The Risk Management Process
Risk has also had its share of benefits to the society
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It creates the hope of profit. Entrepreneurs take risks of different types hoping the reward
will be higher than taking a safer way.
Risk is a deterrent to entry into a market place for ventures that are most likely to be short
lived. Too high a risk might not be desireable and investors will be forced to look elsewhere
for a return.
Risk encourages a safety culture. Those operating in the market place cannot afford to run
too high a risk.
We could define risk management as the identification analysis and economic control of those risks
which can threaten the assets or learning capacity of an enterprise.
The Risk Manager
Though it should be accepted that no single person can be expected to manage all risks inherent in
the business, the risk manager ideally should specifically be identified as the responsible for
coordinating the risk management function, i.e. identification, analysis (evaluation and analysis) and
control.
Risk identification
There are 2 approaches
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The traditional approach which starts by considering the perils to which the organisation is
exposed to and then assess the potential resulting impact
The better way is to first determine the risk sensitive areas and possible loss prodcing events
and then identify the perils which may trigger such events.
The range of risk identification techniques
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Some techniques are best used on site while others are desk based methods not requiring
site visits.
Some will be more appropriate to the development stages of the project while others are
best used when projects are commissioned.
There are both qualitative and quantitative approaches
Some approaches are very general in nature while others are extremely detailed.
There are techniques which are appropriate for post loss situations while others are
appropriate for use prior to losses having taken place.
Organisational charts
These highlight broad areas of risk rather than individual risks such as fire or liability. The risk
identifier should take a bird’s eye-view of the organisation and take stock of the potential risk areas.
Organisational charts identify areas of concentration of risk and also dependences between areas of
the organisation.
Say there is only one computer lab or one server at University. This is an area of concentration of risk
and all university data is concentrated on one area. A fire at that unit affects all operations provided
most operations are dependent on computers.
A manufacturing company dependent on one source of raw material might end up with all its
products defective if they are supplied with a defective raw material.
Advantages of organisational charts
 It takes a broad view of risks, unhintered by details which might cloud or obscure the
broader picture. It helps the identifier become familiar with the structure odf the company
itself.
 It involves others in the construction of the chart therefore may encourage them to think
about risk in the concept of the whole organisation.
 It is good at highlighting areas of concentration of risk. These may easily be overlooked when
people are eagerly expanding or operating an existing organisation
Disadvantages
 Its too broad to enable specific solutions to be suggested for specific risks. It needs to be
associated with other techniques.
 It can end up being too simplistic. Some structures are so complex that they may overlook
some important aspects and ends up overlooking more than what it shows.
Physical inspections
The inspection of plant processes or premises can be time consuming and the nature of most
industries is that they are are complex. Before the actual visit it is necessary that preparatory work is
done in advance to reduce time wasted on actual inspections. You want to know the process in
advance and the products of the processes so that you got a general idea of what you are going to
do and how.
Advantages of physical inspections
 You do not have to rely on anyone else telling you what the risk is like – you see it for
yourself. There is a tendency of those near the risk to understate its importance.
 It allows the person carrying out the inspection to have a good relationship with the people
at the site. They can create a talking relationship which might be beneficial in the future.
 It can be done at a very short notice. There is no need for elaborate preparation.
Disadvantages
 It is extremely time consuming to carry out physical inspections
 There must actually be something there for you to physically inspect.
Checklists
Checklists deal with the particular problem of the time consuming nature of physical inspections.
The basic idea of a checklist is that a pro-forma is sent to the site for completion by someone there.
This dispenses with the need for a physical inspection and hence cuts down the time and cost of
identification. The checklist acts as a source of information about the risk. It takes the place of a visit
so it has to be carefully drawn. The following are worth noting:
 The checklist should be simple to understand and complete. Complex questions and
complicated jargon complicates its completion.
 Checklists should be free from ambiguity.
Advantages of checklists
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They can be a quick and effective means by which risks are identified.
The cost is kept vey low as people on the site are doing the bulk of the work.
They allow for easy comparison of risks by year or by unit.
They can be adapted very easily to changes in the make up of a business. New questions are
added and redundant ones removed.
 They encourage others to get involved in the process of risk identification.
Disadvantages
 The information which comes to the risk identifier is second hand. There is no substitute for
seeing the risk for yourself.
 There may be a low response rate to the checklist. It may be that people do not see them as
important and put them low down on the list of things they have to do.
 The forms can contain ambiguities, despite all the testing and consultation.
 We can never be sure of the manner in which the forms are completed. We hope that it was
done with care and attention.
Flow Charts
These are more detailed than both the organisational chart and the checklist. In many organisation
there are some kind of flow. This could take the form of:
 Production flow, where raw materials come in at one end of a process and a finished
product at the other end. There was an identifiable flow through the system.
 Service flow, where there may not be raw materials but the business may depend on flow of
another form. It could be the flow of people, as in the case of a restaurant and hotel.
 Money flow, as in the case of banks, building society and insurance companies.
In each case there are various stages in the fow and at each stage there are risks which can impede
or halt the flow. An interruption in the flow will have consequences on the revenue and profit. A
flow chart can be used to identify key stages and structure the analysis of the risks at each stage.
This can be illustrated using a production flow
Step one: understand the flow
Step two: Represent the flow
Step three: the risk flow chart
Step four: Structure analysis of the chart
Advantages of flow charts
 They allow complicated plant and processes to be broken down into smaller and more
manageable parts.
 The flow chart is a more detailed analysis.
 Flow charts are qualitative rather than dependent on statistical or mathematical
calculations. They are therefore simple to follow and understand.
Disadvantages
 They can be time consuming to construct and the end result may not seem to be an
adequate recompense for the effort.
 They can become too simplistic in their approach. This is particularly true where there is a
very complex plant and process.
 The risks which are identified are still general. They are risks such as the fire explosion and
breakdown. This may not be adequate in many cases.
 No measure of the likelihood of events is included. Events are talked about as if they all have
an equal chance of occurring which is clearly not the case.
Hazards and operability studies (HAZOPS)
It is an extreamely detailed examination f a plant or processes which is used extensively in the
process of industries, particularly the chemical industry. In these high risk industries, everyone
knows general problem areas and what is required is the process of identifying the particular
sources of risk problems.
Advantages
 The most comphrensive risk identification process if properly used.
 If a team is used a wide range of people are used with different experience and abilities.
Disadvantages
 Expensive and time consuming
 Risks are missed in an attempt to simplify the process
Faulty trees
The technique has its origin during the American Space programme where there were many faults in
the complicated business of launching a space craft, that some mechanisms had to be devised to
detect these faults.
An illustrative example could be one of a car failing to start. Some of the possible faults are as below:
no petrol
battery
flat
lost keys
electrical
faulty
Faulty tree encourages the risk identifier to seek out all the ways in which some main event may
occur.
The second use of the tree is that we could now calculate the probability of of the main event
occurring.
Advantages of the fault tree
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It is an excellent way in which to reduce complicated events into their component parts.
It gives some structure to the identification of all the possible risky events in a problem.
It allows for the calculation of likelihood.
Disadvantages
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It can become very numerical and this can frighten a number of people away from its use.
Probabilities are often unavailable thereby removing one of its major advantage.
Arrangement for the securing of the funds needed in the event of a loss
Direction and control of the funds on the occurrence of a loss.