You may have seen that some businesses have risen rapidly in a short time, some have grown over the years with determined steps, and some have disappeared no matter what they did. The process that will cause all these results is risk management. Because business owners and managers know that every step to be taken or not taken in the business world carries a great risk for the business itself and its future.
Companies with a well-established corporate structure run the risk management process in a regular and planned manner, and take precautions against adverse situations that they may suddenly encounter. Of course, no matter how well the process is implemented, there may be surprises such as the COVID-19 pandemic. However, applying good risk management will prevent many obvious mistakes and ensure that businesses always have a contingency plan.
What is risk management?
Risk management, also called enterprise risk management; It is the process by which organizations identify, evaluate and counter-plans threats to their capital and earnings. While it is a professional definition, even the smallest business needs a risk management process.
In the risk management process, only the risks that will trouble the business are not evaluated. In this process, the risks that will result in favor of the company are also evaluated. Because taking risks is often like flipping a coin. However, unlike games of chance, a decision in favor of the company is taken as a result of the risk management process.
In this process, the risk appetite of the enterprises is calculated. In other words, how big a risk the company is willing to take, this situation is revealed. Companies with a high risk appetite are ready to play big. Companies with a low risk appetite may follow a certain strategy by taking small risks and avoiding big ones. As we said, the important thing is that the result of the risk taken is in favor of the company.
Is risk management really important?
Take a look at the world economy, don’t you think it’s important? Every step to be taken or not to be taken in the business world carries great risks. Imagine the risk taken by a company that invests all its capital in blockchain development due to the rapid rise in cryptocurrencies. Imagine if the blockchain system consisted of crypto money, how many companies went bankrupt?
It is the result of the risk taken that Amazon has opened its world limited to the sale of books to the entire retail sector, and that Netflix has become the number one digital streaming platform in the world today from a company that delivers DVDs to homes. Such examples can be multiplied. However, the examples of companies that fail as a result of the risk they take are perhaps thousands of times more than successful ones.
Perhaps no company was considering the possibility of a global epidemic until the COVID-19 pandemic took its toll and emerged. However, the companies that laid the foundations of the mobility system determined for a similar situation made their employees work at home during the pandemic and survived this process in the most harmless way. So a plan B should always be established through the risk management process, even if it may never be implemented.
Risk management process and considerations:
The risk management process can be determined by the company’s own experts, or processes that have already been determined can be operated. For example, there is a Risk Management guide prepared by the International Organization for Standardization in the ISO 31000 standard. According to this guide, the risk management process consists of 5 basic steps;
- Identifying risks
- Calculating the probability and impact of a risk
- Prioritize risks that will affect business objectives
- Fixing risk conditions
- Monitor, track and intervene results
According to the Inter-Agency Report prepared by the National Institute of Standards and Technology, briefly NIST, there are 4 main factors that must be present in the adverse risk scenario handled in the risk management process;
- Identification of valuable assets to be affected
- Detecting the source of the threatening effect
- Determining why and how the source of the effect that will create a threat takes action
- Identification of other damages to be caused by the source of the threatening effect
How to start the risk management process?
- A communication and consultation plan is established to develop risk awareness.
- Factors such as business objectives, corporate culture, regulatory legislation, and political environment that will determine risk appetite are evaluated.
- Risk scenarios that may have a positive or negative impact on the organization’s ability to do business are defined.
- A risk heat map is determined based on the impact of the defined risk scenarios on the company.
- Evaluating the risks; Strategies are developed for risk avoidance, risk reduction, risk sharing, risk acceptance.
- Risk treatment is initiated with an implementation process in line with the determined strategy.
- The results of the applied process are observed and the process is recalculated when necessary.
What are the advantages and challenges of risk management?
- The advantages of risk management;
- Creates risk awareness across the company.
- Confidence in goals and targets increases as risks are taken into account.
- Since it is organized within the scope of the process, the works are carried out much more efficiently.
- Since it is organized within the scope of the process, the application processes work much more efficiently.
- Employees’ and customers’ trust in the business increases.
- It makes the company stand out in the market competition.
- Challenges of risk management;
- Startup spending can be high.
- The first period of the process implementation can be difficult for everyone.
- During the risk management process, a fight may break out and things may get messy.
- There may be many people who will oppose the risk management process until results are obtained.
What are the objectives of the risk management process?
The risk management process can be customized according to the companies’ own goals and objectives. However, the ISO 31000 standard, which provides a framework in this regard, sets out 11 risk management principles, namely targets, that companies must reach at the end of the risk management process;
- Creating value for the organization.
- To make the risk management process an integral part of the company.
- Influencing the decision making process positively.
- Making ambiguities available to be explicitly addressed.
- To have a systematic and structured application process.
- Uncovering the best information available.
- Optimizing the implementation process for the project.
- Detecting potential errors before they occur.
- To ensure transparency.
- Adapting to change.
- To create an application process that will be constantly monitored and open for improvement.
At the end of a risk management process, the objectives to be achieved or to be achieved by the enterprises in general are determined in this way. But you don’t have to be limited to these. These targets can be reduced or increased according to the risk appetite of the business.
We answered the question of what is risk management that allows you to take safe steps in the dangerous waters of the business world and talked about the details you need to know about this important process. Whether small or large; All businesses must have a unique risk management process.
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