Risk Management for Organizations - Assignment Example

Risk Management for Organizations Name Institution Name Course Name and Code Instructor’s Name Date I. Introduction The workplace is one of the places in which exposure to risks is more likely and frequent. Different workplace scenarios attract different kinds of risks, but all the same, exposure to risks is certain regardless. Therefore, it makes it necessary that every organization put in place a viable risk management policy that will help in keeping exposure to risks at a minimum (Crouhy, 2001). For such a policy to be put in place, identification of the potential risks must be first done. When the risks are identified, they should be assessed from every context, as this assessment will enable risks to be correctly categorized and correctly prioritized in the risk management policy of the organization. When the policy has the right priority, the risk management process begins, where risks are controlled, minimized and/or prevented from occurring. Risk management measures are not only meant to work for those working within an organization, but they should also cover the organization’s direct consumers and also those indirectly influenced or affected by the organization’s operations (Haslett, 2010). This report seeks to study and underline the saving of costs when correct risk management measures are put in place. It hypothesizes that an organization that has appropriate risk management measures in place will experience higher productivity and better operation. Though risk management is done for many parties (both within and without the organization), this report puts the organization’s employee as the main priority in risk management, and it classifies the employee as the most exposed to risks in an organization that any other party involved. The main aim of this study is to find out and analyze the cost saving or economical impact of risk management to an organization. Also, this study will seek to answer the following research questions: How do risk management measures benefit the organization/ What risk management strategies can an organization implement? How can superiors communicate safety in the workplace? What are the cost saving advantages? II. Definition of Risk Management As the name suggests, risk management involves evaluation and identification of the potential risks, which is followed by designing methods by which these risks will be avoided or exposure to these risks will be kept as lowest as possible. The first step in risk management is accepting that there are unpredictable or predictable but unavoidable situations expected in any investment (Levich, 2002). The second step, which is the practical step of risk management, is moderation of the potential risks and the effects thereof. Risk management is an essential part of an investment’s decision making process, and it sometimes occurs involuntarily or without the awareness of the investor or owners of an enterprise. One of the ways though which risk management is done is when the manager, in his financial planning, gives room for any unforeseen losses that can occur in the business. Also, risk management is involuntarily done when consumers or organization buy shares and bonds, because they first assess the risk level of what they are about to buy before making any investments (Allen, 2003). Banks also do risk management when they incorporate a lengthy process of individual financial analysis before granting loans or mortgages to individuals of companies. Every investment has its objectives, and it is these objectives that act as a guideline to the right risk management policy of the investment. This, therefore, means that a potential risk to one investment can be totally risk-free for another, based on the objectives of each investment (Das, 2005). 1. Why is Risk Management measures critical of management? Risks may or may not occur in the process of running an enterprise. However, it is important to have a risk management policy in place, because this will provide a leeway for handling the risk if they ever occur. This is as opposed to rushing the last minute when the risks have already happened and affected the investment. Having a risk management policy in place, therefore, gives the business advantage and control over the potential risks. Also, it provides the enterprise with a variety of routes through which it can escape in case the risks occur. Having variety means that the business will always be in a position to choose the best method for each time risks occur (Jorion, 2007). Managers of an investment need to have the best risk management practice, as it enables them to choose the best insurance policies for their enterprises. Also, a good risk management policy enables them to make the best purchasing and selling decisions for the business. What’s more, risk management is priceless when it comes to human resource management, because it helps in making decisions on hiring, training, compensation, workplace relations, incentives, motivation et cetera, bearing in mind that the labor force of an organization is its highest and most important resource (Jeynes, 2002). A. Types of risks In every investment or organization, there are different potential risks, and this means that risk management policies can never be exactly the same for different organizations. Each risk management policy should be designed according to the type of risks involved. Each business faces different combinations of these risks, but there is no one business that faces only one of these risks. It is also important to note that it is not only the business that is affected by risks, but every party directly or indirectly linked to the business is also affected by different types of risks accordingly (Gallati, 2003). Other parties include investors, sponsors, consumers, employees, suppliers, distributors et cetera. The main types of risks faced in risk management include strategic risks, compliance risks, operational risks, financial risks, political risks, environmental risks and human resource risks (Crouhy, 2001). Strategic risks occur in different ways. For instance, it occurs when a business is placed in a place that is not strategic, either in the market or geographically. Also, strategic risks may occur when another business or enterprise places itself (in the market or geographically) in a way that causes it to have higher competitive advantage and sustainability over this present business, causing it to face the risk of low returns or losses (Levich, 2002). Compliance risks, as the name suggests, are risks that occur when the business is expected by a regulatory