"Yes, risk is inherently prone to failure. Otherwise, it will be called "self-confidence". - Jim McMahon
Risk - is the opportunity to lose something precious. Values (such as physical he alth, social status, emotional well-being, or financial he alth) can be gained or lost by taking risks as a result of certain action or inaction, foreseen or unforeseen (planned or unplanned). In order to act competently within the enterprise, risk managers create various risk management systems, as well as tools with which they can be implemented.
Definition of concept
Risk can also be defined as the intentional interaction with uncertainty. The last concept is a potential, unpredictable and uncontrollable outcome. Risk is a consequence of actions taken despite uncertainty.
Risk perception isa subjective judgment that can vary from person to person. Any undertaking carries a certain danger, but some people are much more risky than others.
Economic risks may manifest as lower income or higher spending than expected. There can be many reasons, for example, an increase in prices for raw materials, the expiration of the construction of a new operating enterprise, failures in the production process, the emergence of a serious competitor in the market, the loss of key personnel. Political regime change or natural disasters.
Preparing for the risk management program
Learn the basic risk management steps and take appropriate controls or countermeasures to reduce the likelihood of them occurring. Hazard reduction must be approved by the appropriate level of management. For example, the risk associated with the image of the organization should be accepted by senior management, while IT management will have the authority to make decisions about the threat of a computer virus.
The risk management plan should offer applicable and effective safeguards to manage risk. For example, the observed high risk of computer viruses can be reduced by purchasing and implementing antivirus software. A good risk management plan should contain a timetable for the implementation of controls and responsible persons for these actions.
According to ISO / IEC 27001, the action taken immediately after the completion of a risk assessment is to prepare a plan that should document decisions on how to reduce itto a minimum. Risk mitigation often means the choice of security controls, which should be documented in a Statement of Applicability, indicating the specific methods and means that were chosen to do so and why. To effectively manage risk in an organization, you must follow all the steps in the sequence suggested below.
Identification and analysis of risk (First stage)
This is the initial stage of risk management. It consists in understanding the specificity of the threat and the place of its possible manifestation. The identification and analysis of risks is understood as the study of its specificity and features, which are due to their nature and other features characteristic of this particular case. It is important to study future losses, as well as the change in risks over time, the degree of threat relative to a specific period. Without these steps, risk research cannot be carried out with maximum efficiency.
As part of the identification and analysis of risks, the manager is obliged to answer some questions related to them, for example:
- What is the source of the risk?
- What will you have to work with when taking a risk?
- How and how much information will be received?
- How can minor risks affect major risks and vice versa?
- What risk management strategies can be put in place?
This stage is very important, and this is not only because of the peculiarities of managing the risk system, which was discussed earlier, but because of the information base. This step provides the manager with reliable risk data,its possible side effects and implementation, and also allows you to assess the threat itself, its parameters, the amount of possible economic losses and other indicators necessary in order to make a decision on managing it. In practice, this stage provides a reliable information basis for the manager to calculate the entire risk.
It should also be taken into account that after completing the subsequent stages, this base may become larger, which will cause constant information growth. Therefore, it is necessary to follow the sequence of risk management steps.
Search for other methods and ways (Second stage)
The main goal of this stage is to study the tools that will prevent the manifestation of risk, as well as to study its negative impact on the functioning of the state, legal or natural person or enterprise. There can be a lot of these tools, and they can be different, but the manager stops at the main ones:
- How can you reduce the risk of ongoing insurance events?
- How to get the minimum financial damage when the risk materializes?
- Which financial sources will be able to compensate for financial damage if it occurs?
A specific approach and management plan will be needed for each type of risk.
Search for management tools (Third stage)
At this stage, the manager forms and selects an individual approach to risk within an organization, state orprivate person. The need for this selection procedure is related to the different effectiveness of risk management methods and the different amounts of resources required for their implementation. The main questions that the manager decides at this stage:
- Which management method would be safer and more beneficial for the organization?
- Will the total overall threat from risks change when several methods are used to minimize them?
- Will certain risk management strategies work?
When choosing a threat management method, the manager should consider:
- effectiveness and need for risk, as well as a management method under financial constraints;
- Will a single threat and how it is managed affect the total number.
When choosing a risk and how to manage it, one should always take into account financial constraints and try to optimize losses. The criteria may be different, for example, in order to increase the financial efficiency of the enterprise.
