The risk management process: stages, purpose and methods

The level of development of engineering and technology, the introduction of a large amount of information dictates to the business high standards of quality of services and manufactured products. If such requirements exist, it is necessary to take into account all critical factors in the design, development and implementation of processes, including the risk factor. An entrepreneur needs to use all possible methods in the arsenal of risk management in order to minimize them.

Concept

The risk management process is the adoption of decisions and the implementation of actions that contribute to the achievement of an acceptable level of security by an enterprise. In practice, this action is identified with diagnostic processes and risk minimization, the purpose of which is to ensure stable financial results and create conditions for further development.

goal

The objectives of the risk management process are as follows:

• organization survival capabilities;
• business continuity;
• maintaining profitability;
• stability indicators;
• continued growth.

These goals need to be formulated before the risks begin to manifest. Due to the tasks set, it is possible to decide on measures to prevent the impact of threats on the company’s activities.

Organizational Process Basics

Consider the basic processes of risk management in enterprises.

It is impossible to implement a single top-down scheme that would take into account each situation when making and implementing business decisions. The repeatability of the risk management process does not mean that the actions at the individual stages will be identical. They use statistical methods that, in combination with knowledge of financial instruments, can manage risks and allow for effective preventive measures.

The organization of the risk management process is associated with the creation of control procedures that constantly monitor the impact of previously identified hazards on the activities of the entrepreneur. Paying active attention to risk, he can determine one of the alternative approaches to the problem, choosing between physical risk control and financial control.

Stages

Consider the main stages of the risk management process in companies in the form of a plan, which should be part of any project. It should identify all potential and actual hazards, determine the likelihood and weight of each risk, and propose mechanisms for resolving problems. The plan identifies those responsible for crisis management. Activities required for risk planning include: risk identification, risk assessment, and the creation of a risk management table.

In this case, a plan is a set of actions whose purpose is to force the manager to create and organize a risk management process. It should also lead to the formation of a certain infrastructure. Its tasks include actions aimed at preparing alternative ways to solve the problem, isolating, reducing and eliminating the risk, if possible, determining temporary and monetary reserves for security purposes from threats that may arise during the planning of project goals.

In the planning process, the necessary source materials are the organization’s risk management policy, a plan template, a breakdown by work, a register of employee responsibilities and roles, a project card, a guide to acceptable risks.

The above source materials should be used when creating a risk management plan. It should include a methodology that identifies the tools, methods and data sources that are important for process control. When creating a plan, a description of the roles and responsibilities of employees and organizational groups is carried out. In addition, it should contain the overall project budget, a list of terms. Risk management activities should be described in detail at all stages. It is necessary to reflect the system for assessing undesirable events of the project and the criteria that determine the time to complete the procedures in relation to the emerging risk. The last step that should be included in the risk management plan is to create documentation and monitor risks during project implementation.

Table example

The stages of the risk management process are presented in a specific example in the form of a table.

Table creation

The risk management process system can be represented by the formation of a special table with a risk management plan.

The source for creating a table in the form of a plan is a list of individual risks, where each of them is described in a certain line. Next, they establish the weight of a particular risk, the probability of its occurrence, determine the level of risk tolerance, calculate its impact on the project and determine the amount of risk.

The table below shows an example of a risk management plan.

Other actions that must be followed in the process of implementing the plan:

• Formation of preventive measures: definition and description of actions to prevent this type of risk. Of course, it is often impossible to avoid it, but in some cases it can be prevented.
• Identification of persons responsible for preventive measures. Such a person should be described in detail.
• Definition of a crisis scenario: if there is a risk, it is necessary to minimize its consequences. That’s why it’s important to always have at hand a script of what needs to be done to gain control over the risk.
• Identification of the employee responsible for adhering to the crisis scenario.

Below is a table of risks.

Rating

Assessment and risk management processes characterize the main methods.

Each method includes common elements. These include: hazard identification, assessment of the likelihood of potential threats and losses that it can bring. This applies to both business and the social sphere. Regardless of which method or strategy a company chooses, information should always be collected to help determine and develop an optimal risk management methodology. Each of the risk management processes consists of four successive stages:

• risk identification;
• risk measurement;
• risk control;
• monitoring and audit of risks.

