Risk management is the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities. Risk management’s objective is to assure uncertainty does not deflect the endeavor from the business goals.
Risks can come from various sources including uncertainty in financial markets, threats from project failures , legal liabilities, credit risk, accidents, natural causes and disasters, deliberate attack from an adversary, or events of uncertain or unpredictable root-cause.
Risk management Process
1. Identify the Circumstances
It is essential to recognize the circumstances in which a risk arises before it can be clearly assessed and mitigated. Firstly, defining the relationship between your organization and the environment in which the risk exists, this helps in identifying the boundaries to which risk is limited. For instance in the strategic context, consider the environment within which the organization operates or in the organizational context, consider the objectives, competencies, employees and goals.
2. Risk Identification
The identification of risk does not imply a situation where the management has to factor in distant possibilities. For instance, a management cannot identify a serial killer coming over to the factory at night and taking the flammable liquid to burn his victims as a risk to the hazard. They can but in the next step such a remote risk will be discounted.
Risks may be categorized into legal, physical, financial, or ethical.
Legal risks constitute liabilities to other stakeholders in the business including shareholders, clients, suppliers, staff, or any other concerned party, revoked by a certain event, not in line with federal, state or local government laws.
Physical risks involve injuries, physical assets of the organization such as real estate, plant, vehicles, inventory, lands etc.
Financial risks involve financial assets of the organization including loans, fees receivable, attendances, other fees, insurance costs, lease payments, damage claims and penalties or fines.
Ethical risks involve real or possible damage to the repute or principles of your organization.
3. Risk Assessment or Risk Evaluation
This step involves evaluating the probability of occurrence and resulting impact of each identified risk factor and shortlisting over the risks that possibly have the highest impact and should be therefore managed first. The priority of the risk can be evaluated by combining effects of probability and impact of consequences.
If the risk is small or acceptable, they can be continued with minor adjustments/ treatments. However, they should be continually monitored going forward. If the risk is big, it should be mitigated at priority before executing the original plan.
4. Risk Control
Avoiding the risk is the decision of either proceeding in the planned direction or opt for an alternate route which has less risk and is in line with the final objective.
Reducing the risk occurrence probability or impact of its consequences or both can be considered while facing a risk, for instance, utilization of complete safety kit for players in a particular sporting event.
Transferring the risk is another option, mostly done through buying insurances. Nowadays, even re-insurance is even getting popular, which can further be treated as a backup of a backup. Other ways include lease agreements, waivers, disclaimers, tickets, and warning signs.
Retaining the risk can be another strategy where one knows that it is an inherent part of the event. For instance, consider a sports betting club, if the risk is not the part of their game, the business would not work. The inherited risk brings in the participant and underlying motivation basis of betting business.
Financing the risk means allocating financial allowances to absorb the consequences of the risk in case it happens. This is a scenario where risk impact is manageable and is not as big as to cause bankruptcy or the like situations for any organization.
After the control measures are implemented it has to be documented. This has multiple benefits such as understanding what was done to tackle a risk thereby allowing similar risks to be tackled in that fashion, to prove that sufficient measures were taken to minimize and eliminate risks and due diligence were exercised etc. It is a appreciated practice
5. Monitor and Review
Monitoring and Review as the final step involves understanding the impact of the control mechanisms developed on the hazard and the risk it poses. If the hazard does not pose the same risk which was intended to be controlled then the control mechanism will be evaluated as successful and if not it will be evaluated unsuccessful and a better solution will have to be developed. This follow up is essential to ensure that no mistake was made and that the risk does not perpetuate
There are risks that do not change and are static in nature. However, other dynamic risks if not continually monitored and reviewed may grow like a bubble and their financial, legal and ethical impacts soon get out of control.