One of the main tasks of a manager at this stage is the correct approach and the use of certain tools to address not all risks, but those that cause the greatest damage to the state, organization or individual.
In some circumstances, such as a very tight budget, a manager may ignore minor risks, provided they are true and not likely to cause much damage. In this situation, it is usually said that an active fight has been introduced for serious risks, and a passive one for insignificant ones.
Begin implementation of the methodrisk management (Stage Four)
At this stage, the manager must begin to implement the methods adopted by him earlier. So, within the framework of this process, various kinds of changes are applied, for example, in financial or technical terms. The peculiarity of the actions that a risk manager takes is not how they will affect the company, but how they will be executed.
This is due to the implementation of risk management methods, which forces the manager to answer a series of questions on the implementation of his strategy:
- What risk actions should be taken?
- When and how long will they take place?
- What kind of resources and how much will be involved in these measures?
- Who will monitor the quality of the events and who will be held accountable if they fail?
Analyzing outcomes and improving risk control methods (Step 5)
This stage is the final one for the risk manager, since all actions related to the threat have been completed at it, and the main task is to analyze the outcome and improve the risk management system. This stage is very important for the organization, since after it it can accept and manage risks itself, without the participation of managers.
At this stage, the specialist must answer the following series of questions:
- Is this system effective and how does it cope with its task?
- At workWere there weaknesses, where?
- Which factors most influenced the realization of the risk, should the entire system be changed because of this?
- Have all the measures been taken correctly and have they affected the protection of the company from financial damage, should they be replaced with more effective ones?
- Was the system of internal control and risk management flexible enough as it fulfilled the role of protecting the company from them?
At this stage, there will be a maximum increase in information related to risks and methods for managing it and maintaining optimization within the organization.
After analyzing all the outcomes and monitoring them, a verdict is made whether the interventions were effective. This operation is complicated by the fact that while the risk is being analyzed, it does not bring financial returns, that is, it is not implemented, but the organization still incurs losses associated with the management program. Therefore, it is often necessary to compare real costs with hypothetical losses.
This risk stage management assessment has a very important objective: to figure out how to prepare the organization for more severe environmental threats and minimize their impact on the firm.
How to manage risk
Risk management is about identifying, assessing and prioritizing, followed by the coordinated and economical use of resources to minimize the threat.
The main steps of the business risk management process can be performed in the following sequence:
- Identify and characterize threats.
- Assess the vulnerability of critical assets to specific risks.
- Define hazard (i.e. the expected likelihood and consequences of specific types of attacks on specific assets).
- Find ways to reduce these risks.
- Prioritize mitigation measures.
How to manage risk properly
In practice, the overall risk assessment process can be complex and the balancing of resources used to mitigate threats should aim to reduce losses.
Intangible risk management is a new type of threat that has a 100% chance of occurring but is ignored by the organization due to inability to identify. For example, when insufficient awareness of it is applied to a situation, there is a knowledge risk.
Relationship threat occurs when ineffective collaboration occurs. The risk of process involvement can be a problem when inefficient operational procedures are applied. These risks directly reduce knowledge worker productivity, profitability, profitability, service quality, reputation, brand value, and revenue quality. Management of non-material risks allows you to create immediate benefits from their identification and minimization of consequences.
Similar difficulties occur in the distribution of resources. This is the idea of opportunity cost. Resources spent on risk management could be spent on more profitable activities. Again, perfect risk management reduces tominimizing costs (or labor, intellectual resources), as well as reducing their negative consequences.
According to the definition of risk, this is the probability that an event will occur and adversely affect the achievement of the goal. Therefore, it itself has uncertainty. Risk management can help managers to have a good control over the situation. Each company may have different components of internal control, leading to different results. For example, the structure for ERM components includes internal environment, goal setting, event identification, risk assessment, risk response, control actions, information and communication, and monitoring.
Commercial risk, as well as production risk, according to many specialists working in labor protection organizations, is important not only for its assessment, but also for real events that occurred in the workplace. It can also be categorized as short-term or operational risks that affect the return on assets and include price, costs and performance. Business risks are relatively easy to manage because there are clear approaches to managing them and they have little or no impact.
We reviewed the concept of financial risk and the steps to manage it.