The Function Of Risk Management

Published Date: 02 Nov 2017

Introduction

Every businesses face regular change. Certainly, these changes can effects business and impact on other activities means business will be under risk. Risk assessment is become very necessary for organisation to survive. To remove or eliminate these risk need proper planning and risk management. They identify risk factors and analyse and manage carefully.

Main responsibility of risk manager is to clearly understand the external and internal environment changes and identify potential risks and to avoid it need to put action plan in place. This will only possible when appropriate strategy and contingency plan developed. Having a risk management provide number of benefits but these is little bit difficult to quantify. Therefore, risk management is play key role to explain the impact of the risks on company.

Task 1 the function of risk management within the business

Risk management is very important part of the business planning process. Main task of the risk management is to reduce the risk factor which can affect the business.

Definition: "Risk management is a process for identifying, assessing, and prioritizing risks of different kinds." When the risk factors are identified then risk manager make further plan to eliminate or minimize the risk. There are lots of different strategies are available, standards of risk management that are developed by ISO, and national institute of science and technology.

Types of Risk; There are lots of risk are arise, some common types of risks like fires accidents, earthquakes, and other natural disasters. There is also some legal risks like fraud, theft etc. one of the very important factor is uncertainty like wise financial market, failure of projects, credit risks, data security etc.

Goals of Risk Management

There is a concept behind the risk management practices to protect organisations. Risk Management focusing on to Keep Company viable and reduce financial risks. The other function of risk management is to protect employees, customers, and general public as well, like in the events of fire and terrorism attack that can affect them. It is also protecting data records, physical assets of the companies.

Process for Identifying and Managing Risk

Risk management is related to every organisation whether it is public or private, big or small. It is a most important part of the culture of the organisation, with an effective policy programme which is lead by top level of management. Every manager and employee involved in risk management has their responsibilities.

Therefore many different strategies are minimize the risk, there are five basic steps are to identify risk and managing the risk factors clearly. In first step risks or threats are identified, 2nd step is to identify the key assets those having risks. In next step manager analyse the consequence of the threats to the assets. And the other steps are to figure out the way that can help to reduce risk.

Strategies for Managing Risk

There are many strategies are available to managing risks. It can be managed by to accepts the results risk and budgeting for it. 2nd is that transfer the risk to other party or 3rd party like insurance companies and insured against the fire and slip and fall accidents. It is also possible that to close down the particular high risk area of the business and can be avoid. Manager is able to reduce the negative effects of the risk by using back up plan for data or installing sprinklers for fire etc.

Risk management is very helpful part of any organisation of having success and maintain it. As per the importance of it, a company should have it. It can help to protect physical and financial assets and people too.

Functions and roles of Risk management:

Risk Monitoring and Control is the process of keeping track of the identified risks and trying to minimize or reduce it. The inputs to Risk Monitoring and Control are as follows:

Risk management plan (RMP): it is an integrated part of the plan project. It is a document procedure to managing the risk in project. It details process of identify and quantify risk, and responsibility to managing risks, and how emergency plans will implemented, and how the reserves will allocated.

Risk response plan: this plan is describe risk identification, responsibilities, and results from qualification and quantification process. The process agreed response for every risk, level of risk after implementing strategy, budgeting and contingency plan.

Project communication: this is providing information about project records and results of performance and risk. It is reports to monitor and control risk commonly for example of risk warning, issue log etc.

Additional risk identification and analysis: As project performance, it measured and reported, unknown possible risks might rise.

Scope changes: it needs new risk analysis and action strategy.

These are the five tools and techniques to Risk Monitoring and Control:

Project risk response audits: During the whole project life, risk examiners, examine and document the efficiency of company’s risk response in avoiding, transferring, or justify any risk factor occurring, as well as the effectiveness of the risk bearer.

Periodic project risk reviews: it is kind of regular reviews which are scheduled to monitor the progress for changes if any in project.

Earned value analysis: EVA is effective tool, that use to analyse and monitoring overall project performance with the basic plan of the project. If the project will divert from the basic project line then need to be update our risk analysis and risk identification.

Technical performance measurement: it is comparing the technical achievement during execution to the scheduled of technical achievement.

Additional risk response planning: If an unexpected risk appears and affecting the project more than expected then it means plan may not be sufficient. So you have need to additional planning to reduce or control risk.

Task 2 why it is imperative that risk should be measured for this medium sized company

Risk is "the possibility of something happening that impacts on your business objectives. It is the chance to either make a gain or a loss. It is measured in terms of likelihood and consequence."

