What is risk management and why is it important?
Suppose you are the manager of a large company and you have a key employee who has been by your side from the inception of the company, fully and accurately learning things and training new staff. But…
Unfortunately, the employee of our story has not been working well for some time and is constantly losing his job. Worst of all, his actions have negatively affected the performance of other employees, and no matter how hard you try to bring him back to his prime with encouragement, persuasion, rewards, you do not succeed.
In this case, you have two options:
The first way is to fire that employee, which is, of course, a big risk for your company. Finding someone who is so familiar with the business issues related to your company may take months and your work may be suspended.
The second way is for him to stay in the company, but you know that in staying, this person does more harm than good to your business. They do not do their job properly, and this also has a negative effect on other members of the company.
You see, every step may be detrimental to you and your company. So what can be done and what decision should be made?
The only solution is to manage the crisis. To avoid risks like this (and even much bigger risks), you need to learn risk management skills.
So join us in this article to start with what is risk management and why it is important, and finally learn the process of doing it in business.
What is a risk?
Defining risk is a bit challenging, but in a general sense, the following sentence might be a good definition for this word:
Risk is a kind of uncertainty in achieving the desired results. That is the probability that we will not achieve our goal or even get the worst possible result.
Risks are everywhere, from simple everyday tasks such as driving to macroeconomic investments. But that does not mean we should not do it because it is risky. However, we can choose a way that is less risky and more likely to achieve the goal.
But finding the same low-risk way also requires a skill called risk management.
What is risk management?
We all face different dangers in our work and personal lives that have filled our lives with special and unreliable circumstances. As Benjamin Franklin put it: “In this world, nothing can be said with certainty but death and taxes.”
Risk management is about everything that can happen to you. From the day we decide to take the first step to achieve a goal until we achieve the desired result, many things happen that put us in different difficult and dangerous situations. But none of us have to leave the sails of life and business to fate.
Now let’s review the simplest definition of risk management:
Risk management simply means that we can still achieve our goals despite risky situations. In other words, instead of escaping the dangers that lie ahead, enter the field and with proper management, reduce their risk as much as possible.
The risk management process involves identifying, analyzing, evaluating, and controlling risk to minimize adverse outcomes. In this way, we comprehensively anticipate predictable or sudden events and try to turn risks into a better and more profitable situation by gaining knowledge and awareness. Sometimes, in order to reduce the losses of a dangerous event, our path changes completely, but certainly, the new path is less dangerous.
What is the difference between crisis management and risk management?
Crisis management means managing the crisis situation after a sudden accident, but risk management means managing and preventing before an accident occurs. Crisis management addresses post-accident problems, but pre-accident risk management considers the various possibilities to minimize potential damage in the event of an accident.
Let me give you a concrete example: Imagine that an area has been destroyed by an earthquake and the people of that area are in trouble. Many people have been killed in the earthquake and a lot of money has been borne by the authorities. Now the authorities have to resort to crisis management to solve the problems. However, if the relevant authorities had previously predicted the occurrence of an earthquake in the relevant area using risk management, and based on this forecast, they would have taken steps to strengthen and renovate the buildings and educate and inform the people to deal with the earthquake, the earthquake damage would be less and crisis management would be a lot easier.
Why is risk management critical to our business?
You are always at risk. As soon as you breathe, an infected particle may enter your breath and make you sick. We actually take risks at any given moment by doing anything. It makes no difference whether we are resting at home or managing our office staff. Therefore, we should always think well, consider aspects, make informed decisions and act logically before taking action on anything. By doing these steps, we will be more likely to succeed in something that results in something important to us.
Having risk management is a vital issue because it prevents crises. Despite the risk management, even if a particular crisis occurs, the damage and losses caused by it are minimized. This is even more important in business because it reduces financial losses and avoids wasting time achieving the main goals of the business.
How to manage risks?
To manage the risks in your business, it is best to hire an experienced project manager first. Then ask him to review and collect all the risk items. Make a comprehensive list of the risks and consider them in a meeting with your business executives. In this session, add the issues raised by other managers to the comprehensive list and ask the project manager to review them all.
Although not all hazards on the collection list are likely to occur, this list can be used as a complete resource to create the initial mentality in the minds of everyone on your team and increase their readiness to face the worst work events. Here are nine steps you can take to begin the process of preparation for risk management.
