Every activity, from jumping out of an airplane to simply crossing the street, carries some degree of risk. Risk management is a way of thinking that operates with the goal of eliminating, or at least significantly reducing, the level of risk associated with an operation. Typically risk management practices are most commonly found in the world of business, although composite risk management is now used by the military and law enforcement to increase the safety of their operations. Essentially, the risk management process works to identify any hazards that could result in damage to the company or unit’s resources, including injuries to personnel. Once these hazards are identified, corrective measures are put in place to reduce or eliminate the risk.
At the heart of any effective risk management strategy is the realization that all activities will involve risk, and that successful operations will require a certain tolerance for risk. Managing uncertainty is a key factor in risk management. One of the most important steps in the risk management process involves evaluating one’s available resources in preparation for certain negative scenarios. Once the personnel involved have a solid understanding of the possible negative outcomes, it is possible for them to prepare for the worst. In some situations, a careful analysis might show the risk associated with an activity would be too great to justify the benefits. In these cases, the prudent course of action would be to cancel the endeavor and formulate another plan.
In the business world, using manufacturing as a model, some specific risks involved would be employee theft of raw materials, waste and misuse in the supply chain, or even the hazards of delayed shipments to retail outlets. As corporations work to identify these risks, they also work to analyze cost effective strategies to alter the process. In these cases the end result can still be achieved, but the degree of risk is minimized if it cannot be removed altogether.
The idea of risk management might involve an extremely complicated process such as actuarial tables for life insurance companies, or might require nothing more than taking a few extra safety precautions, such as putting on your seatbelt before driving. Back in the workplace, employees might be directed to wear protective equipment such as gloves, earplugs, or goggles in order to reduce the risk of injury. In many cases, companies who fail to identify and manage risks can find themselves liable for operating in unsafe conditions.
Risk management practices not only strive to minimize the potential for physical injury, but also to reduce the potential for fraud, waste, and abuse of company funds. Ensuring that all personnel and resources are utilized in the most efficient manner will affect a company’s financials, including their profit margin.
The actual risk management processes will vary significantly between companies and organizations. The primary focus may be on physical safety, such as in security functions, or it may be in preservation of capital, such as in the insurance industry. In all circumstances, risk management practices require an organization’s leaders to establish clear priorities and goals so that an acceptable level of risk can be established.