body, the press or the government to comply with certain regulations or legislations. For instance, a company that specializes in manufacturing plastic bags for packaging may be faced with a compliance risk when the government or regulatory bodies come up with a new regulation that plastic packaging in shopping malls and convenience stores should be done away with (Allen, 2003). Operational risks mainly and directly affect the equipment used in the business’s operation. For instance, a manufacturing company may face the risk of vital production equipment breaking down. Also, a business specializing in film production and video editing may face the risk of vital recording or shooting equipment being lost or stolen (Gallati, 2003). This slows down normal operation of the business, hence the reason why it is called an operational risk. Financial risks are mainly associated with credit and loans. For instance, customers may delay payment for goods or services given to them on credit. Also, a bank may hike a loan rate (especially for rates that are not fixed), causing the business to end up paying more for the loan that what was planned for in the first place (Jorion, 2007). Political risks occur when the country in which an enterprise is operating becomes politically unstable. This may interfere with the supply chain and with the normal operation of the enterprise, thus causing it not to be profitable. Also, if the business exports some of its goods or services, it may be affected by political instability of the destination country. Environmental risks mainly involve risks that occur as a result of natural processes of the universe. For instance, a beach hotel has the environmental risk of tsunami, more than a hotel in the city center has. Human resource risks are wide, and they range from insufficiency of employees to expenses of training them to occupational health and safety issues (Gallati, 2003). B. Strengthening the obligations of the Risk Management An organization has different levels, and each level is managed by a person. Each manager of different levels of the organization should be actively involved in risk management. This can be done by ensuring that they are given information that is useful to them in managing the risks at their level of operation. Accountability checks and performance checks should be done to ensure that they are doing the very best in ensuring that the areas they head have the best risk management procedures going on (Haslett, 2010). 2. Risk Management measures techniques. Every organization has to secure itself from the potential risks by having in place the best risk management practice and techniques. These techniques do not have to be complex for them to work; they can be simple yet effective and efficient. First and foremost, the risk management technique should be broad. The business should not look at the potential risks from a limited angle. Having a broader point of view enables the risk managers to devise a measure that is also broad and relevant to many risk situations. Secondly, each business should ensure that it has a system or a database that runs the business, and that this catalog is secure. This is because if an organization’s database is tampered with, it faces the risk of its secrets being exposed to its competitors; it faces the risk of a breakdown of systems and loss of liquid money. Since a number of employees of an organization have access to the organizations’ database, it should be ensured that no employee can have access to the database unless they provide some form of personal identification. This process should be automated to eliminate human errors and bias or corruption (Crouhy, 2001). III. Incorporating useful Risk Management measures on a day-to-day basis. Consistency in risk management is of utmost importance in every organization. However, studies show that most businesses fail because of the inconsistency noted in the way they identify and evaluate risks, and in the way they design and implement the risk management policies. Overall managers also sit back in the comfort of believing that their organizations have the best risk management practices going on, especially because the monthly or annual reports given to them by other managers under them look perfect and in order. It is usually a rude shock to them when the risk becomes a reality and it occurs to them that they had never been prepared to handle such an occurrence. Risk management, therefore, should be done consistently without any assumptions or routine. For this to be possible, the following risk management measures should be employed accordingly (Jeynes, 2002). 1. Enhance efficiency Efficiency in any business is very important, whether or not the business is established. There is no limit to the level of efficiency a business should attain, but the level of efficiency should never be lower than that of the business’s competitors. If the competitors have higher efficiency than a certain business, then it means that the business’s has no sustainability and that it cannot stand the competition for long. A measure of how efficient a business has become is the cost of production; a highly efficient business is able to cut on the cost of production, thus increasing its profit margin. Such a business is able to sell its products for the same price as its competitors, thus making more profits than them, or it is able to offer its products at a lower price, thus increasing volume of sales. Another way of measuring the efficiency of a business is how much its resources are used. Higher efficiency means that all of the resources are used frequently and fully, and low efficiency means that some of these resources (machinery or human resource) are at times unused due to lack of tasks (Allen, 2003). 2. Boost employee awareness Employees can not give maximum output if they work in an environment that does not give them a sense of satisfaction, security and appreciation. One of the ways through which such an environment can be created in the workplace is by creating employee awareness in different areas, both work related and those not related to work. For instance, one issue that is not directly related to work is domestic violence or marital issues, yet this issue greatly affects how an employee performs (Jeynes, 2002). Therefore, the best way an organization can create awareness is by educating and inviting people to educate the employee on such issues. Also, the organization should train the employees how to deal with or how to help a fellow employee who is affected by such issues (Haslett, 2010). Another area in which employee awareness should be created is in the organization’s policies and code of conduct or ethics. A method should be created by which the employees are constantly and consistently reminded of the important policies of a company and its ethics. This way, risk management becomes easier, because employees will be more careful in their actions at the workplace, meaning that very little room is left for accidental occurrences (Smithson, 1998). 