The risk management is enabling to avoid losses and safe business owners; they maximize the potential of the organisation and help to achieve the company objective. SME can face some change in technology, skills, competitive positioning, legal, warranty, legal, liability etc risks. Therefore, the proactive (risk) management of the company anticipate risks; it is crucial to create and develop core value of business. For example of local medium size organisation in furniture market have very hard competition for market share along with various risks like pricing, warranty, guaranty, market positing etc.

The potential differing types of risk

Running a business is not a very easy task; there are many risks around business. Some of the risks are potential hazards can destroy a company or can be serious damage. It can be a very expensive and time consuming for repair process. Although the risks are implicit in running a business, risk management fully prepare to minimize or decrease the risks in future and helps to move smoothly. If a company know the risk is a reality of the business then they well prepared and able to minimize the risk impact. Dollar’s up and downs can highly impact on the business.

Physical Risks: physical risk is like risk of building is very common type of risk. Fire or explosion can destroy a building. Building risks are the most common type of physical risk. There are certain things to do to minimize the risk of fire are very important:

Make sure all employees know the company address to give fire services in case of fire emergency.

Exit location.

Installation of fire alarms and detectors.

A sprinkler system is also very useful to protect the plant, equipment, document and other things.

All employees know that they have priority over anything else.

Accidents can also occur when hazardous material spills. These hazard materials are acid, gas, toxic fumes, and other chemical waste etc. First precaution is that kind of happenings, all employees are trained and equipped properly to handle the any situation and also fire hazardous department prepared to handle any disaster. An exact plan should be implemented to immediately handle the effects of risk.

A plan should be created and implemented to handle the immediate effects of these risks. Government and fire services department helps organisations to acquire the information about the methods of prevention in different accidental situations, they provide advice to them to how to control or minimize the damage if occur.

Location Risks: employees are very well aware about the location of the business, it among the hazards facing at location like some natural disastrous: floods, earthquake, fires and other natural disasters. Employee should be aware about the neighbourhood around business place and be ready to move quickly and safely in the time of any hazards.

Human Risks: Drug abuse and Alcoholism may be major risks to personnel in the work force. Employees those are suffering from these problems should be seeking treatment, rehabilitation, counselling if needed. And now days many medical insurance coverage will be there to protect you the cost of the treatment for example of AXA health insurance.

Protective against misuse, fraud and theft can be complex, but these crimes are occur often workplace. Security checks in and out verification will be helpful to protect the kind of risky situation. Stringent accounting procedures may discover embezzlement or fraud. Background check of the employee before hiring is pretty good to protect the fraud.

Sickness between the workforces is natural and is a problem. For the prevention of loss of productivity, need back up personnel to cover the situation, arise due to the absent of employees in ill condition.

Technology Risks: Most of the organizations have limited time and resources. Technology affects and impacts every where and helps to minimize or eliminate the risks for example employment practices, volunteer recruitment, fundraising, copyrights, crisis management, security, data protection etc.

Generally technology risk management is very essential for the prevention from major risks in technology. For example hard drive of computer containing various data information’s that are very important. So risk management for technology no need to be complicated and have very cost effective solutions that are helpful and organisation can protect the data easily.

Prioritizing Risk:

When the risk factors are identified, then the risk management assess the probability of risk. For example, risks may be:

Very likely to occur

Few chances of occurrence

Little chance of happening

Very few chances of occurrence

So the most important thing risks must be prioritized and manage accordingly probability of occurrence.

Managing Risk: to manage risk factor insurance is a principle safeguard and many risks are insurable. One of the great examples of fire insurance it is necessary to occupied insurance at any place where business situated, whether it’s own or rented property.

Some risks are high priority, like risk of fraud where the money payable and receivable duties handle by an employee. In that kind of insurance, the companies will write a cash bond to provide for the coverage against the embezzlement.

In the case of where business relies on computer data like wise banks or other financial institution, they must need to be protecting themselves on mandatory basis. Ultimately, the risk management is very necessary and may be prudent step of prevention from major risks.

Possible Prevention

The biggest insurance of the risk is prevention. To prevent the business need to be train employees, back ground checks, maintenance equipments, fire extinguisher, safety checks are properly in place. Single, accountable employee will be appointed with managerial authorities to handle the risk management. The risk manager should be formulating an emergency plans for emergency situations like as:

Fire

Explosion

Harmful equipment mistake or any other damage or emergency

A safety plan should be developed and implemented regularly, with proper training, and specific information provided. A periodic, stringent re-valuation of the possible risks factors should be carried out. If any problem arise should be addressed immediately and insurance coverage also be reviewed periodically and can be upgrade and downgrade too.

