Benefits of Risk Management, Risk Management Frameworks - Assignment Example

Question 1: What is risk management; why is it important; what benefits does it offer organizations? Risk management continuously helps to identify, assess and prioritize the taking of calculated risks for business ventures. Risk management constitutes a significant aspect for business planning and is intended to decrease or even do away with the risks associated with a certain form of business events having a negative influence on the business. Risk Management coordinates the economic application of resources to minimize the probability of losses by trying to control adverse events and also to maximize the fulfillment of positive opportunities Aims and objectives with regards to methods and definitions differ extensively as to whether the risk management procedures is because of project management, security issues, production issues, industrial procedures, financial upheavals and irregularities, insurance assessments of because it affects public health and safety. Importance of Risk Management Risk Management is extremely crucial because it helps the decision making process regarding viability and competitiveness between organizations. It also helps in the creation of value which is the main factor to manage the business better in global markets when all organizations have equal access to available resources because then business processes to congregate on international standards. Operational efficiency can be increased by having plans for risk management already in place because it enables a business to do more for less. This means putting aside resources from regular expenditures in making strategic investments which will support company goals. A large percentage of the budget is spent on keeping the business running. Progressive organizations must have contingency plans to develop and expand resource deployment and implementation which will spare resources to concentrate on risk management strategies. [Mes10]. Benefits of Risk Management Risk is always associated with insecurity and improbabilities with the possibility of things not turning out as expected. The benefits of risk management are that the organization is fully prepared for such eventualities and has a mechanism in place to handle risks and minimize losses. It is not possible to totally eliminate all risks, so good risk management develops awareness of risks when times are good, and perpetuates regulations and self-control during crises [Raz01]. The benefits of risk management can be both long and short term. Accordingly, each stage of risk management efforts beginning from risk identification and evaluation and formulating alleviation or improvement strategies has its own benefits [Mil92]. Question 2: Compare and contrast Management of Risk with another risk management framework (such as that offered in chapter 7 of Project Management by Larson and Gray), highlighting the similarities and differences between them. Risk management is a comprehensive subject within which different frameworks. Each framework is aimed at providing complete guideline for the risk management in different disciplines. Two of such frameworks include Management of Risk framework (M_o_R) and New Framework recently developed by the Harvard Business Review. The assessment of similarities and differences is as conducted as follows: SIMILARITIES Both frameworks are developed for enabling business for conducting informed decisions for the effective decision making and risk management. Both frameworks of risk management are applicable to all types of organizations. These can be applied on the strategic, project and operational level for the effective risks management. Both frameworks recommend the incorporation of framework elements across the strategic level to implementation phase in an interconnected manner. The stakeholders of both frameworks involve organizational members all levels such from strategic to operational level. Both framework mandates consistent application of the process to ensure the effective management of risks. Both frameworks mandate the application to be adopted in an adaptive manner with respect to the organizational needs. Without adaption, none of the frameworks can be used in full potential. DIFFERENCES As a matter if fact that both decisions are aimed at providing organizations for the effective management of risk; however, frameworks also differ in some perspectives: The M_o_R is the route map for the effective management of risk within an interconnected model of principles, approach and processes that lead to the comprehensive and specialized technique of risk management. On the other hand, HBR’s risk management framework insist that risk management framework at the initial phase requires developing qualitative distinction among the type of risk faced by the organization. The difference in systems is determined in the graphical representation of the framework presented below: (MoR, 2007) (Kaplan, & Mikes, 2012) The   M_o_R framework requires implies that similar framework can be applied across the board to all types of risk management. These areas of application include that risk management on strategic, organizational, project and even to the operational level. Framework of HBR states that depending upon the type of risk, the decision shall be made pertaining to adopting rules based risk management approach or the alternative approaches. Hence, both frameworks are comprehensive in their respective