Step 1: Discovering Your Purpose
Establish a system for recording potential risks and hazards. This system should be such that risks can be easily recorded and maintained based on the date of registration, description of hazards, related probabilities, the impact of hazards, their status and how to deal with them.
Step 2: Identify the risks
Identify the types of hazards with all members of your team and make sure everyone on the team is sufficiently aware and prepared to deal with the hazards.
Try to identify risks comprehensively and examine their differences based on the area of each risk. For example, determine which category of risk is related to technology, materials, budget, customer, quality, suppliers, law, or any other identifiable element.
Be aware that risks do not have to be sudden and accidental. Sometimes a conscious decision comes with a risk. For example, increasing the production of a factory seems to be a very good and positive thing, but the factory manager knows that with this decision, he should also consider the risk of equipment failure and sleep on the production line.
Step 3: Discovering Your Purpose
When you identify risks, you subconsciously see opportunities in them. New opportunities are all events that can positively impact the advancement of your goals and projects. It helps you plan to take advantage of positive opportunities and, as you prepare for adversity, prepare for new and sudden positive opportunities.
Step 4: Analyze the risks
In this step, analyze how likely these risks are and what destructive effects each of them has on your work.
For example, to estimate the loss of a risk, estimate how much financial loss each risk will incur and how much it will cost to deal with it.
Of course, note that the harms of a hazard are not just financial, there are other criterias such as time and quality that need to be considered. For example, how much time is wasted, how much it costs, and what effect it has on the quality of employees work?
In fact, risk analysis makes it easier to find the right solutions to solve them.
Step 5: Assess and rank the risks
The third step is to assess and rank the risks. That means figuring out which risks are most important and taking more time to avoid them. So how do you do that? very comfortable. Do not forget that in the previous step you examined the likelihood of risk and its impact. Well, now the same information becomes the criteria for ranking existing risks; That is, the risks that are more likely to occur and have a more destructive outcome are ranked higher and the priority will be to solve them.
Focus on those risks that are likely to occur. If you look at the risk analysis matrix, these risks are highlighted in red. Identifying these types of risks is very important for any business because they do the most damage to your business and it is very difficult to compensate for their losses.
Yellow matrix cells are less likely hazards and have moderate damage. If the risk is not serious enough or there is an easy way to fix it, it is best to move it to the bottom of the list (matrix green cells).
Step 6: Discovering Your Purpose
After identifying, analyzing and ranking the risks, it is time to find ways to deal with them. At this point, think about what techniques you can use to deal with each risk, or if there is no solution, what plans you can have to minimize the damage to you.
For example, to eliminate a risk such as a fire, you can use a solution such as fire insurance to reduce financial losses. Well, this example was quite clear, but in the example of the incompetent employee at the beginning of the article, both of your solutions (firing or continuing to work) had their own risks; So you have to choose a way that reduces the loss of your work.
In general, develop strategies to reduce the losses and losses caused by exposure to risk, and make the necessary plans to deal with the most serious hazards.
Step 7: Choose an individual to deal with each risk
To deal with any risk, choose a member of your team according to his abilities and morale. The selected person must prepare himself in all directions to deal with the identified risk. In this way, the best kind of cooperation to deal with the anticipated risks is formed between the people in your business and more useful results are obtained.
Step 8: Constantly review and update the risks
In the previous steps, you learned what your business’s risks are and what unpleasant consequences might await your business if they do occur. If you understand this well, you are now more than ever emphasizing that you need to be aware of potential risks that do not work for you. Review and update the various risks and dangers with your team at least once a week, and do so as a routine. Always have a complete report of the hazards and keep them under a microscope regularly to both prevent and, if they occur, take appropriate action at the appropriate time.
By holding regular meetings with members of your business team, make sure that everyone has the necessary and sufficient information about the potential risks and risks and that they are informed about the methods and plans identified to deal with each risk. The fact that everyone on a team is aware of such an important issue and is aware of the changes that have taken place in its various parts will lead to better work progress and more effective action in the event of emergencies.
The final message of risk management
Risk management is over. Finally, risk management is not an exercise that you only do at the beginning of projects, but it is an ongoing task that you need to pay attention to and spend time on.
Risk management wants to tell us that we are not going to run away from high-risk jobs, we are going to move cautiously and move in a way that has the least risk.