Whenever we think of risk, we invariably associate it with uncertainty and the possibility of something going wrong. The discipline of risk management focuses on identifying and assessing possible risks and for each risk thus identified, prepare a plan to face it, when it does occur! There's a lot of misunderstanding about a risk management strategy being able to eliminate every risk that you can probably think of. That is perhaps, not even the intention with good risk management. The below quote from a world-renowned risk management expert pretty much sums up the merits of good risk management.
"Good risk management fosters vigilance in times of calm and instills discipline in times of crisis." - Dr. Michael Ong
Advantages of the Risk Management Process
The benefits of implementing a systematic risk management process are both long-term and short-term. In fact, each phase of the risk management effort, right from identifying risks, assessing risks to coming up with mitigation strategies, has its own benefits and they are listed as follows.
Risk Identification Benefits: Identifying risks is by far the most crucial phase of the risk management process. The most obvious benefit is that all the risks that are identified at the start of a project are considered in the mitigation strategies. This in turn, implies all risks that are identified are most likely to be potentially resolved in a planned manner without affecting the objectives of the project and the end result. Another benefit of risk identification is that all assumptions are listed down and analyzed. Analysis of assumptions is an important step in removing potential inaccuracies and inconsistencies at the start of the process itself. Now, risks need not always be negative. Positive risks (opportunities that were not a part of the original project plan) are often stumbled upon during the identification phase and you can carry out appropriate actions to make the most of the occurrence of these "opportunity" risks. This will in turn have a positive impact on the entire project or business.
Risk Assessment Benefits: This phase entails focusing on each identified risk and assessing its impact on the project or business. The measures planned to eliminate or minimize the risks assessed, are a result of a constructive debate or discussion among the various stakeholders. The greatest advantage of this process is that it serves to bring the various views onto the table and in the process of finalizing potential solutions, everyone is brought to the same page. This in turn brings forth a sense of accountability in all stakeholders (including external vendors, contractors, etc.), which is one of the goals of risk management. Participation in the risk assessment activity also serves to promote an organizational culture where everyone is "risk aware" and able to appreciate how their performance is going to be measured and rewarded. In addition, as a result of the cost-benefit analysis, contractual procedures can be revised for pricing terms, deadlines etc., based on the assessed risk factors.
Risk Analysis and Evaluation Benefits: It is a subset of the risk assessment process, where each risk is described along with its attributes such as significance and likelihood of occurrence, recommendation to minimize risks and stakeholder profiles, etc. Each risk is mapped to a business function or process which results in allocation of ownership of the risk. Changes to policy, setting up contingencies etc., are the benefits of a successful analysis and evaluation exercise.
Risk Treatment Benefits: Once the risk profiles have been finalized, graded, prioritized and evaluated, the next step is to implement the plan. Through internal controls (including policy decisions) and compliance regulations the mitigation strategies are brought into action. Negative risks or "threats" are not met with shock or surprise and opportunity risks are not forsaken due to lack of preparation and planning. The important benefits of operational efficiencies and profitability are realized upon successful treatment of risks in this phase.
Risk Monitoring and Review Benefits: Risk management is not a one-time activity. Continuous risk monitoring and review of risk treatment plans underpin a successful business strategy. This activity provides long-term benefits in terms of lessons learned for better risk management strategies in future and the effectiveness of the risk treatment measures, which will undoubtedly come in handy for subsequent projects.
In comparison to not having a risk strategy at all, the benefits of risk management to businesses are, in summary, as below.
Awareness of Significant Risks: The most significant threat to a business i.e., total failure can be avoided by identifying and planning for the most significant risks and communicating them across the board to all stakeholders.
Saving on Cost and Time: A preemptive approach to the threats in a project or business through risk management, always results in significant cost savings and prevents wastage of time and effort in firefighting.
Discovering Opportunities: Instead of being unprepared for the opportunities that unravel during the course of a project or business, risk management can help plan and prepare for them.
Harvesting Reusable Knowledge: Risk management is an exhaustive effort with inputs from various stakeholders and their experiences and insights. This collective know-how, or at least significant parts of it, can be reused for future endeavors. A single risk management plan can provide ready templates for successive plans to start from, instead of reinventing the wheel. This is probably the single most useful long-term benefit of risk management.
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