Risk or Regret ?
Mastering the art of Business Risk Management
In the contemporary 21st century, things are complex, unpredictable, unprecedented, and unforeseen – this roughly translates to a universally accepted fact that since it is a complex and unpredictable world, managing a business has become an imperative factor in preventing losses. This comes in the form of having a complete and thorough risk management system that must be in order at all times – this is not only essential for protecting your individual projects but also for the organization as a whole.
Business organizations have become dynamic landscapes, and risk management has emerged as a vital practice to make sure there is enough space for sustainable growth and a high chance of achieving success. Unfortunately, however, most business organizations face a plethora of risks, many of which are newly-found or continually evolving.
Although there have been several developments in risk management systems in the past few years, with tons of organizations opting for enterprise risk management (ERM) systems – several other businesses have incomplete risk management systems thus leaving them rather vulnerable to multiple contemporary threats as they are also unable to capitalize on the benefits of risk management.
With all the options, methods, forms, and of course, the emerging significance of risk management – just how important is it for your organization and how can you master the art of business risk management?
Business Risk Management -
An art or a science?
Business risks are known to be ever-changing and driven by factors like extreme usage of the internet and social media by the younger generations, higher complexity of supply chains, etc.
In fact, risks can even be categorized and departmentalized as reputational, operational and transformational.
Evidence-based research reveals that there are weaknesses and shortcomings in the current risk management systems and practice – however, it also reveals that they are both ‘art’ and ‘science’ related.
The ‘science’ of risk management deals with all the formal tools and techniques that an organization may use to identify, evaluate, and monitor potential threats; whereas the ‘art’ of risk management is headed towards softer skills that are needed to identify, manage and control the qualitative, people-related risks (human factor) – these are done to effectively put together risk management with business strategy.
Why does a Business need A Risk Management System?
As a business, you know that risk management is not just a want but more of a need – but what makes it so appealing? Why is it considered one of the key driving factors that leads the path to a business’s success?
Here are the undeniable benefits of a good business risk management system that explains why every organization should have one:
It has a direct impact on higher productivity for the business: Regardless of the industry you serve, productivity is and always will be tied to your process no matter what you do. This is where risk management comes into the picture as it allows you to review your process and figure out ways to improve and rectify the follow-up – thus making way for improvement. Not only does this help bring up your productivity levels, but it also makes sure that there is reduced risk in the overall work environment.
Risk management improves your business overall: Did you know that a good risk management strategy is not confined to just insurance policies? It should also save you money since you would be facing fewer losses and higher efficiency. This of course means that your business will have reduced operational costs and increased profit.
Allows for more informed decisions: Without a decent risk management system and strategy, your business organization will not be prepared for unforeseen circumstances – and if by chance it is prepared, the situation may call for an uninformed, impulsive decision that you might regret later. Thus, with a good risk management system your business will be able to make proper, calculated decisions that will reduce loss.
The Art of Business Risk Management: A comprehensive guide for a risk management plan
Keeping in mind that risks are an indispensable part of any business, it is important to note that well-executed risk management strategies actually empower your business to expect, and anticipate potential challenges, seize the opportunities and understand the strengths, make informed decisions about future risks and uncertainties, etc.
All this gives birth to a risk-management plan that should be incorporated and inculcated into your risk-management system.
Here is a comprehensive guide:
Step 1: Identifying and assessing the risk – This is obviously the most crucial step in the plan, as it involves locating, detecting, and assessing the potential risks that could affect and damage your business. These risks are of various types such as strategic, operational, financial risks, etc. Reviewing with a thorough follow-up will help understand risks and subsequently make informed decisions.
Step 2: Risk Quantification: This includes the overall assessment of the implications taken on by each risk. It also deals with the impact of each risk – it involves assigning values to the potential impact and likelihood of each one. Those that target the human factor are considered to be a higher-impact risk than those targeting the monetary value. In order to understand the process of such quantifications, the urgency and efficacy of interventions must be established – for instance, advanced techniques like the Monte Carlo simulation opt to delve deeper and give a better understanding of the outcomes and help in decision-making.
Step 3: Figuring out mitigation Strategies: Developing strategies that will mitigate and do away with risks involves actions where you brainstorm and come up with plans that will reduce the impact and likelihood of risks. To achieve this, implement proactive measures, which could mean offering diversified products, enhancing and improving cyber-security protocol, implementing supply chain management, and establishing emergency response plans. The ultimate goal is to minimize the negative and adverse effects of risks whilst taking full advantage of potential benefits.
Step 4: Risk Monitoring and Control: Effective risk management is a continuous process that requires regular monitoring and control mechanisms. These are essential to track the efficacy of the mitigation strategies of a risk management plan. Developing Key Performance Indicators (KPIs) to measure the success of risk management efforts and such KPIs could be based on how effective the risk management technique has been made over time.
Step 5: Contingency Planning: One of the most important parts in a risk management plan, contingency planning outlines the worst-case scenarios and unexpected adverse events and this prepares the business accordingly. This contingency plan provides a birds-eye view roadmap for navigating crises and minimizing the adverse effects. This is important for a simple reason – a risk management plan does not guarantee that negative incidents will not occur, but it will prepare to face them.
Step 6: Communication and Training- Clear communication is an important factor in the risk management process as this plan can only be considered effective if it is communicated, perceived, and comprehended by others. Such communication leads to implementation. Employees at all levels should be educated about the identified risks, the mitigation strategies and plans, their roles in controlling the risk management framework, etc. Regular training sessions ensure that the workforce will be prepared to respond effectively.
The Key Principle of Business Risk Management:
A business organization follows a particular set of principles that represent the risk management procedure and its risk response. Once risks have been identified, the following strategies can be considered – these are commonly known as the four Rs’ of risk management:
Risk Avoidance: This risk strategy is focused on carefully and meticulously planning out things so that certain risk factors can be removed (as permanently as physically possible) from the operating processes. This approach assumes the notion that a perceived risk factor can be removed, if followed properly, to remove or completely mitigate the unhappier consequences.
Risk Reduction: There may be situations where a risk factor cannot be excluded completely – but the business organization may try to reduce the effect of such risk to the highest extent possibly by tweaking and adjusting the aspects of its current operations and processes.
There is an obvious difference between risk reduction and risk avoidance – this being that the former accepts risk as it comes and understands it cannot be completely avoided thus it is a preventive measure, whereas risk avoidance blatantly tries to avoid the chance of risk.
Risk Sharing: This involves splitting the damage of a future or perceived risk – this can be split either between different departments of the organization, different participating members of a project, or between external stakeholders such as business partners, investors, and joint venturers.
Risk Retention: This involves taking a decision and understanding that taking a risk is actually worth the damage or effect. We don’t mean, jump right into the jaws of risk – but it simply means that the business organization will have to make adequate plans and calculative moves to deal with the eventuality of damage incurred by the mentioned risk.