The Principles Of Risk Management

Every project manager and business leader needs to be aware of the practices and principles of effective risk management. Understanding how to identify and treat risks to an organisation, a programme or a project can save unnecessary difficulties later on, and will prepare managers and team members for any unavoidable incidences or issues.

The OGC M_o_R (Management of Risk) framework for risk management identifies twelve risk management principles, which are intended not … to be prescriptive but [to] provide supportive guidance to enable organisations to develop their own policies, processes, strategies and plan.

Organisational context
A fundamental principle of all generic management methods, including PRINCE2 and MSP as well as M_o_R, is that all organisations are different. Project managers, programme managers and risk managers need to consider the specific context of the organisation in order to ensure thorough identification of risks and appropriate risk treatment procedures.

The term organisational context’ encompasses the political, economic, social, technological, legal and environmental backdrop of an organisation.

Stakeholder involvement
It is easy for a management team to become internalised and forget that stakeholders are also key participants in everyday business procedures, short-term projects and business-wide change programmes.

Understanding the roles of individual stakeholders and managing stakeholder involvement is crucial to successful risk management. Stakeholders should, as far as is appropriate, be made aware of risks to a project or programme. Within the context of risk management and stakeholder involvement, appropriate concerns: the identity and role of the stakeholder, the level of influence that the stakeholder has over and outside of the organisation, the level of investment that the stakeholder has in the organisation, and the type, probability and potential impact of the risk.

Organisational objectives
Risks exist only in relation to the activities and objectives of an organisation. Rain is a negative risk for a picnic, a positive risk for drought-ridden farmland and a non-risk for the occupants of a submarine.

It is imperative that the individual responsible for risk management (whether that is the business leader, the project/programme manager or a specialist risk manager) understands the objectives of the organisation, in order to ensure a tailored approach to risk management.

M_o_R approach
The processes, policies, strategies and plans within the M_o_R framework provide generic guidelines and templates for risk management within a particular organisation. These guidelines are based on the experience and research of professional risk managers from a wide range of organisations and management backgrounds. Following risk management best practices ensures that individuals involved in managing the risks associated with an organisation’s activity are able to learn from the mistakes, experiments and lessons of others.

Reporting
Accurately and clearly representing data, and the transmission of this data to the appropriate staff members, managers and stakeholders, is crucial to successful risk management. The M_o_R methodology provides standard templates and tested structures for managing the frequency, content and participants of risk communication.

Roles and responsibilities
Fundamental to risk management best practice is the clear definition of risk management roles and responsibilities. Individual functions and accountability must be transparent, both within and outside an organisation. This is important both in terms of organisational governance, and to ensure that all the necessary responsibilities are covered by appropriate individuals.

Support structure
A risk management support structure is the provision within an organisation of standardised guidelines, information, training and funding for individuals managing risks that may arise in any specific area or project.

This can include a centralised risk management team, a standard risk management approach and best-practice guidelines for reporting and reviewing organisational risks.

Early warning indicators
Risk identification is an essential first step for removing or alleviating risks. In some cases, however, it is not possible to remove risks in advance. Early warning indicators are pre-defined and quantified triggers that alert individuals responsible for risk management that an identified risk is imminent. This enables the most thorough and prepared approach to handling the situation.

Review cycle
Related to the need for early warning indicators is the review cycle. This establishes the regular review of identified risks and ensures that risk managers remain sensitive to new risks, and to the effectiveness of current risk management policies.

Overcoming barriers to M_o_R
Any successful risk management strategy requires thoughtful consideration of possible barriers to implementation. Common issues include:
established risk management roles, responsibilities, accountabilities and ownership
an appropriate budget for embedding a risk management approach and carrying out risk management activities
adequate and accessible risk management training, tools and techniques
risk management orientation, induction and training processes
regular assessment of M_o_R approach (including all of the above issues)

Supportive culture
Risk management underpins many different areas and aspects of an organisation’s activity. A supportive risk management culture is essential for ensuring that everybody with risk management responsibilities feels confident raising, discussing and managing risks. A supportive risk management culture will also include evaluation and reward of risk management competencies for the appropriate individuals.

Continual improvement
In an evolving organisation, nothing stands still. An effective risk management policy includes the capacity for re-evaluation and improvement. At a practical level, this will require the nomination of an individual or a group of individuals to the responsibility of ensuring that risk management policies and procedures are up-to-date, as well as the establishment of regular review cycles of the organisation’s risk management approach.

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An Introduction To Enterprise Risk Management

Risk management is a fundamental principle in any organization, since risk is a reality that needs to be dealt with; irrespective of the business model. There is no straightforward formula for determining how much risk should be allowed by any given organization; for it to get some value or create business opportunities that they can exploit. This poses a serious challenge for most businesses, since all business decisions present either; an opportunity or risk to the company’s capital base and revenue. A company must therefore, have in place a stringent risk management solution or policy; in order to reduce the impact of risk on its revenue.