Task 3 impacts from the external environmental on risk management

External factors are influence and huge impact on managing risks. These factors are use as environmental factors such as political, legal, economic, social, or environmental factors. These factors can affect the supply chain and financial circumstances of the company. So means of many problems will arise like problem with raw material, financial difficulties facing by suppliers and customer, it’s leading to increasing risk or failure of whole business process. If we deeply concern with the matter then external failure cost, identify as risk of poor quality products reaching in supply (Evans and Lindsay, 2011).

External driving forces (environment) are those things and certain situation those arising outside of the company and effect the company operations. Examples of external changes may be, the industry itself, economically, demographically, competition, political interference, etc.

If the risk management does not dealt appropriately with external driving forces then it may cause of business failure or under strategic risk. The main task for risk management is to observe the change in external environment and adopt suitable strategy to minimize risk or eliminate the risk.

We can take the example of external environment war of Iraq (2003). It was huge impact globally and business economically and financially, oil pricing was up suddenly and whole processes of business organisation was effected. Through supply chain process like oil supply was less, then the pricing up and it was reverse effect on the pricing strategy of products for example of demand and supply, demand was up but supply was so slow. Consequently, it was failure or strategic risk, financial loss and the operations were also affected.

In order to success of a business and gain competitive advantage, risk management must know what certain changes are indeed occurring, what will be the changes in future. So, risk management need quality information system, to analyse the expecting risks, because some risks are not avoidable but can be minimize. It is quite difficult to respond effectively with strategic risks by managers. These risks can arise in:

Supply chain

Total Quality management

New Product

Technology and integrated supply management

Global supply chain

Technology influences business every where and effective over what we are doing, who we are. New technology like internet is very effective tool for business organisation but it is become part of our DNA. For example of "wikileaks" it affects many business and individuals. There are many internet frauds can bury business organisations like examples of the hacking scandals. Biggest example of internet scam was phone tapping by newspaper organisation "The Sun".

Risk management reduces the impact of external influences on business

Evans (2011) identified a process which is helps to reduce the external influences on the business known as "Hoshin planning" that helps to managing risk successfully. This is a system approach to managing change in critical business process. It is clear understanding of organisational planning and priorities.

It is a kind of risk policy and helps organisation to running day-to-day activities of the firm along with strategic planning. When setting a risk policy, this approach has many advantages, it helps employees to understand the policy clearly according to the own concerning area of responsibility. It encourages the employee. It helps to raise staff awareness and link the policy between business strategies. It is vitally important and need of it for various areas of risk and integral part of the business.

Task 4 appropriate responsibilities, strategies and objectives towards management of risk connecting these with contingency planning and crisis management

Risk manager: this is authorise position and overall responsibility towards organisations risk management function. Risk manager is providing advice and direction to the managerial team which is his accountability. The manager focus on the whole business process, identify the various opportunities to eliminate risk by reviewing and developing strategies to control over areas of risk. Risk managers job is very wide enough and have compliance risks, operational risk, finance and trading risks etc.

Essential Job responsibilities/Functions:

He/she is responsible to identify, measure, and mitigate risks, which are due to human error, process failure, lack of integrity, data fraud etc.

They are working closely with the market and credit experts to control the overall risk exposure of the organisation.

They are focus on operations and control over enhancement, (ERM) enterprise risk management, future forecasting, investment management and dealing with other advisory services.

Managers are identifying business problems and understand it. They conduct analysis to rectify the problematic areas and assist the solution implementation by providing systematic support.

Perform reviews, with internal control assessments and in accordance with audit programs and divisional strategy and standards.

They Develop and sustain relationships between business entities and develop continues assessment policies.

They are helps to design, prepare and analyse the report and find the clear and logical answer of the problem.

They develops proper analyses, and measures in a continually changing environment.

They identify the potential weak points, and recommend practical alternatives for improvement.

And they have other duties and responsibilities as assigned.

Contingency planning: Contingency planning is known as continuity planning, means like some unplanned events can devastate the business for example natural disastrous like earthquake, floods, hurricane, Tsunami etc. contingency planning helps organization with crisis management to prepare some series of procedures to protect them, in emergency situation if arise then firm is better able to manage crisis situations. It helps to firm to take some steps to minimize the risks at earlier stage.

Managers and management are done their best to achieve organizational goal but sometimes strategies can go wrong. Contingency planning is conducted along with the better framework of crisis management. When a crisis arise, then it is very important for a company: it does not become disaster for them. Ensuring that it doesn’t involves:

Identifying risks planning for the future

Managing the media

Develop emergency plans

It is also very important and essential to perform risk assessment, to assess a business’s vulnerability to trouble to its stability.

