Introduction
Identification, assessment, and control of financial, legal, strategic, and security threats to the assets and profits of an organisation constitute the process of risk management. These dangers or risks could be caused by a wide range of things, such as monetary instability, legal liabilities, poor strategic management, mishaps, and natural calamities.
Your company may only see a little impact from an unexpected incident, such as a slight increase in overhead expenditures. But in the worst-case scenario, it may be disastrous and have negative effects, like a heavy financial load or possibly the liquidation of your company.
An organisation must allocate resources to minimise, monitor, and regulate the impact of adverse occurrences while optimising favourable ones in order to mitigate risk. How to best identify, manage, and reduce important risks can be determined with the aid of a consistent, comprehensive, and integrated approach to risk management.
Principles of risk management
1. Make sure risks are recognized quickly
Make sure you're ahead of the game by finishing your risk assessment before the project begins. This is likely the most crucial rule of risk management.
Create preventative measures and a response in case a risk occurs by determining its cause. Risk must be measured when dangers have been located and identified.
2. Take organisational goals and objectives into account
Make sure your organisation's general goals and objectives are aligned with your risk management plan. What financial and reputational effects will a risk you've identified have on the organisation if it materialises?
The targeted results and priorities of each organisation will differ, and these needs to be incorporated into the risk management strategy. The risk management plan needs to be in line with the organisation's overarching objectives and culture.
3. Control risk in the context
Since each organisation will have a varied level of risk tolerance, context is crucial when analysing project risk. Different elements (political, technological, legal, societal, etc.) will have varying effects on businesses and industries. One organisation might, for instance, be particularly susceptible to its legal environment, whereas another might need to pay closer attention to their societal implications.
Additionally, each organisation has its own internal culture and risk management process, as well as a varied way of communicating risk. When preparing for risk, the risk management strategy should incorporate both the internal and external context.
4. Include interested parties.
It's crucial to enlist the assistance of project participants' expertise (such as team members and contractors), as well as that of professionals within your organisation who can offer risk management guidance (e.g senior managers).
Stakeholders should participate in decision-making at every stage of the risk management process. Stakeholder input will help you uncover and acquire understanding of potential dangers you may not have previously thought about.
5. Make sure roles and responsibilities are clear.
The risk management strategy may be the responsibility of a single person, such as the project manager or change manager, but it should be run in a transparent and visible manner. Everyone should be aware of their part in risk mitigation, and throughout the risk management process, roles and duties should be transparent and inclusive.
Give everyone a chance to be heard, and promote inquiries and dialogue. More risk can be creatively and successfully managed the more participants there are. Every team member must be vivacious, adaptable, and responsive. Everyone should have the ability to manage risk to their own degree.
6. Establish a risk review cycle.
It's crucial to avoid adopting a "set it and forget it" approach once you've identified the risks and created a risk management plan or strategy. All hazards should be assessed at each stage of the procedure, and any necessary interventions or preventative measures should be put in place.
By reporting on the risk and promptly informing stakeholders of any changes, you can keep everyone up to date on the project. You might be able to intervene and solve any issues that develop if you keep track of them during the process.
7. Aim for ongoing development
Review your risk management strategy once a project is finished to see if there is opportunity for improvement. Always work to improve how you handle risk, and apply what you've learned to your subsequent projects.
Steps of risk management
To enhance your risk management procedure, adhere to these risk management procedures.
1. Determine the risk.
Being aware of potential project risks doesn't have to spell doom for your company. The exact opposite. The process of identifying hazards is one that your entire team can benefit from and enjoy.
Utilise the expertise and knowledge of your entire team as a whole. Everyone should be asked to name any risks they have knowledge about or have already experienced. This procedure promotes cross-functional learning and communication.
The most high-level risks should be at the top of the list, and the most specific risks should be at the bottom. To list potential risks in a project, use a risk breakdown structure. When planning tasks for a project, this visual risk management technique will assist you and your team in identifying potential risk areas.
Create a project risk record after you and your team have collated potential problems so that risks may be tracked and monitored in a clear, concise manner throughout the project.
Any efficient risk management strategy must include a project risk log, also known as a project risk register. It not only assists you in managing current risks but also acts as a resource for previous projects as it maintains an ongoing database of each project's possible risks. You and your team may quickly and accurately identify and assess potential dangers to any project by detailing your risk register with the appropriate data points.
2. Consider the risk.
When your team has identified some potential issues, further investigation is necessary. How probable are these dangers to materialize? What effects, if any, will they have if they do happen?
In order to choose where to focus first, your team will analyze the likelihood and consequences of each risk throughout this step. Accurate risk analysis depends on a number of factors, including the severity of the impact, time lost, and the possibility of financial loss to the company. By carefully examining each risk, you can identify any problems that frequently arise throughout a project and improve the risk management procedure moving forward.
