Manage risk
SHIPS are safe in the harbour; but that is not what ships are made for!
The markets are changing at such a rapid pace today, that it is not very wise for companies to ignore the risk management aspect.
However, companies have turned risk conscious and are teaming up to cope with all kinds of risks at every level of management and decision-making.
Apart from the usual currency and market risks, we have political risk, legal risk, contract risk, strategic risk, operational risk, technology risk and a hundred other kinds of known, unknown, quantifiable and hypothetical risks lurking out there, waiting to catch you unawares. Risk management essentially is about perceptions and actualities.
It is a quintessential case of the glass being half full or half empty, depending upon the opinion of the individual. Unlimited risk translates into unlimited opportunity, so if you intend closing your doors and shutting yourself out from all things risky, you could well be singing your own dirge.
Risks can be categorised into gross risk and residual risk. Gross risk is the risk that a company is exposed to without any risk management system in place, while residual risk is the net risk after considering the risk management capabilities of an individual organisation.
It is important to set priorities and ascertain the effectiveness and adequacies of damage minimisation and control exercises. According to one consultant, risk management is not as simple as setting up a special cell for the purpose or acquiring off-the- shelf expertise to deal with it. It is not the sole headache of the management either.
An organisation can effectively control and manage risk for maximising value only if the entire organisation becomes risk conscious and risk responsive.
Most organisations resort to quantifying risk and then cover themselves to limit its ability to affect the business adversely. But the problem with companies being completely risk averse is that risks are generally too numerous to be fully covered; they are largely dependant on markets and factors over which organisations have little or no control.
Most importantly, it could lead to lost opportunities; and the chances of survival of such risk-averse companies in a highly competitive and constantly changing business climate are very slight. It is important to understand that risk management or risk control is not useful to handle all kinds of risks.
The unknown and the unexpected could always pull the carpet from beneath your feet. The best way to deal with such unexpected setbacks is to first ascertain the expected setbacks or losses and then translate the information and experience so gained into a sound knowledge base that could be used for future benefit.
Risk creates opportunities and opportunities translate into value. When organisations concentrate solely on minimising risk, they could end up minimising value.
The first step towards risk management is to identify the risk factors.
It is important to develop a comprehensive framework that profiles risk; taking into account every major quantifiable factor concerning macroeconomics, political environment, competition, finance and revenue limitations, systems and legal compliance.
The next step would be to prioritise these risk factors depending on their potential to inflict loss or damage. After that comes the 3M approach of measuring, monitoring and managing by system tools, models and making both management and employees responsible for managing risk. For this, risk management needs to be propagated to the employees through transparent communication of systems, processes and procedures.
A culture of risk awareness needs to be built up at every level of the organisation. Employees should be led by example and compensation and reward mechanisms should ideally be linked to RM practices.
Risk management strategy is a double-edged sword; it needs to be handled with care.
When put to use in a proper manner, it can result in optimum risk control and maximum capitalisation of opportunities.
Companies with better risk management strategies in place are able to consistently manage their price value ratios better than their less evolved contemporaries, get better value for investment and score higher ratings with the customer base.
BINDU SRIDHAR
faqs@cnkonline.com
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