"The first step in the risk management process is to acknowledge the reality of risk. Denial is a common tactic that substitutes deliberate ignorance for thoughtful planning." ~ Charles Tremper
On an individual level, saving some modest income from your monthly salary and investing it in good investment schemes can ensure that you're ready to face any possible risk of financial crisis in the near future. For large organizations, who are multibillion dollar enterprises with significant global presence, financial risks are compounded many times relative to individual financial risks. Failure of economy, rising prices, labor strikes, accidental hazards - the possibility of any of these risks can't be denied and emergency readiness is something that can be of great help in such situations.
Definition of Risk Management
It is difficult to confine the word, 'risk' in limitations of verbal language, as its scope and extent is far and wide. However, pertaining to risk management, it can be said that it is the scientific and holistic assessment of potential risks hidden in a project. By using tools and techniques explained in the risk mitigation strategies, the probability of occurrence of any risk is analyzed. Similarly, in the event of the occurrence of the risk, the financial impact on the organization and actions that can be taken to minimize the loss is also given a deep thought. Many a time, the concepts enshrined in risk management are generally associated with negative connotations. However, it is a fact that risks also present opportunities, though in disguised forms. Risk managers must not only focus on negative aspects of risk but they must try to find various positive dimensions and hidden opportunities in risks.
Purpose of Risk Management
Risks are an integral and inevitable part of life. As individuals, every decision that we take regarding our personal or professional life brings along with it the risk of failure or success. Similarly, for large corporations and governments, assessing risks before investing billions of dollars in projects is vital to abort the chances of loss of men, money and material. Risks can be man-made or natural. Human mistakes that lead to operational failure often pose risk to human life safety. For example, if a nuclear engineer in a nuclear power plant is careless about his duties, even a minor error can lead to dangerous consequences. On the other hand, if the radiation is caused due to a natural disaster (earthquake, Tsunami), then the risks are triggered by natural phenomena. While occurrence of risks due to operational failure or poor human performance can be controlled by improved technology and better training, threats of natural disasters are difficult to handle.
It is a harsh reality that even with the growth of advanced science and technology, it is not possible to predict occurrence of natural disasters to mathematical accuracy. Even if they're predicted, the loss caused by catastrophic risks can only be lessened, but not completely averted. Hence, when we study risk management, the basic objective is to analyze threatening situations that can cause extreme loss to governments or any organization. Though practically it's not possible to completely eliminate risk in any situation, the discipline of risk management that has been developed in the past couple of decades aims to study, analyze and predict occurrence of adverse events to avoid loss of men and money.
In the recent years, multinational companies, corporate honchos and investment tycoons have heavily relied on this newer aspect of management to make wise decisions in terms of investing money in certain geographical locations. A career in this field is now an extremely popular, recognized and a mainstream area with loads of research, study and analysis in B-schools and research institutes. Be it the insurance companies, investment banks, real estate, infrastructure, private holdings, public enterprises - all are laying significant emphasis on recruiting experienced and well qualified risk managers. Since the art of risk management serves the purpose of saving companies from irreparable losses, it is growing by leaps and bounds.
Risk Management Concepts and Guidance
Analysis forms the core of risk management concepts. Knowing what you're going to do is very important. It is the ignorance that nothing will go wrong, which becomes the nemesis for companies.
Know the Project
Awareness about numerous aspects of the project is vital to make effective business plans. Lacking in knowledge in any of the area can be a loophole for poor planning. Hence, know the project well before you began to assess the risks associated to it. Only then you'll be able to figure out minor and major risks.
Make a list of all possible risks and estimate or calculate probability of occurrence of those risks. You may consider using numerous risk management tools and techniques to come with accurate estimates. For this, you need to have databases and information regarding your project. Further, after evaluating the probability, you've got to know the impact of the risk. Make a note of all that can be lost due to the risk. Now, think of ways to minimize probability (mitigation) and impact (contingency). Also, calculate by how much you should reduce the amounts of mitigation and contingency to lessen financial risks. After you've done that, you can directly calculate the reduction by multiplying mitigation and contingency. Subtracting reduction from risk will give you 'exposure' and it is called the amount that you simply can't avoid, even with your risk analysis. Exposure is the minimum risk that you have to bear even with everything being perfect. This step by step approach can help you deal with financial risks effectively.
The more research and analysis you do, better will be your chances of coming out with effective risk control strategies. That is why, it is helpful to take ideas from all the staff of the risk management team. You can certainly take advice from experts in the same field. Sometimes, thinking out-of-the-box can be very beneficial.
Risk monitoring is a continuous process during the project. You can take help of software designed to handle the task of huge databases effectively. During the monitoring process, you have to oversee that all steps regarding safety are being taken properly and everyone is working with an awareness to minimize risks. Effective communication is very important to explain things to employees from various educational and cultural backgrounds.
The concepts of risk management are not something that are difficult to master. It can be summed up to be a scientific way to avert the chances of losses based on statistics and data handling, common sense, good judgment skills and effective execution of plans.