Crisis management and scenario planning: Therefore, Scenario planning is a very helpful tool for business firms to use when they are attempting to find their position in future. Henry (2011) defines a scenario to be: "A challenging, plausible, and internally consistent view of what the future might turn out to be"

A crisis can be occur if you having well prepared by using scenario planning or PESTLE analysis. In competitive market, situation can arise suddenly and economic conditions can be change, and there is no guarantee of success. So business needs a contingency planning that can help organisation to restart business and minimize disruption. That why a business needs to be follows these steps or must take to manage the crisis:

Assess whether a crisis exists

Set up a crisis centre

Deal with the press and post-crisis trauma

Therefore, in scenario planning has played an important role in crisis management. Though, they both have strong link to future forecasting and contribute relative value for each to examine the process of crisis management.

The Competitive environment has direct impact on every business organisation. All businesses continually, examine and scan the environment to forecast latest trends and patterns to asses their impacts on the business. While in case of uncertainty they are trying to get as the advantages over their rivals. Here is three types of uncertainty can arise, that identify by Van der Heijden (1996):

Risks

Structural uncertainties

Unknown uncertainty

So the all business firms will utilise the scenario planning for future forecasting. Therefore, while forecasting has significant value in estimate from existing data, but it is not able to provide a clear picture of possible future situations, which scenario planning can offer. While business faces regular changes and they have number of sources to help, which will be from outside of the business and useful. As for example consultants may be useful if they are cost are manageable. And also some supplement services are available for contingency planning process and for this, special skills be required.

Task 5 the role of risk management in maintaining a strong position within the market place and how risk management contributes to competitive advantage.

Sad Grove (2009) defines risk management system is: "A framework of structures and procedures that ensure the organization can carry out the tasks required to achieve its objectives".

The risk management’s main task is to identify the major risk factors and remove them or minimize them systematically. They demonstrate on these, through these a company can maintain their position in market:

Reliability

Consistency and quality

Efficient documentation

Effective communication

Becoming an exceptional enterprise

Awareness of Significant Risks: awareness of potential risk means you are in position to avoid significant threats through identifying and proper planning to minimize the significant risk.

Saving on Cost and Time: A preventative approach against the threats are used by risk management is always cost effective and time saving.

Discovering Opportunities: risk management helps to define opportunities and prepare plan to systematically implement it.

Harvesting Knowledge:

The management of risk is helping companies to make better decisions through forecasting significant threats and opportunities to a business. There are lots of hidden benefits to business have from a good risk management team and will often surface later. So, no doubt timely forecasting of risk will easily helps to generate effective strategic plan and become milestone for the success of the company.

In the experts corner a very thin margin between success and failure. Effective planning is getting your focus right and on target. And it’s your ability to keep continuity growth and make the company market leader and it’s depends on successfully execute priority tasks.

Risk management and competitive advantages: it is very rare, and few companies those are tend to use their potential to manage risks as source of competitive advantages. These companies are taking risks to go beyond compliance cost and controlling defensive approach and adopt aggressive approach positive attitude toward risk. They understand their capabilities to handle the risky and can influence the competitive advantages. It is different way to turn their capabilities into competitive advantages. Let’s have considered example of it:

It is the case of Nokia vs. Ericsson; in this case two famous cell phone companies are at the beginning of the millennium. Both companies were shared the supplier, Royal Philips electronics. But the supply disrupted by fire in company in March 17, 2000. So at that time the both companies had having same risk.

After that Ericson trusted on the current supplier, and supply side resumed after one week. Then the supply was normal, did not seem to be a big problem. But Nokia didn’t take it easy to threat and seriously took action. They regularly monitor the recovery process of supplier and realized the supply side was not up to the mark as it was promised. They made quick action and booked all potential suppliers. By the period of time Ericsson found out of the real blow of disruption and they were too late to respond and that mean time they hadn’t found enough supplier those were produced components for them. Ericsson was in serious trouble and lost $200M in their cell phone division.

For the continued problem company merged with Sony in 2001. So, response of Nokia at exact time of risk not only protected company from severe damage but also increase their market share. It is clear example of risk management how risk can be competitive advantages if management observe and respond quickly over threat.

Conclusion: finally, risk management is a vitally important part of any organisation whether it is SME, or large scale organisation. They have some common and external threats that need to be regularly review by risk management otherwise these threats can be critical and demise the businesses.

Risk manager able to find alternative methods to minimize or eliminate risk factors and helps companies to achieve successfully objectives.