3. Gain financial control There is no better way of having efficient risk management than to gain financial control. Financial control enables one to be more in control of the outcomes of a particular situation than when one is not in financial control. It is not advisable for an organization to throw all its financial management tasks to a stranger (by outsourcing); it should first take control of its financial planning before letting a third party in. it is impossible for an organization to have financial control if its budgeting practices are poor. When an organization knows how to do budgeting, then it gains financial control very easily because it ensures that it never spends more than what it gets (Haslett, 2010). 4. Improve communication Most of the risks in the workplace occur because of poor communication within the working environment. Therefore, risk management cannot be fully effective if communication in the organization is not improved. First, managers need to improve the way they communicate to their employees if they ever have to experience efficiency in the workplace. A growing distance between the management and the employees is in itself a great risk factor. For communication to be improved, managers should try as much as possible to use face to face meetings rather than electronic communication. Electronic communication should only be used when the information being conveyed is somewhat based on fact. However, when the message being communicated involved explanation of a certain point of view or when the message has some level of emotion in it, then there are only two options; face to face meetings or a personal and interactive phone call. The second option should come as a very distant one from the first, meaning that face to face meetings are the best (Smithson, 1998). Managers should also ensure that more meetings are held, because this improves interaction between employees and it also gives them a sense of belonging in the organization ad in any decision making process of the organization. Good communication can only be achieved when more listening than talking is done (Jeynes, 2002). In the conventional methods of management, it is the manager who calls all the shots in the workplace, and the employees are mere subjects who run at the command of the master. However, those days are long gone, and there is no way a manager can get the best out of his employees by being bossy; a listening ear is the best medicine. Therefore, employees should be allowed to talk, and the managers should train themselves to listen sincerely and carefully (Haslett, 2010). IV. Developing a safer workplace A workplace that is not safe is likely to have more risks and accidents happening than that which is safe. A workplace that is not safe creates a thriving atmosphere for accidents and losses to occur, and this is costly in time and resources (human resource and material resource), thus putting the organization at a high risk (Dempster, 2002). Every organization should meet the Occupational Safety and Health Administration (OSHA) standards despite the number of employees it has. An organization should also create a safe working environment by complying with any regulations set by government bodies or agencies. This way, health and safety risks are minimized. Also, it may seem obvious, but creating a safe working environment also means that employees should be given safety manuals. Domestic violence and abuse should also be taken seriously for the work place to be safe. Creating drug and substance abuse awareness also ensures that the workplace is safe (Smithson, 1998). 1. How does the organization raise employee awareness? One of the basic steps in creating employee awareness is by creating employee self-awareness. This can mainly be done using performance management, where the employees are allowed to gauge their performance over a period of time in comparison with fellow workers. Good performance management will always create employee awareness and cause them to give the best output, thus helping greatly in risk management (Horcher, 2005). Employee awareness can also be created by educating them on technological matters that affect the organization. For instance, the employees should be trained and made aware of malicious software, adware, spyware and viruses that they expose the organization’s database to when they access the internet. Therefore, these employees get to be more careful when opening sites and downloading material from the internet. This way, the organization is able to secure its financial information and its database from hackers and spammers (Dempster, 2002). A. Establishing policy and procedure Risks are more likely to happen if some areas in the organization are let freely without having governing policies. Fewer mistakes are done if a certain way of conducting things is outlined for the employees. Thos is what is known as policy and procedures. Each employee should be trained and educated on the organization’s policies and procedures on a regular basis, such that the policies and procedures are in the employees’ finger tips. Apart from managing risks, making employees aware of the policies and procedures enables them to be more efficient, thus increasing profitability of the organization (Jorion, 2007). B. Approval from decision makers Every organization has the key people involved in the final stages of decision making processes for the business. Risks can be managed better if the organization only proceeds with certain actions if the decision makers give their approval of the action. This way, the organization is less likely to suffer the risks that occur when an action is done carelessly. The decisions made should be written down, so that referring to them will be easier and also for accountability purposes. Business consultants and advisors may not be the decision makers of the organization parse, but the organization should also seek for their opinion before jumping into actions that can adversely affect the business and its employees (Hopkin, 2010). 