What is Risk Management
Risk management can be described as the meticulous procedure of recognizing, isolating, evaluating, and regulating risks that can affect an institution’s finances or assets. Such risks can be as a result of several factors, which may include economic improbabilities, catastrophes, human errors, and other liabilities.
In recent years, digitization of the activities of companies has significantly increased the risk of loss or theft of sensitive data. Therefore, the need to have risk management tactics that protect companies from cyber-attacks has become extremely important. This threat has forced many companies to develop detailed risk management strategies, which help with quick identification and neutralization of digital threats to data.
The primary purpose of risk management is to allow an institution or a business to adequately prepare for unforeseen occurrences with the sole aim of damping the effect of such events, which ultimately saves money. The lack of proper planning for unexpected events can sometimes lead to bankruptcy or closure.
Why is Risk Management Important?
The primary function of any risk management strategy is to help an organization consider possible threats or problems that may occur before they happen. It is vital because it allows a company to prevent or minimize risks, which ultimately saves resources.
A good risk management strategy is going to give an organization the required framework to prevent or minimize risk. Proper risk management strategies help decision-makers within a company to have confidence in everyday decision-making.
Also, thought-out aims and objectives that adequately cover risk management strategies can ease a company’s activities—other essential benefits of a good risk management scheme include the following.
- It prevents the company from taking out a significantly large insurance policy that covers risks that are unrelated to the business.
- It provides a conducive work setting that encourages productivity and ensures customer satisfaction.
- It helps to protect the company from harmful events that may affect it or society at large.
- Tries to minimize legal risks, which helps lift the morale and productivity of the staff.
- Provide a comprehensive cover for the staff and the assets of the company from harmful risks.
Risk management combined with medical care is an essential strategy that has helped enhance the safety of patients. Depending on the organizational structure of a hospital, the risk management section may be separate from the hospital or a department.
Hospitals and health care centers that have integrated risk management strategies with patient safety have seen significant improvements, which have reduced premiums and increased transparency. Therefore, such hybrid departments improve patient health, experience, and also encourage reporting.
Strategies and Processes of Risk Management
Risk management strategies usually follow a familiar series of steps, which constitute the entire risk management procedure.
- It establishes a context to determine the limits within which the entire process of risk management is going to occur. This strategy is essential in determining the level of risk and pattern of analysis.
- Identify and specify risks, which can adversely affect the operations of the company.
- Next is to analyze the probability of occurrence of the risk and possible impact. It helps the company to understand how such a risk can affect the goals of the company.
- The result of the analysis is evaluated to understand the consequence of the occurrence of a risk. It gives the company a platform to determine if such a risk is manageable or not.
- The company makes a plan to mitigate the most problematic risks amongst a pool of risks. These strategies may include prevention and contingency options.
- Risk mitigation includes monitoring and tracking existing and new risks, which allows for periodical review and restructuring.
- All stakeholders, including external and internal, should be involved in the risk management process.
All good risk management plans should be able to consider the potential risk, the possible consequences, how to mitigate it, and the financial impact.
Depending on the types of risks assessed, the company decides on the typical approach for managing the risk.
- Although complete prevention of risk is almost impossible, specific plans can be put in place to prevent as many risks as possible. This approach is known as risk avoidance.
- The reduction of risk is another strategy for dealing with risk. A company may put in place procedures or adjust objectives to reduce the occurrence or the consequence of risks as much as possible.
- Sometimes a company may decide to retain a possible risk as it may consider it worthy of managing. Such risks, if well managed, may generate a significant amount of profit for the company.
- In some cases, risks are distributed amongst stakeholders (internal or external).
Risk Management Limitations
Although beneficial, risk management strategies have limitations. It includes the cost of collection of data and the lack of certainty of the reliability of assessment. Also, not all techniques can issue a reliable outcome as each risk within a project is different from the other. Therefore, this can sometimes make decision making difficult.
Other essential limitations to risk management include the following.
- The time required to perform the analysis and the expert personnel can be a significant limitation.
- The cost of computer programs to perform simulations can be too high and sometimes unjustifiable.
- Many risk assessment techniques consider past information, which is devoid of future projections.
- Some risk analyses can give a company the false illusion of having control of all potential risks. It is usually not helpful as new decisions, or new products are not in the picture.
Risk Management Standards
In many sectors, companies must review and decide on risk management strategies to ensure that the techniques used are relevant and realistic. Risk management and internal audits analyses are necessary for all major commercial decisions.
International Organization for Standardization and National Institute of Standards and Technology have developed several risk management strategy standards with the sole purpose of assisting companies to identify, assess, and reduce the effect of risk to their operations.
The following principles are to be considered while carrying out risk management assessments.
- The process must add value.
- Must be part of the company’s decision-making procedure.
- It must be clear and explicit.
- It requires structure.
- It must be hinged on available data.
- The process must be project-specific.
- It should account for all forms of errors.
- It must be adaptable, continuous, and open to improvement.
- An instance of risk management could be a company’s decision to select a location for a new outlet, which has significant pedestrian traffic but less competition from rivals.
- A second example is buying expensive shares of new business with the anticipation of future gain as the company may have a high projection of return.
- A third example is a company that produces and sells ice block might decide to produce a small amount of ice if they see that the weather forecast projects a few degrees drop in temperature in the coming days.