The following methods are used to assess risk:

• Sensitivity analysis is a simple tool, which consists in studying the impact of changes in the benefits and cost of the project, the discount rate. This analysis is used to determine the sensitivity of the results of evaluating economic efficiency to changes in various variables. It is an important tool to reduce the risk of decisions made in a market economy, in particular, it can affect the profitability of investments. The future cannot be predicted for sure. The cost of each change included in the investment plan will deviate from these assumptions. The main feature of this analysis is the calculation of the turning point, which means that the cost of the product sold will become equal to income.
• Risk analysis based on the so-called decision tree, which determines the interdependence and possible results depending on the choice of procedure. For example, buying a very expensive device at a price that allows you to perform work faster for several days or doubles the rate for overtime work. We start with the initial event and, in turn, present possible sequences of events. We get the probability as a result of the product of the probabilities of all the events created on the tree.
• SWOT analysis, that is, analysis of strengths and weaknesses, threats and opportunities for working on a project. It is especially useful in situations of change in the project environment. The name of the method comes from English words (strengths, weaknesses, opportunities, threats). It is used as a universal tool for the first stage of strategic analysis. It allows you to use the collected information to develop a strategy based on strengths and opportunities, eliminating or reducing weaknesses and threats. This is a very old and primitive technique regarding the analysis capabilities of today.

Each risk is inextricably linked with knowledge of the specifics of a given event. The analysis indicates the specific causes of the threat and the associated losses. This allows you to determine whether this disaster is a consequence of certain laws. As a result, it is possible to limit the amount of losses or maximize profits if benefits from such events can be obtained (for example, profits from the sale of individual insured instruments). On the basis of which financing methods are determined where economic losses are possible, and risk management methods are selected.

Risk Management Process Analysis

It is carried out in three key areas:

• Is it possible to improve the risk assessment process in order to better predict and recognize risks.
• How to adapt risk management actions to changing business goals.
• Is it possible to improve the coordination of the teams responsible for risk and the control of their work.

How to manage

Project risk management processes are often considered in project management concepts. In recent years, the concept of project management has been widely developed. Many companies today operate on the basis of this concept. Therefore, the PMI (Project Management Institute) conducted a detailed analysis and divided the risk management in the project into six stages:

• Prepare a risk research plan for a specific project. It is recommended to carry out the appropriate procedures: select the necessary documentation and techniques.
• Risk identification - determination of the actual state and factors characterizing the risk of the project.
• Qualitative risk analysis - includes an assessment of the significance of threats that may arise during the implementation of the project. Statistical surveys of factors can also be used, although they are usually included in the next stage.
• Quantitative risk analysis - focuses on conducting probabilistic measurements in the field of occurrence of individual risk factors. This probability can be considered as objective or subjective.
• Risk Prevention Planning. The main goal is to create a plan aimed at preventing or limiting potential risk. The main attention is paid to the development of appropriate methods and material means of protection against risk factors.
• Monitoring and control of risks. It consists of two aspects: forms and implements a risk management system; consists in carrying out preventive and supervisory measures covering this project.

Features regarding financial risks

Consider the process of managing financial risks in the enterprise.

This is the area of ​​management that is dedicated to creating value through the appropriate use of certain financial instruments to reduce the company's risk.

Work with financial risks is part of the enterprise’s risk management activity, which consists in determining, evaluating it, and also in planning measures to reduce it. Risk managers focus on using financial instruments in a certain way and at a certain time to limit the enterprise’s exposure to risk, which can be very costly for it.

The financial risk management team consists of specialists in the field of financial markets, experts in quantitative methods and financial engineering. They have extensive knowledge in the field of accounting for financial instruments, as well as international norms and standards.

Control procedures

The risk management process implies the existence of control procedures that are based on decisions and actions of people within the organization, supported by the measurement of specific risk factors. Using statistical methods, the probability of damage is completely eliminated. There are two methods:

• a way to avoid risk: it performs a preventive function;
• work on risk reduction - is undertaken in order to try to reduce the frequency and size of potential losses.

The first method is the main one, able to reduce potential losses caused by the influence of risk. For this purpose, long-term strategies are applied that are passive, but require huge costs.

Risk reduction is applied when introducing the latest solutions and creating more durable technologies.

Financial risk control allows managing risks within the enterprise (retention) or transferring it outside. The simplest solution - to stop the risk at the enterprise - is not associated with additional initial costs, so the temptation to widely use the method is very strong.

Conclusion

Elements of risk can be observed in almost all areas of the company. It is not a random quantity and depends on the action of many factors on the company. For its development and stabilization, the proper organization of the risk management process is necessary in order to maintain profitability and increase profitability in the market, as well as the formation of competitive advantages.