Risk is defined as the possibility of an event that could lead to disastrous consequences, and risk management is the practice of using methods, tools and strategies to manage and implement counter measures to fight and/or avoid these risks.

Risk management focuses on protecting your business by understanding the possibilities that could go wrong, evaluating the risks that can be dealt with and implementing strategies to work on fixing them.

That said, every business faces risks that could present threats to its success. As businesses grow and become more successful, they become more exposed to several catastrophes that can harm their future existence. Therefore, it is critical that you defend and protect the growth of your business from all potential threats and risks.

However, this isn't something that you need to worry about. It is rather something that you must plan for. Here are some proven methods to help you through the process:

How to identify risks?

There are multiple sources of risks. They may come from within the project or from outside. To be able to successfully identify the risk, one has to:

  • Review the program scope
  • Estimate the costs
  • Schedule & Evaluate the path
  • Assess the technical maturity
  • Assess the key performance parameters
  • Understand the performance challenges
  • Stakeholder expectations
  • Understand internal & external dependencies
  • Challenges faced while implementation & integration
  • Supply-chain vulnerabilities
  • Cost deviations
  • Safety & security
  • Ability to handle threats
  • Historical data from similar projects

Risk identification is an iterative process. If used accurately, this process can help in early and continuous identification of events and their impacts on the project's performance, capability, outcome and goals.

Once you have identified the risks that you may face, you then need to estimate the likelihood of these threats turning into reality and their possible impact. However, before you rush into doing that, it is suggested that you gather all relevant information that will help you accurately estimate the probability of the occurrence of the event and the associated costs. Past data can also be used as reference guides if there are no accurate means of forecasting.

How to analyze the different types of risks?

All risk management processes follow the same basic steps to protect the business. However, before we reach that stage, it is important to analyze and evaluate the risks and possible threats that we might face. Here are some of the factors that you’d like to consider:

  • Human Risks – these could be anything that directly or indirectly relate to your human resource including illness, death, injury, loss of a key individual etc.
  • Strategic Risks – these mainly are associated with operating in a particular industry, and could arise from situations like partnerships and collaborations, changes among customers, changes in demand, industry changes, merger and acquisition activity or research and development.
  • Operational Risks – Operational risks are associated with your business' operational and administrative procedures. These risks are the ones resulting from insufficient or failed internal processes, people and systems or from external events. They mainly cover business continuity plans, crisis management, recruitment, supply chain, accounting controls, IT systems, regulations, board composition and so on.
  • Compliance Risks: These are risks associated with the laws and regulations. Some of the factors that you should consider while protecting your business from such legislative risks include how strong is your business legally, can your product or service become less marketable by passing of a law or increase in taxes. For e.g. as it happened in the case of tobacco products.
  • Financial Risks: These are associated with the financial systems and financial structure of your business, the transactions that your business makes, all internal and external factors like interest rates and foreign exchange rates, debts, competition, business failure, stock market fluctuations, non-availability of funding and so on.
  • Reputational Risk – These arise when expectations are managed ineffectively and the company fails to execute and deliver timely solutions. As a result, employees resign, customers stop buying, vendors part their ways, and government and media start piling on.

Aside these, some other risks that must also be kept in mind while analyzing include environmental risks, employee risk management, employee safety, political and economic instability in (domestic or foreign) markets that you export to, health and safety, procedural failures, project issues, technical issues, natural disasters and structural issues.

How to protect your business from the risks?

Risk is all about uncertainty that can be effectively de-risked if a framework is put around it. And that means you can move much more confidently towards achieving your project goals. It is always a great idea to search for approaches that are cost-effective for eliminating a risk than the cost of the event if it occurs. Here's how you can go about it…

  • Avoid the Risk: In some cases, you may want to avoid the risk altogether by not getting involved in a business venture or the project. This step can be taken when the venture or project hasn’t been executed, and you have gained an understanding that the risk involves no advantage and will have effects that are not worthwhile.

However, it is important that you understand that when you avoid a potential risk entirely, you are also losing out on a potential opportunity.

  • Share the Risk: If you are unsure of the outcome, there is always an option to share the potential risk and/or the potential gain with other people, teams, organizations or third parties. Again, this step is only possible before the venture or project has been executed.
  • Accept the Risk: Your last option before execution of the project or venture is to accept the risk. This option is usually considered when there's nothing much that can be done to prevent or reduce the risk, when the potential gain is worth the risk or when the potential loss is less than preparing for the risk. For instance, you will accept the late launch of a project and bear the losses, if the potential sales will still cover your costs.

However, do make sure that you fully understand the impact before taking any steps.

  • Control the Risk: If you accept the risk, there are still a number of ways that can help you to reduce the impact. Business Experiments are an effective way to reduce risk and involve rolling out the high-risk activity in a controlled way, and on a small scale. These are done to test possible ways to reduce a risk by observing where problems occur, and to find ways to introduce different actions before you execute the activity on a larger scale.

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Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Kotak Mahindra Bank Ltd. and its employees.