What is Risk management?
Risk management is the process of assessing, identifying and controlling threats to an organization’s earnings and capital. These risks or threats could stem from various sources, including legal liabilities, financial uncertainty, strategic management errors and natural disasters. As a result, risk management strategies have become a top priority for companies to alleviate related problems. For example, a plan can include the processes for controlling the identified threats, including proprietary corporate data, intellectual property and customers’ personally identifiable information.
Every organization and business faces the risk of harmful events that may cost the company money or even shut down. Risk management prepares for the unexpected by alleviating risks and minimizing extra costs before they happen.
Importance of Risk Management:
By implementing a risk management plan and considering potential risks before the occurrence, an organization can protect its future and save money. A robust risk management plan helps a company to establish procedures to minimize potential threats. In addition, understanding and controlling risk enables the organization to be confident in its business decisions.
Corporate solid governance principles help companies to reach their goals.
Essential benefits of risk management include:
- Creating a secure and safe work environment for staff and customers.
- Increasing the stability of operations in business while decreasing liability.
- Protecting from detrimental events
- Protecting the assets and involved people from potential harms.
- Helping to establish the insurance needs of an organization.
An example can be given as a combination of patient safety with risk management. In hospitals, patient safety and risk management departments are separated, incorporating various leadership goals. However, several hospitals are focusing on providing high quality and safe patient care necessary to protect financial assets with incorporated risk management.
Risk management processes and strategies:
- Establishing context: The criteria used to evaluate the risk should be established, and analytical structure should be defined.
- Risk identification: The company defines identified potential risks that negatively influence a specific company project.
- Risk analysis: When specific risks are identified, the company determines the related odds and consequences. The goal of risk analysis is to understand particular risks and how they could influence its objectives and projects.
- Risk evaluation and assessment: The risk is further evaluated after checking the overall likelihood of occurrence along with consequences. The company make decisions depending upon whether the risk is worthy of being encountered and dealt with.
- Risk mitigation: In this step, the companies assess high ranked risks and develop the plan to alleviate them with specific risk controls, including risk prevention tactics, risk mitigation processes and contingency plans
- Risk monitoring involves tracking down new and existing risks, and the overall risk management process is reviewed and updated accordingly.
- Consult and communicate: External and internal shareholders should be included in consultation and communication at risk management steps.
The optimized strategies in Risk management should attempt to answer the below-mentioned questions:
- What wrong can happen at the individual level and as a whole at the workplace
- What will be the effect on the organization? What is the probability of an event and whether it will have a small or large impact?
- What exactly can be done? What proper steps can be taken to prevent the loss? And what measures can be taken in case of the loss?
- If something unexpected happens, how will the organization manage to pay for it?
Risk Management approaches:
After the identification of possible risks and the implementation of the risk management process, described below are several strategies that are to be taken under consideration regarding various risk types:
Risk avoidance: The complete elimination of risk is not possible, so the risk avoidance strategy is specifically designed to divert as many threats as possible to avoid the disruptive and costly consequences of any damaging event.
Risk reduction: Companies can reduce the damage of certain risks, which is achieved by adjusting specific aspects of the overall company process or project plan.
Risk sharing: The consequences of risk can sometimes be shared or distributed among business departments. The risk can even be shared with some third party, such as a business partner or a vendor.
Risk retaining: Sometimes, the risk is worth keeping (from the business standpoint). For example, companies often retain a certain level of risk if the project’s anticipated profit precedes the cost of potential danger.
Risk Management Standards:
Following are some principles/target areas that should be part of the risk-management process:
- Creating value for the organization
- It should be part of complete organizational process
- It should contribute in the overall decision making process of the company
- It should explicitly address uncertainties
- It should be well-structured and systematic
- It should resonate with the best available information
- It should cover including potential errors and human factors.
- It should be all-inclusive and transparent.
- It should be continuously improved upon.
These standards are recognized by target industry groups and international regulatory bodies. These are also updated and supplemented to reflect the changing sources of business risk.
Risk management examples:
An example of risk management is to identify risks associated with selecting a new location for opening. The related risks can be mitigated by choosing sites with low competition and bigfoot traffic.
Another example is about an outdoor amusement park where the business is weather dependent. The part might build up cash reserves to suppress any risk of a sizeable financial hit due to bad season.
Yet another example can be of an investor involved in buying stock in the new company with a high valuation even when they know the stock could drop significantly. In this situation, risk acceptance is displayed as the investor buys (despite the threat), anticipating the potential of a large reward outweighs the risk.