Framework for assessing enterprise risks using the Analytic Hierarchy Process

This article is intended to introduce the way of adapting the Analytic Hierarchy Process Method to the assessment of economic risks at the enterprise. In order to show it we calculate the risks for the project of implementing cloud storage to the university.

Keywords: economic risks, expert opinion, Analytic Hierarchy Process, AHP, cloud storage

Introduction:

An enterprise is the main element of the economic system of society. To ensure the effective operation in modern conditions the management should be able to realistically assess the financial and economic state of the enterprise, and the state of business partners and competitors. This requires:

‒ Assessment of the financial and economic condition of the company;

‒ Formal and informal methods of collection, processing, interpretation of financial information.

Financial and economic state is the most important criterion of business activity and enterprise reliability, determining its competitiveness and capacity for effective implementation of the economic interests of all economic actors. As was noted previously, management should be able to assess the financial and economic state of the enterprise, bring a risk assessment at a system level, and reduce the probability of loss from the realization of risks, thereby, improve the quality of corporate governance, the degree of confidence of investors and the public. The age of computer technology sets new demands and opportunities for the analysis of enterprise data. Automated Information System, which includes the ability to collect, store and process information has long ceased to be a novelty. At this stage of development it is important to create an information system that allows to analyze the data presented on the basis of which the Manager can take this or that decision in addition to the qualities listed above.

Since risk is a category of probability, for its evaluation the judgments of experts are used. Method of expert judgments of risks is a complex of psychological and mathematical procedures of expert choice, its analysis and synthesis in order to develop rational decisions about the risks. In assessing experts use the numbers, the probability of which is designated descriptively, with values ranging from «very unlikely» to «almost certain» that corresponds to the scale: 1- 3–5 — 7- 9.

In case of participation in the survey of several experts discrepancies in their assessments are inevitable, but the magnitude of this difference should be taken into account. The group assessment can be considered sufficiently reliable only when there is a good consistency of individual preferences of specialists. This value Thomas Saaty named as consistency index (CI) which is used for the analysis of the consistency of estimates:

где = (2)

where n: dimension of the matrix

λmax: maximal eigenvalue

si — the sum of the priorities in the column of pairwise comparison of criteria

Wi — the weight of each priority in the line of pairwise comparison of criteria.

Further in the article a model for calculating the economic risks of the project «Implementation of cloud storage at the university», is presented, which was modelled using the Analytic Hierarchy Process (AHP), which was developed by American mathematician Thomas Saaty. «AHP allows intuitive and efficient way to structure a complex decision problem into a hierarchy, compare and perform a quantitative assessment of alternative solutions». [2, p. 268]

As the university also acts on the rights of economic entity, the object of study of the enterprise is university. The subject of study is its financial and economic activities.

In the first stage the following projects for the implementation of cloud storage at the university were selected:

1. The arrangement resources of teachers in the cloud;
2. The arrangement resources of teachers and unified storage resources in the cloud;
3. The arrangement resources of teachers, unified storage and an operator in the cloud.

Fig.1. Hierarchy for assessing the alternatives of the project

‒ The risk of data confidentiality, as the safety of the data being processed should be ensured;

‒ «The risk of regulatory issues (, the indicator of risk of possible changes in the regulatory and legal issues» [1, p. 95];

‒ The risk of back-up of data from traditional data storage. The error in back-up can cost to the university’s economy as well.

‒ Administrative risk carries the risk of an administrative nature. Interest in the project of administrative power, its support it greatly reduces this risk;

‒ The risk of incompatibility of implementing cloud storage.

In order to assess the projects for the risks experts use the project description, on which project details such as the type and cost of servers, its lifetime period and etc. Thus, identifying the main risks of the project, which affect the financial and economic state of the university, the experts assessed the risks in terms of their value. The vector of priorities in table 1 was also calculated at this step. Priority vector is the weight of each of the priorities recorded in the line, the sum of which must be equal to one.

Table 1

The assessment of risks of the project

The following table 2 shows a matrix of pairwise comparisons of projects by experts in terms of the risk of data confidentiality. Thus, we assessed the project implementation of cloud storage for each indicator of risk criteria.

Table 2

The assessment of the project by the criterion of the risk of data confidentiality

The last stage of the calculation model on table 3 we analyse alternative projects. We sum the calculated risks on all indicators of risk criteria for each project, multiplying by the weight of the criteria and calculate the global priority value, which shows us which subproject would be less risky to the financial and economic points of view.

Table 3

Analysis of the project to implementing it at the university

Conclusion: This article discusses an analytical method for assessing the risks of the enterprise using the analytic hierarchy process which was proposed by T.Saaty. As an example, a project “The implementing a cloud storage to the university” was selected. As a result of the calculations, it was found that the least risky is the project «Placement resources of teachers, unified storage and the operator».

References:

2. Saaty T. L. Decisions. The Analytic Hierarchy Process; Planning, Priority Setting, Resource Allocation, New York: McGraw-Hill, 1980.