Read the case and discuss the following questions in groups. Discuss reasons for MegaFon’s success.
- Why did MegaFon decide to use @RISK model? What did they want to change and which goals to achieve?
- How does @RISK model help the risk management team at MegaFon in terms of risk management?
- What do you think are the main reasons of MegaFon’s success on the market? What are the key success factors of any business on the market?
- What other modern successful Russian companies can you describe? What is the basis of their success?
Risk Management Programme at Russian Telecoms Giant, MegaFon [31]
In 2012 MegaFon increased and formalized its level of qualitative analysis and forecasting, as well as put in place a process that would integrate risk management with its budgeting and investment planning. The aim was to provide the management team with insights that enabled informed decision-making to increase its capital expenditure efficiency.
@RISK Enhances Budgeting Process
Every year, MegaFon’s eight regional branches in Russia are required to undertake a major planning and accounting exercise for the 12 month ahead. This provides the management team with an in-depth analysis of the risks associated with each element of its budget and enables it to determine whether the company will be able to fulfil its promises with regard to cost incurred and revenues achieved.
Each branch states the risks it faces, such as competition, changes in legislation that will require it to operate differently, price increases and changes to stuffing cost. They also calculate how much each budget will be over or under the forecast. The risk management team at MegaFon’s headquarters amalgamates the information from each of its offices and simulates possible scenarios using an @RISK model. The variables within these models are analyzed in a tornado graph, allowing the five critical factors most likely to significantly affect the company’s gross revenue to be identified and therefore mitigated. In addition, @RISK shows realistic minimum, best case and median budget figures and the probability of their occurrence. These are compared to the budget plans to determine whether the forecast is too aggressive or not ambitious enough. Overall, the management team can see whether their desired revenue is achievable.
Informed Investment Planning with @RISK and TopRank
Each year MegaFon needs to plan for the continuous upgrading of its network. Projects include building new antenna, installing the latest equipment and laying fiber optic cable. In 2012, MegaFon took the decision to invest in a large construction project with the aim of Minimizing its operating costs and improving network quality and control over technical operations.
Two potential locations were shortlisted and the management team used Palisade’s software to make an informed decision on the optimal one. It first used Palisade’s TopRank to perform sensitivity analysis to identify the factors in each location that would have the most influence over the total cost of the project. From here, the team used @RISK to forecast how these critical factors might change. This allowed MegaFon to understand the most likely Net Present Values (NPVs) for each possible location and identify the risks for building or not building (i.e. opportunity cost) each data center. @RISK allowed MegaFon to use graphs to show easily how NPV and cash flows could change over time, and the probabilities of those changes occurring, rather than the static number that they would have had to rely on without the risk analysis tool.
Reducing Financing Risks
Future plans for MegaFon’s risk management programme include developing it to enable the company to analyze various risks through modeling. For example, as part of an exchange rate risk mitigation plan, MegaFon plans to analyze the different derivatives they can purchase by simulating different scenarios and exchange rates to provide a cleaner picture of potential losses and gains.
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