3. Give the risk priority
Prioritization now starts. Ranking each risk takes into account both its propensity to occur and its possible impact on the project.
This step reveals the project's overall picture to you and identifies the areas on which the team should concentrate its efforts. Most significantly, it will assist you in determining practical answers to each danger. This prevents substantial delays or interruptions to the risk management workflow throughout the treatment phase.
4. Address the danger
Send out your treatment plan as soon as the greatest dangers are revealed. Although it is impossible to predict every risk, the earlier steps in your risk management process should have prepared you for success. Assign your team the duty of either resolving or at the very least reducing each risk such that it no longer poses a threat to the project, starting with the risk that has the highest priority.
Utilizing your team's resources effectively while keeping the project on track is another aspect of effectively managing and mitigating risk. As time passes and you create a bigger database of previous projects and associated risk logs, you'll be able to predict potential dangers and take a proactive rather than a reactive strategy to treatment.
5. Track the risk
The continual monitoring of possible dangers requires effective communication between your staff and stakeholders. And even though it often seems like you're herding cats, keeping track of those moving targets is anything but perilous when you have a risk management plan and its related project risk register in place.
Risk management rules
1.Keep only as much as you can afford to lose. For instance, it would be a bad idea to forgo employment practices liability insurance if your company could not afford a $10,000 loss. Over 85,00 complaints about employment practices were submitted to the Equal Employment Opportunity Commission in 2017. Despite this alarming statistic, about seven out of ten companies do not have EPLI. We agents appear to have a lot of work ahead of us.
2.Avoid taking big risks for tiny rewards. An umbrella, for instance, is relatively affordable in comparison to the potential expense of a significant litigation, even one without validity, as it may impede the company's ability to obtain financing for growth.
Frequently, people ask me how much umbrella liability insurance is adequate. I share a client's experience of having a visitor to his business trip and fall. A $5 million lawsuit was brought by the guest. Although my client was successful in court and no money was exchanged, it took two years for the issue to be resolved. The company was growing at the time and required bank finance. The good news is that the bank agreed to lend it the money since it had a $5 million umbrella.
3.Think about forthcoming events' likelihood and possible effects. Example: It may seem sensible to use a grinder while wearing safety glasses, but not a face protection, until the wheel explodes in your face. Allowing employees to skip lockout/tagout procedures to save time is another illustration. This was probably going on at Grand Rapids Plastics, which shut down in 2016 after its biggest client, Fiat Chrysler, terminated its contract. An OSHA inquiry into an employee's death that occurred while they were working in 2014 resulted in a $558,000 fine for the employer. Even though no one specifically linked the closing to the fatality, it's simple to draw the connections.
4.Avoid using insurance as a stand-in for risk management. A serious accident, a handicap, or death, for instance, cannot be changed by insurance money, nor can OSHA fines, legal action, or harm to a company's reputation. On the morning of November 5, 2003, Kristi Fries, a worker at the now-closed Mancelona, Michigan-based Maverick Metal Stamping, reached to take a piece out of a 110-ton stamping press. The controls of the machine were activated by her unzipped hoodie, forcing the press to descend and crush her arms, leading to the amputation of both below the elbow. The machine's repair parts had been sitting on a shelf in the maintenance shop for several months.
5.An uninsured loss is a retained loss; there is no such thing as an uninsured loss. A retained loss is $750,000, for instance, if an employee steals $1 million and the insurance company pays $250,000 of the loss. The National White Collar Crime Center calculated that employee theft costs the world economy around $3.7 trillion annually. According to several corporate security specialists, somewhere between 25% and 40% of all employees commit fraud against their employers. They assert that somewhere between 30% and 50% of all business failures are caused by employee stealing. These retained losses have the potential to bankrupt a company.
6.For each recognized exposure, employ at least one risk financing and risk control approach. An employee injury on the job is covered by workers' compensation insurance and a pre-employment physical, for instance. Additionally, it stops the corporation from hiring someone who is unable to perform the task without risking injury. Another illustration is a company that provides benefit plans to cover the risk and wellness programs to reduce it.
By preventing events, containing those that do occur, and then providing risk financing through insurance, designing and developing a risk management process around the six laws of risk management will pay off handsomely. Your clients will appreciate you for helping them minimise the cost of doing business as a result.
Conclusion
Two categories of events exist. i.e., risky occurrences can be categorized as opportunities, whereas risky events can be categorized as hazards.
Avoiding the threat, reducing its negative impact or probability, transferring all or part of the threat to another party, and even holding onto some or all of the potential or actual consequences of a specific threat are common methods for managing threats (uncertainties with negative consequences). To react to opportunities, utilize the reverse of these tactics (uncertain future states with benefits).