places. As a matter of fact, it is crucial for the organization to apply the guideline of taken framework in full for the effective success in risk management in an organization. Question 3: Risk management frameworks are good for identifying, monitoring and reporting on risks; they are not so useful for exploiting opportunities and mitigating threats. Discuss. The identification of risks is important because it categorizes risks that could affect the unimpeded progress of the project undertaken including the remedial measures that must be taken for risk alleviation or elimination. The risk factors can be assigned to individual members of management who will monitor the risks throughout the development process to enable them to allocate appropriate resources for alleviating the risks and obtaining feedbacks for analysis, alleviation, appropriation of resources, monitoring and updating records in the project document [Cha89] Risk monitoring, updating and reporting envisages the identification of new risks and effective measures for risk treatment. This is achieved by monitoring risks systematically and implementing lessons or information for resource allocation and risk assessment. Risk monitoring, updating and reporting process throughout the length of the project and this takes place after planning for risk alleviation and the allocation of appropriate resources to prevent any risks from harming the project. Risks usually change as the project progresses and in different phases of the project, continuous monitoring and reporting is essential [Boe02]. Because risks can crop up anywhere and very unexpectedly, and risk managers might not be involved in the work process, there should be clear guidelines for all team members of what constitutes a risk that should be reported immediately. It is imperative for project managers, stakeholders and risk officers to work in partnership for creating and implementing secure methods if team members wish to remain anonymous when reporting risks if it can be a source of work related or personal embarrassment. Risk reporting depends upon project objectives with which to develop reliable and all-inclusive reporting procedures, scrutinize risk and emergency declarations and provide feedbacks after analyzing alleviation procedures for future risk evaluation and distribution of resources. Reporting on risk reporting should have policies to identify new risks. Teams that have cohesive policies for liability and responsibility while respecting privacy will do great with an anonymous reporting procedure to avoid project errors and delays on performance and not for organizational politics. When team members believe that their reporting on risks is taken seriously by the management, they report risks and therefore help the organization to avoid mistakes and execute the project in the best manner [Slo93]. Question 4 Discuss the merits and shortcomings of using the expected value of all open risks in the risk register as the measure of risk exposure. Are there other risk exposure measures which are worth considering? Risk management has taken an important place in the contemporary business organizations. Different methodologies are determined for the assessment of level of risk exposed to the business. Each of the methodologies has merits to offer while they are also complimented with the short comings as well. Some of the advantages and disadvantages of such measures are referred below: ADVANTAGES The methodologies provide concise determined roadmap or system for the risk. Such systems provide concise results about the type and level of risk exposed to the business. Hence, conciseness is the main advantage offered by these firms. Most significant impact from risk is the financial loss posed to business if the risk is not dealt effectively. Therefore, measurement in terms of the financial impact makes risk framework more workable. Risks frameworks enable business to identify the opportunities that can be generated by transforming the risk factors or threats to the business. Risk exposure techniques are a range from simple to complex methods. For instance, M_o_R framework is one of the recommended measures for assessing the level of risk exposed to the business. DISADVANTAGES Most of the risk frameworks are concerned with dealing with the financial impact of risk failure. These frameworks ignore the other potential devastating impacts such as reputational loss and other risks. Competency, data, resource, environmental and other factors which are gaining increased importance on the contemporary business world are still less adhered in these frameworks. This forms one of the biggest shortcomings of these systems. Employing comprehensive and complex systems that account all factors of concern requires extensive cost and expertise involvement which is often beyond the control of most of the organizations. Hence, limits the use of other frameworks. OTHER POTENTIAL MEASURES Larkin (2003) has declared the strategic risk shall be considered as most critical for the organization, and strategic map shall be employed for the comprehensive assessment of strategic risks posed to the organization. Similarly, Kaplan and Mikes (2012) from Harvard business School has developed more comprehensive alternative system. The recommended system determined separate framework for the three different types of risk posed to an organization which are preventable risk, strategic risk and external risk. The system has clearly defined the