Six strategic steps in risk management
Over the past decade risk management has become one of the most discussed and complicated areas in our professional and personal lives
My colleagues and students debate various aspects of this topic time and again in class, during discussions of their business plans, or even when they go out for a cup of coffee. We face numerous risks, which pop up like mushrooms after the rain and some people even give up their dreams as their hopes collapse unexpectedly due to the unpredicted course of events. However, I always recommend not to give up and I usually tell them an old joke I heard from my American colleague: “If you take risks, you may lose your possessions. If you don’t take risks, you may lose your passion!” However, the question is still there – how to manage risks in today’s world?
Here are 6 strategic steps you can follow to effectively work on risk management.
Identification of risks
Every businessperson would like to avoid risks and every textbook on risk management suggests that an effective manager should identify business risks or at least catch the major possible ones. For example, the essential textbook in the field entitled “Fundamentals of Risk Management” by Kogan Page offers many long chapters and studies written about this. The majority of suggestions are built around the idea of conducting a comprehensive study involving analysts, consultants, and all stakeholders in order to create a comprehensive map of risks. While this is an excellent approach for a large organization, what can you do if you work at a small and medium enterprise (SME) or you are simply a university graduate who would like to develop personal business, career, and/or startup plans? My suggestion is – if you cannot upscale your risk assessment like a large corporation, and then replicate a corporation at your own level. With this approach, you become a top manager for yourself. Identify your priorities (business, career change, startup, etc.), read what the best experts on the internet have to say, and then find 5-7 people (build a team if you think about long-term horizons!) who can consult with you over a cup of tea, telling you about their prognoses, or experience, or giving tips/life hacks in the specific areas of your concern. And don’t forget to put everything in writing – these informal consultations will work for you just like a formal consultation for a big company!
Detect sources of risks
As a second step, together with your friends or colleagues or all by yourself you should develop a map of the sources of risk. There are specific sets of risks for each aspect of your business or your priorities. The sources might be universal, impacting all aspects of our lives (for example, a negative epidemiological development related to the spread of COVID-19 might become a source of risk for all of us). However, there might be very specific sources of risk such as sector-wide economic changes that impact the dynamics in the labor market and ultimately affect employment prospects for young graduates or those who plan to change their profession.
At this stage, with your team of supporters ( you should treat with them as there are the most eminent consultants in the world!), you need to identify the 5-7 major sources of risk, visualizing them for your own understanding and for future discussions with your colleagues. Alternatively, you can use various ready-made templates from textbooks or from online websites or tailor existing templates for your specific needs.
Measurement to manage risk
After identifying risks and the sources of risk, the next important step is to develop measurements and hierarchies of risks. Here again, you can find many templates, schemes, and outlines for measuring risks in various textbooks as well as on various professional webpages. I usually suggest a traditional and well-tested approach that offers a hierarchy of five levels:
1) Critical risks
2) High risks
3) Moderate risks
4) Low risks
5) Unexpected risks
This hierarchy of risks helps you select priorities, and think about your actions and activities to discuss with your colleagues at your next get-together. For instance, there might be many low-risk areas or many critical risks. As my colleagues say: “you are half-ready already, if you know and measure your risks in advance.”
It is important to highlight the 5th element – unexpected often catastrophic events that are almost impossible to predict, or “Black Swans.” The author of the “Black Swan Theory” Nassim Taleb discusses not only how to identify the sources of these events but also ways of dealing with major high-profile events and cataclysmic changes. The best strategy is to consider in advance where and how you can safely retreat in the case of a Black Swan event. It is not that you are always thinking about catastrophic events, but you should dedicate at least one percent of your time and one page in writing on your bridgehead about where you can safely retreat before charging forward again!
Evaluation of your risk management strategy
The next stage – working on managing risks – leads you to the very important step of making decisions on how you plan to organize an appropriate risk response approach and develop your strategy. In this context, it is essential to evaluate your options and your actions in order to develop an appropriate risk management strategy. A simple way to develop your options can be reflected in a table that I call “DARS”:
By now, you have probably identified your risks and detected the sources of risk. Therefore, you now know what kinds of risks to expect and you should be ready to move forward by selecting an effective strategy and organizational procedures for dealing with each one. For example, you can choose to simply dodge certain risks if you have no adequate financial or human resources. Or you can reduce the possible impact of some risks by sharing them with other companies or SMEs.
Mitigation of risks
Clear understanding of risks and developing instruments for dealing with them brings us to the next step in our risk management strategy. Usually, experts divide risks into two categories:
• Risks that can be prevented; and
• Risks that can be mitigated.
For example, we can identify some risks that can be prevented. Let’s take an example from my experience with preventive measures: setting up an international exchange for my graduate students, colleagues, or startupers at a foreign company or university. There is a risk that a company or university will reject or be unable to accept the visiting students or colleagues. Option one is to find an additional 3-4 universities or companies and to apply to all of them (dream company/university, good company/university, and sure-bet company/university). Option two is to analyze the requirements of the company and/or university and improve your knowledge of the subject or specific business.
On the other hand, risk mitigation allows you to select some measures to reduce the negative impacts. A good example is the restrictions related to COVID-19. Many of my colleagues and graduate students managed to mitigate risks by learning information communication technologies (ICTs) including elements of online education, and by creating the technological groundwork in a home office (good internet connection, home computer, printer, and other ICT equipment). Thus equipped, they were ready for risk mitigation.
Monitoring risk management activities
The final step in the implementation of your risk management strategy will be easy once you have conducted all the previous steps: identifying risks and their sources, selecting your instruments, and establishing your very own monitoring system. The first step is to select the horizons of monitoring: short (3-6 months), medium (12-18 months), and long (30-40 months). Modern approaches to risk management suggest the importance of visualization of all the materials related to your risk management strategy: this could be on paper, in electronic format, somewhere in the cyberspace cloud, or on social media outlets. A visualization format will make it easy to monitor the risk dynamics and your actions in preventing and/or mitigating risks. As I usually say to my students: “Success is the ability to move from risk to risk, not staying paralyzed in one place!” Indeed, studies published by Harvard Business Review (HBR) suggest that taking risks and the ability to effectively manage them is part of the organizational culture of many successful companies, as very often they turn risks and challenges into new opportunities.