Evaluating and Managing Business Risk in Organizations
Managing risk is an essential part of any business. Business risks may appear in any facet of the business. Risks and uncertainty are realities every business must face. A risk presents itself where one is forced to make a choice between alternatives whose potential outcomes are unknown or where one is forced to deal with an unanticipated situation that could adversely affect the organization. For instance, these risks could be:
• Financial Risks: such as investment choices, inadequate working capital, poor financial calculations, accounting fraud or excessive spending to mention a few.
• Economic Risks: such as interest rate changes, changing government policies, exchange rate changes or demographic movements.
• Production Risks: such as obsolete/ defective materials and goods, continuous technological evolution, product mix and quality, machine breakdown or cost of production.
• Human Resource Risks: arising due to fraudulent employees, negligent/inefficient employees, social engineering, recruitment risks or labor drain.
• Legal Risks: such as judgments from court cases, legal infringements, new legislations or business laws.
• Political and Social Risks: arising from issues such as civil unrest, elections, and unfavorable ideologies of political leaders or corruption.
• Management Risks: such as poor management decisions, insider trading, corporate governance issues, corporate policies and strategy.
• Market Risks: such as competing against fierce competitors, changing consumer tastes or behavior, piracy, distribution and dealership issues or marketing strategy.
To effectively handle these business risks, the following steps should be taken:
• Assess The Risk: To effectively assess the risk the following question need to be answered. Does a risk indeed exist? If it does exist, is there any alternative to be chosen? How much information is available about these alternatives? What is the potential impact of the risk should it occur?
• Assess the Alternatives: What would it cost the organization to pursue each of these alternatives? Note that the cost being referred to include both financial costs, human costs, cost to the organizations image, material costs, environmental costs, competitors reaction to your course of action etc. Alternatives could also present the option to:
a) Transfer the Risk to another party more competent to handle it. (E.g. through insurance, joint ventures and strategic alliances, outsourcing etc.)
b) Mitigate the Risk. I.e. to manage the impact of the risk by minimizing the odds.
c) Ignore the Risk. I.e. brace yourself and accept the impact.
• Implement the Alternative Chosen: Once an alternative is selected, an implementation plan is quickly arranged. The plan should clearly itemize steps needed to implement the strategy chosen. The implementation plan should also have a backup plan for another alternative strategy should the former fail. There should also be a feedback process to handle issues that may arise in the course of implementation.