objective, role of staff and relationship with other business functions. The above defined alternatives are just two to determine. Project management disciplines have also determined their respective framework for the risk management (Phillips, 2006). Hence, frameworks are better that are able to accommodate the increased number of factors that affect the business. Question 5 Risk management frameworks, such as Management of Risk, are said to improve risk management. How does Management of Risk help to better manage risks? Discuss some of the ways by which its principles, documents, processes and techniques help organizations to improve their performance. Planning for Risk Management prepares a person for any unexpected business reversal due to unanticipated setbacks caused by unfavorable circumstances or disasters. Due to the progressive of businesses all over the world, the risks of failure due to unexpected reasons are greater than before. However, when an organization has taken protective measures with planning it is not caught unawares in cases of emergencies. This spares management for more productive tasks such as ensuring better marketing resulting in increased sales. With risks covered and not creating problems, management can concentrate on improving things within the company to encourage employee productivity. [Stu96]. When all risks are covered with thoughtful planning, it increases the probability of the organization achieving its set targets because of equitable allocation of resources to meet just such eventualities. This envisages more efficient use of resources since using a systematic decision making process. This helps to address important fundamentals which of course help to make better and logical decisions. The proper managing or risks in corporate practice is extremely crucial, especially for projects that are being carried out simultaneously in different locations with large amounts of investment. Proper risk management strategies enable the prevention of inordinate losses resulting from unfavorable setbacks, natural or unnatural. This includes political upheavals, default of financers or partners, regulatory penalties and any natural disasters such as storms, earthquakes, floods etc [And05] Identifying probable future risks is the most important aspect of the risk management process. This helps in the inclusion of risk factors at the beginning of the project which later helps a great deal in alleviation strategies. This means that risks are identified and provided for in a planned manner without having any affects on the overall result of the project. Another very tangible benefit is that all probable risks are analyzed and listed. Analyzing probable risks is quite important for removing mistakes and inconsistencies from the beginning of the project. Risks do not necessarily have to be negative because there are positive risks and assumptions that were not included in the initial planning during the identification process are often recognized later, and the organization can implement suitable measures to convert these “positive risks” into benefits. Such opportunity risks have a positive effect on the overall project or business. This in essence reduces or probably eliminates risks while generally increasing the profitability of the project [Lel98]. Question 6 Compare and contrast the risk management process in Management of Risk with that of another risk management framework (such as that offered in Project Management by Larson and Gray). How important are the differences for users of the two frameworks i.e. how different are the two frameworks likely to be in use? M_o_R framework is developed to provide a complete network of interconnected activities across the broad irrespective of the type of risk. Contrary to this, framework from HBR requires to identify the type of risk necessary for defining the system that shall be applied for the management of risk (Kaplan, & Mikes, 2012). Consequently on the basis of the type of risk different models of control are determined. Such as integrated model and culture of compliance is effective for eliminating internal risk. Strategic risks require an organization to determine system for reducing the likelihood of the risk as well as for reducing the cost and impact of such risks. Similarly, risk arising from the external environment is required to be dealt with more comprehensive assessment even by employing sophisticated systems. Furthermore, each type of the three categories defined in the HBR risk model requires different functioning from risk management staff. Furthermore, while different process for each category of the risk is determined in the HBR model, the M_o_R framework is concerned with the simple two levels of the process which are input, output with respect to activities that are related for the identification of risk, assessment of risk which finally moves towards the final level of control of risk. Hence, M_o_R framework leaves an open ground for the organizations for the adoption of the framework for respective organizations. The simplicity of the system of M_o_R framework and the complexity of the concrete system of HBR framework entails the differences for user. The difference for the users is significantly important as components of HBR model require users to develop a wider range of capabilities with respect to type of risk. This would then results in employing increased resources in terms of cost, time, expertise etc. For example, stress testing and war