organization. Therefore, this revenue may also be suffered from directly by the operating loss risk.

 

The Sydney Olympic Games has total income of 460 million dollars by selling 6.68 million admission tickets. The Seoul Olympic Games eared 11.5 billion dollars profit by selling 107,368 thousands admission tickets. The 1996 Atlanta Olympic Games sold about 11 million admission tickets with a price per ticket about 40 dollar. Atlanta Olympic Games Organization earned 468 million dollars with ticket income which 26% proportion of whole gross revenue in this organization (Preuss, 2004).

.

Television relay income is also really important revenue for Olympic Games Organization. Specifically, the Seoul Olympic Games obtained 403.6 million dollars with television relay. Moreover, the television relay income of Sydney Olympic Games is as high as 1.332 billion dollars (Preuss, 2004).

 

3.2.3. Risk in Teconology

technology as a signal of social development has been one of main titles in Olympic Games. Athens Olympic Games provided 4000 terminals, 900 servers and 10500 personal computers in 2004. Furthermore, “technical Olympic Games” idea was proposed by Beijing Olympic Games in 2008. Before 2008, China government invested 30 billion to develop informationization construction, including at least 15% investments used in the Olympic Games information system’s security, The multimedia technologies, wireless network, Communication technologies, satellite transmission, security information technology and so on. These applications of information technology not only raise Olympic Games’ efficiency, but also bring the digitized risk. During the period of Olympic Games, the information system has become the hart of congress, which relates the management of conference, signal transmission, information transmission, and social security. Therefore, the unstable and viral destruction of information system are the risk that the Olympic Games have to face.

3.2.4. Transport and infrastructure risks

Infrastructure of Olympic Games not only contains the newly built movement facility, but also includes the sports complexes, the media centre, the Olympic Village as well as the board and lodging place which prepare for the athlete, the official, the media and the audience. Some construction’s function may substitute mutually, but must have the emergency spare construction to guarantee that certain accidents will not affect Olympic Games’ process. Total loss of venues usually means related sports event’s cancellation.

 

Ttransportation risk may occur when the government officials, the television journalist or the athlete cannot arrive on time due to the terriable traffic jam. Transportation of 1996 Atlanta summer Olympics was very thorny. Atlanta provides 16 Olympic Games athletic fields surrounding Olympic Village 2.5 kilometers areas, however some competitions are actually held in 400 kilometers from Olympic village. Some researchs indicate that in the peak period of Atlanta Olympic Games, there are 700,000 people who need 1932 public vehicles, 218 baggage cars as well as 2300 cars. Arrangement of transit exposes many problem, hence Atlanta Olympic committee have to seek help from the school bus and other department’s support.

 

3.2.5. Security and Terrorism risk

 

The Olympic Games is one of the meaningful sport event in the world palying an significant role in international sports and friendship.  Every four years, Olympic Games is runned by one host city and collect the attentions of people in all over the world.

On the other hand, it provides the opportunity for terrorists to destroy the peace. Johnson summarised a diagram to outline the main political activities and terrorism attack. (Please see the appendix 1.)

According to historic resources, the attack of terrorism was made many times in previous Olympic games. Zekulin (2009) claims that there are approximately 168 terrorist attacks associate with sport events between 1976 and 2004. For example, bombing in 1996 Atlanta games. Moreover, in 2000 Sydney games was the treatment of Aboriginals. (Zekulin, 2009).

Beijing was the host of 2008 Olympic Games, some Tibetans always organises actions to protesters the authorities. Klauserl (2010) highlights that since 9/11 suicide terrorist attack, almost every government have increasingly focused significant factors on Sport Mega-Events, especially on the Olympic Games.

Britain is one of the main target countries for terroristic organization due to following reasons: First of all, London is the capital of United Kingdom. It is one of the most economic centres in the world. In addition, London is an essential transport hub in United Kingdom. Normally, it must be first station for foreigners.

 

4. Conclusion

In recent years, corporate risk management collects plentiful attentions of researchers for its value and role in various firms. In general, corporate risk management could be divided into two categories including internal risk management and external risk management. This research investigates the total risk management of 2012 London Olympic Games Projection. As initially shown, this paper identifies critical risks in this projection using risks analysis tools and determines which risks are more serious than others. Apparently due to the some risks, 2012 Olympic Games Organization is more likely to be suffered from huge loss. However, that can be avoided by the correct risk management decisions.

 

 

Reference

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BRUNET, F. 1995. An economic analysis of the Barcelona’92 Olympic Games: resources, financing and impact. 203-237.

 

DAMSTER, G. & TASSIOPOULOS, D. 2000. Event management : a professional and developmental approach, Lansdowne, Juta.

 

Diers, D. (2009). The use of multi-year internal models for management decisions in multi-year risk management. Provinzial Nordwest. 1-35.

 

HAIMES, Y. Y. 1998. Risk modeling, assessment, and management, New York, Wiley.

 

JIN, H. June 2010. Studies on Beijing Olympic Game’s Spiritual Legacy: Brand Value. Journal of Sustainable Development, Vol. 3.

 

KLAUSERL, R. G. F. 2010. Security Governance and Sport Mega-events: Toward an Interdisciplinary Research Agenda. Journal of Sport and Social Issues, 34.

 

Mackay, P., Moeller, S. B. (2007). The Value of Corporate Risk Management, American Finance Association, 62, 1379-1419.

 

MOOTANAH, D. June 2008. London 2012 The inspriational Olympic & Paralympic Games: Managing risks for the London Olympic Transport programme-A glimpse.

PREUSS, H. 2004. The economics of staging the Olympics: a comparison of the Games, 1972-2008.

 

Watson, D., Head, A. (2010). Corporative Finance: Principle & Practice. Edinburgh: Financial Times Management

 

ZEKULIN, M. 2009. Olympic Security: Assessing the Risk of Terrorism at the 2010 Vancouver Winter Games. Journal of Military and Strategic Studies, 12.

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