2. Identify the various risks that affect the organization? Risks are inevitable regardless. Therefore, it is important that a business identifies the risks that can affect it. The business can first do this by having a self evaluation of the risks it can be exposed to. When this is done, the business can then go to the level of doing a general and specific analysis in the market to see what types of risks prevail accordingly. Then a business plan should be written and it should clearly state the objectives of the business, as these act as a guideline to the risk management process of the business (Dempster, 2002). V. How does the organization limit its exposure to risks and losses? As said earlier, no business can be fully free from risks. However, it is possible for any business to limit its level of exposure to these risks, and thus reducing the impact of the risks on the business and its human resource. Limiting exposure to risks can be done in the following ways: 1. Awareness of the types of risks The first thing that needs to be done is having an awareness of the types of risk the business is exposed to. Two similar businesses can be exposed to totally different types of risks based on geographical location and on the types of influences that surround the business. Therefore, risk factors are unique to each business, and a close evaluation should be done so that the business will identify the specific risks it is likely to be exposed to. This way, action can be taken in risk management (Horcher, 2005). A. Assessing the damages caused by these risks When the risks actually occur, they do damage to the business to different extents. Therefore, it is important that the business does a survey of how much damage a certain risk has done on the business so that the correct steps will be taken towards recovery from the damages. Doing an evaluation of the damages also helps the business to strategize better ways of dealing with such risks in future. For instance, automotive engineers, over the years, observed that car accident victims mainly got fatal chest injuries. This enabled them to come up with a better method of dealing with such risks and minimizing the damage; using air bags (Hopkin, 2010). B. Controlling frequent risks Different risks in business have different rates of occurrence. Some risks are rare (such as environmental or natural disasters) while others are frequent in occurrence (such as operational risks or strategic risks). When this is known, it becomes easier for the business to be more in control of the risks that occur quite frequently. For instance, the business may decide to have a full week of maintenance of equipment to lower the frequencies of equipment breakdown. Better still, spare equipment can be purchased for use when unexpected breakdown has occurred (Levich, 2002). 2. Analyzing the appropriate Risk Management measures for the organization This point cannot be over-emphasized; no two businesses can adopt exactly the same risk management measures, because no two businesses, no matter how similar, can face the exact types and extents of risks. Therefore, each business has to analyze the types of risks it is likely to face and come up with a risk management policy that is tailor made for the business. Having the right risk management policy in place ensures more efficiency in dealing with risks. It reduces waste of time and other resources when dealing with crisis or potential crisis in the business (Horcher, 2005). VI. Initiating Risk Management measures for cost saving advantages Risk management measures and policies should be used to save costs for the business. Managing risks both saves the business form costs that occur directly and indirectly as a result of the risks. For instance, political instability indirectly affects the business but breakdown of machinery directly affects the business. The following measures can be taken in risk management to ensure cost saving (Dempster, 2002). 1. Implementing manageable strategies It is one thing to come up with a risk management strategy, and it is another thing to come up with a risk management strategy that is realistic and workable. Workable strategies are easier and cheaper to implement, and this enables the business to save itself a great deal of costs of risk management. No business can come up with a perfect strategy to keep it free from any risks, and therefore striving to attain this is a waste of resources (Hopkin, 2010). 2. Communicating safety in the workplace Health and safety risks occur when the employees of a firm are not well informed. Therefore, the management should ensure that enough safety awareness is created in the employees of an organization to avoid health and safety risks. Also, operational risks can be avoided if the employees have enough awareness on safe operation of machinery and equipment (Horcher, 2005). 3. Control events from enhancing liability losses Losses accrued from liabilities of a business may be indirect, but they still affect the business regardless. Therefore, the business has to come up with a way through which some events can be controlled so as to minimize the number of liabilities the business gets, thus minimizing the costs of meeting such liabilities. For instance, the company can make it compulsory for all interns to have a personal insurance cover for their internship period, thus helping the business minimize on potential costs of the liabilities involved (Dempster, 2002). VII. Conclusion An organization that has appropriate risk management measures in place will experience higher productivity and better operation. Risk management is a very important practice in any business, and it first begins by doing evaluation on the business and identifying all the potential risks the business can be exposed to. When the risks are identified, efficient measures should be devised that will help the business manage the risks in a better way. Risks may or may not occur in the process of running an enterprise. However, it is important to have a risk management policy in place, because this will provide a leeway for handling the risk if they ever occur. Reference Page Allen, S. (2003). Financial Risk Management; a practitioner’s guide to managing market and credit risk. New York: John Wiley and Sons. Crouhy, M. (2001). Risk Management. London: McGraw-Hill. Das, S. (2005). Risk Management: the Swaps and Financial Derivatives Library. New York: John Wiley and Sons. Dempster, M. A. (2002). Risk Management: value at risk and beyond. London: Cambridge University Press. Gallati, R.R. (2003). Risk Management and Capital Inadequacy. Chicago: McGraw-Hill Professional. Haslett, W.V. (2010). Risk Management: foundations for a changing financial world. New York: John Wiley and Sons. Hopkin, P. (2010). 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