Risk is often associated with negative outcomes within an organization; hence it is avoided at all costs. This however, is not the right approach, since the process of identifying opportunities that can be exploited by an organization also involves taking risk. Therefore, when risk is managed correctly, it can create opportunities; but if poorly managed, it leads to negative outcomes.

Enterprise Risk Management is the process of optimizing and controlling risk in an organization. This includes any method and framework that is utilized to either; seize opportunities that will benefit the business; or plan, organize, and control all activities that may limit the impact of risk on the company’s financial status.

Enterprise Risk Management is the latest form of risk management solution which takes a holistic view of all uncertain factors that may affect a company’s tangible and intangible assets. ERM, unlike any traditional risk management solution, has a different approach as far as objective, focus, emphasis, scope and application are concerned. The purpose of ERM is to prepare an organization to handle risk; by integrating strategy, knowledge, processes, people, and technology.

Banking software is a good example of applications that put Enterprise Risk Management into practice. The software comes with modules that are meant to improve the performance of the business and at the same time optimize the cost of risk management. These modules include the content management system and wholesale lending component.

The content management system in banking software is important in risk management, since it is used for organizing and managing client information, employee data, collateral based securities and other confidential documents. The wholesale lending module, on the other hand, is a critical tool for credit risk management. This module has the ability to define products and work-flow data, and comes with powerful reporting capabilities. The wholesale lending module has tools for financial and ratio analysis; giving banking software risk analysis capabilities. Integration between this module and the content management system allows the software to manage portfolio, credit scores and rating, and customers.

In implementing Enterprise Risk Management, it is imperative that an organization first understands the full scale of risk that is to be mitigated. First, objectives should be set by taking into consideration the organization’s capabilities. Then, an implementation plan should be developed and responsibilities for designing, implementing and monitoring be allocated. The risk management process should then be incorporated into the company’s policies.

ERM is all about taking strategic risk; that an organization is able to comply with and control, in order to spur growth and improve performance. An organization therefore needs to learn how to properly manage risk in order to create value and opportunities that can benefit them.

The Specifics Of Project Risk Management

Risk management, as the term implies, focuses on managing the risk. While the approach deals with all kinds and levels of risk, specific attention is logically devoted towards management and mitigation of risk arising from uncertainty embedded in the project. This is accomplished via a host of established strategies, deployed in a sequential manner. Risk management is an overall term, which is often sub-divided by various organisations and departments to ensure respective suitability. Examples could be a financial risk or say a legal risk. However, the term has a wider perspective and while it is not practical to cover it all here, this article follows a controlled approach and thus highlights upon the nitty-gritty of project risk management.

The Process of Project Risk Management

Risk management and thus project risk management is a comprehensive process aimed at risk identification, planning stages post risk identification, defining the essential activities to be undertaken, and therefore lessening of the recognised risks. While relating particularly to the project risk management perspective, activities begin by planning the risk aspect in relevance to the project under consideration. The plan is comprehensively defined to include even the most basic of tasks, essential for project completion. The idea is to plan risk management for the project. The next stage focuses on project risk identification.

Risk identification is a task responsible for recognising the potential risks and naming them. A risk manager could be appointed at this stage, who would be responsible for identification, input compilation and appropriate documentation for further stages. While identifying the project risks, risks can be divided into two categories: generic risks, which are almost universally applicable; other risks, which are the specific project risks. The other crucial tasks, which ought to be conferred due attention at this stage, relate to narrowing down to the precise cause of identified risks, and working out the possible impact the defined risks would pose.

What follows in the process of project risk management is the requirement to quantify the risks and the associated impact. Tools like probability, sampling and other statistical methodologies can be deployed to get precise results. Risks with these techniques can be classified in various categories, for example: impact, those requiring immediate attention, unavoidable, etc. The course to follow would vary with the categorisation.

Once the risks have been identified and quantified, it is now about working out the response. Project risk management aims at deriving reasonable solutions, which could be reworking the subtasks confronted with risk and thus avoiding the risk or perhaps eliminating the risk cause. Accepting and thus providing scope for the risk is also an option.

Controlling Risk

A proactive approach would be to control the risk element. This is enabled by closely understanding the requirements of the project. If the requirements are well understood, chances of incorrect objective statement and related threats can be suitably controlled. To ensure specific understanding it is essential to make room for the customer’s requirements as well. The requirements of the project ought to be quantifiable and realistically defined. Also they must be in line with the company’s overall purpose of existence. And then of course, the most important aspect is to be ready with an alternate course in case of severe threats.

Conclusion

Risk management and therefore project risk management is a continuous process, which begins with the project and continues throughout. It takes a careful examination of understanding whether there has been enough precaution or if more needs to be done to prevent harm occurring. All companies should have a project risk management program in place to prepare them for all eventualities.

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