gaming are m complex techniques and requires understanding of sophisticated systems. Contrary, M_o_R framework requires following defined route of principles and systems in risk management. Hence, use of each HBR model is more of a complex set of activities while M_o_R framework enables the risk mitigation by following wheel of interconnected activities. Furthermore, former model is concerned with the mitigation of risk by using described procedures while latter model requires the user to have a complete system where not only risks are mitigated, but a complete report card for the system is developed. Question 7 Where organizations conduct risk management, they tend to focus too much on threats and not enough on opportunities. Discuss. Evaluating and analyzing risks is an important part of any project planning. This enables to identify each risk and then characterize it with its own specific qualities. These characteristics include the probability of incidence(s), suggestions/proposal to curtail risks and the role of stakeholders in the project. Every probable risk is linked to a business function or procedure and the person or department responsible for facing said risks and implement procedures such as policy changes and the setting up of contingency plans. When the risk descriptions have been put into final form, classified, ranked according to the importance and evaluated, they are then implemented and monitored accordingly [Luf02]. Question 8 There is said to be an inverse relationship between the number and severity of threats a startup faces and its valuation (the more threats a startup has, and the more serious the threats, the lower its valuation). Discuss why this should be and what entrepreneurs can do to reduce the threats. In most cases, risk management plans for exploiting opportunities and alleviating threats. However, that may not always be possible in certain circumstances such as realizing too late that a probable risk could have been turned into an opportunity to profit from it. Team members are not all on the same page regarding project goals, the implemented strategies and operational systems do not provide a structure for evaluating the significance of the information. Opportunities might be also lost when individuals on the team are not empowered to act quickly for assessing the opportunity. Accepting that risks go with doing business and people will make mistakes. The best way to alleviate such mistakes is to have effective risk prevention measures in place. Opportunities could also be lost when there are no predetermined ways of collecting information assessment. This does require an emergency plan to offset unanticipated risks so that the opportunity can be exploited to obtain maximum advantages [Dic86]. In the same way that planning for probable threats is important, mitigation or risk alleviation has equal importance. Threat mitigation is only effective if the organization analyzes and evaluates the true of the risk and then acts quickly to either eliminate or at least minimize the effect of the risk that has to be tackled. Speed of action is also a powerful factor in risk mitigation. Other factors include empowering team members to report risks either personally or anonymously so that corrective action is possible in the shortest possible time. Obtaining insurance to cover losses because or risks is another important factor in threat mitigation. Creating and implementing sound policies and procedures and including them in the initial strategic planning also helps greatly in threat elimination and mitigating. Since risks and threat are all part of doing business and undertaking projects, the most important thing is to anticipate threats and the best way of either eliminating or alleviating them [Hil02]. If the management wants to encourage reporting of risks by any member of the team, then even anonymous risk reporting must be encourage to enable the organization to create contingency plans. Sometimes, arriving at decisions that will benefit the organization is not as simple as it seems. When making a decision, the decision makers should ascertain that they know all the facts about the effect of their decision before they make and implement it. Some facts may be more complicated than others and have to be given a great deal of thought because the consequences of the decision might increase the risk associated with any project. However, before implementing any decision it would be prudent to consider other viable alternatives that could have better consequences for the organization. When alternatives are thoughtfully considered, the risk to be taken is viewed from a deeper perspective and the problem is viewed from many different angles. Any decision will invariably affect and involve other people within the organization, so it would be worthwhile to get their feedback about what they think about the decision that has been made. With all these probabilities, the best way to make a successful decision is to use clear-cut and uncomplicated procedures as they will help to produce dependable outstanding results which will improve the quality of decisions made and implemented. References Mes10: , (Mes 2010), Raz01: , (Raz and Michael 2001), Mil92: , (Miller 1992), Cha89: , (Charette 1989), Boe02: , (Boehm 2002), Slo93: , (Slovic 1993), Stu96: , (Stulz 1996), And05: , (Anderson 2005), Lel98: , (Leland 1998), Luf02: , (Luft and Fatime 2002), Dic86: , (Dickson and Giglierano 1986), Hil02: , (Hillson 2002), Read More