LLast week we introduced the concept of risk, the importance of risk management and the types of risk. Today we will continue with the risk management components that we started last week.
Risk assessment: The first thing you should do in any risk management exercise is identify risks. Your concern at this point applies only to those events whose occurrence or non-occurrence could lead to disruptions or losses in business operations.
For example, if you are shipping your perishable agricultural products from Kano to Lagos by ground, the price of which will be calculated and paid upon delivery, you need to be aware of the probable events that could cause your business to make losses in this transaction. What are the risks of the vehicle you hire to deliver the goods being left on the road and not repaired in time to deliver the goods before they break down? What are the risks of the vehicle having an accident and the goods being completely or partially destroyed? What are the risks of Lagos buyers revising their goods downwards due to a temporary supply glut?
The risk identification exercise should also include a good understanding of each risk identified.
Risk assessment: Risk identification would only show all risks that could affect the specific transaction, project or ongoing business. But beyond that, you need to assess and classify each risk. Evaluation and classification is about determining the likelihood of their occurrence and the negative consequences of their occurrence. A simple way is to classify each event as “very likely”, “moderately likely” or “very unlikely”. Then rank them based on their likely negative business impact, should they occur.
After identification and assessment, the next important task is to develop specific responses to each risk or group of risks.
Response development: Roughly speaking, you have three possible answers:
Avoidance: You can avoid a risk by eliminating its cause. If there is a risk of goods being stolen from your warehouse, you can eliminate this risk by strengthening physical security (manned, video surveillance, controlled access, etc.) and warehouse access processes. Risk prevention is about taking specific actions to prevent the risk from occurring.
mitigation: The aim here is to reduce the likelihood of the risk occurring and to manage the negative consequences of its occurrence. In the previous example of delivering perishable goods, you could reduce the risk of losses on the road by hiring the services of a reliable haulage company with a good fleet of trucks and a track record of safe deliveries to try and reduce the risks of accidents and vehicle breakdowns. In addition, you can protect your goods with transport insurance from a reputable insurance company, which will reimburse you for any damage if a breakdown or accident leads to partial or complete spoilage of the goods.
Mitigation is sometimes about taking multiple actions to address just one risk or group of risks. The insurance example is called risk transfer. Sometimes you can reduce your risk by doing this secure, share, moveEtc.
Acceptance: Sometimes a risk is identified as an opportunity and there is not much that could be done to avoid or mitigate it. In such a situation, you must weigh whether the likely consequences are tolerable or not. When the likely consequences are tolerable, that’s easy to accept. On the other hand, if the likely consequences may be significant, it will be up to your appeal to make a decision one way or the other.
Often business people and decision makers take risks with likely serious consequences when they have done everything they can to minimize the likelihood that something will go wrong in a given situation. For example, when NASA scientists and engineers decided to land humans on the moon, they were acutely aware of the likely consequences of the astronauts’ failure to return to Earth. But after doing whatever they had to do, they took the risk that certain things could still go wrong, which fortunately wasn’t the case. So we can take risks, if we have done everything we can satisfactorily minimize the probability of occurrence. The word satisfactory is key here and it is about our risk tolerance.
What should you do to ensure your business is alert to the risks it faces and that appropriate action is always being taken or can be taken?
Legal considerations: Make sure your business is legally registered to do what it does. Certification renewals should be taken seriously and timely to eliminate any windows that by law allow you to work outdoors by default. If necessary, hire a lawyer to provide such services.
Financial records: Keep your accounts properly and make sure you make the legal payments on time. Hire an accountant to help you meet the various obligations.
Employee: Make sure you have proper contracts with your employees. They should also be continuously trained and motivated to keep their interest and commitment in their work. If your employees are competent, they can sense risk from a mile away and take action!
Insurance: Identify any areas of your business where insurance coverage may be required either by law or just in your own business interest. Corresponding insurance policies can offer both property protection coverage and against third-party claims. Vehicles, office equipment, plants, etc. should all be insured. Goods in transit, fire, burglary and special risks should be insured depending on the situation and circumstances.
Object protection: This is especially important if the location where you operate is critical to your business. You should plan to pay rent, installments and any lease payments on time to avoid disruption.
We’ll next conclude this series with more specific actions to help ensure your organization is alert and responsive to the risks it faces.
