Risk Management: A Lucid Term For Knotty Process
“If you treat Risk Management as a part-time job, you might soon find yourself finding one” — This famous quote literally gives the job description of a Risk Manager working in any firm, whether it is small or large. Risk management is not limited to organizational perspective, it expands to every other aspect of life. Life is full of uncertainties, and while we can’t predict the future, we can always prepare for it. This article draws a parallel line between organizational risk management and life risk management to give you a clear picture of this knotty process.
Risk Management — Definition
As said earlier, life is full of uncertainties. These uncertainties give rise to risks that may have effects on an immediate basis or in the future. Risk management is the process of identifying, assessing, and controlling these risks that could negatively impact your life. Whether it’s your health, finances, or personal safety, having a risk management plan can help you avoid potential pitfalls and achieve your goals with confidence. From the organizational perspective, risk management is all about the analysis of possible risks that are associated with every decision taken — some are predictable while others can’t be predicted.
Risk Management — Process
As we have defined Risk Management, it is easier for us to identify the problem statement and target to be achieved. Let’s get to the process behind it -
One of the first steps in risk management is identifying potential risks. This can be done by reviewing past experiences, assessing current situations, and considering future possibilities. For example, if you’re planning a trip abroad, you might identify risks such as illness, theft, or natural disasters. By anticipating potential risks, you can take steps to minimize their impact. On similar grounds, organizations have risk management groups that look after different types of risk — Market risk, Operational risk, the risk associated with major decisions, etc. Identification is a very imperative step as we cannot find solutions to latent problems or risks. And to identify the latency, we have different analyses in place in order to tackle such situations.
Once risks have been identified, the next step is to assess their likelihood and potential impact. Some risks are more probable than others, and some may have greater consequences. For instance, the risk of a minor injury from a household accident may be relatively high, but the impact is likely to be minimal. On the other hand, the risk of a major illness may be relatively low, but the impact could be devastating. By assessing risks in this way, you can prioritize your risk management efforts and focus on the most significant threats. On similar grounds, organizational risk arises due to small wrong decisions that cumulate and result in bigger problems. That’s why an assessment of all types of events and the risk associated with them is imperative for optimized risk management. There are norms in place in different organizations in various industries that have the ability to predict future risks based on existing knowledge and use that knowledge to select the solutions as applicable.
After assessing risks, it’s time to take action to control them. Now all the identification and assessment will go in vain if this step is not followed rigorously. Risk management is a close-knit knotty process, if one pillar of action is down, everything falls like dominoes. There are many strategies for managing risks, depending on the nature of the risk and your personal circumstances. Some common risk management strategies include:
- Prevention: As the saying goes, “Prevention is better than cure”, Risk management is all about learning from past experience and based on the current correlated situation, predicting the future and taking precautions in advance to avoid the same mistake happening again. So avoiding risk in the first place is the primary job in Organizations. In real life as well, we can take the example of wearing a seat belt before driving or having security measures built to avoid any home burglary.
- Mitigation: Every risk be avoided, some risk is important in the business line as we have a high-risk, high-reward model everywhere. What can be done is, reduce the impact of risk and move ahead with it. In real life, mitigation can be health insurance or keeping extra supplies. On an organizational level, we have a term — Provisioning. Any novel tough situation is handled by these provisioning that acts as a buffer.
- Acceptance: This step comes under the damage control department, where we have to move forward with the consequences of the risk that can’t be avoided. This step is necessary as we don’t have answers to situations that we aren’t aware of. Like, when the pandemic struck, all the protocols went south and people had to come up with unique ideas to overcome the challenges. Acceptance plays a major role in risk management as it teaches us something and enables us to avoid the same in the future.
Risk management is all about constant learning, revisions, and adaptation. The case with Silicon Valley Bank was that of Risk Management 101. They had money but weren’t able to adapt to the post covid changes that happened in economics all around the globe. Poor management communication and inability to adapt was the main reason for the collapse of the bank. Dynamic changes are constant in terms of risk evolution and risk management people have to make sure that they are up to date with changes. It is critical to untie various knots in the risk management process and take action on the same in order to avoid complications, both in life and organizational perspective.
