Risk Identification as an Underdeveloped Art - Essay Example

? Risk identification Is Risk Identification an Underdeveloped Art? Modern business is fraught with several uncertainties associated with risks. In spite of the sophisticated forecasting techniques adopted by the progressive managements, there are several factors which are not in the control of the business, causing uncertainties in the business. Judgment involves careful analysis of these factors for estimating the likelihood of the different negative consequences or outcomes of a decision and its impact on business. Strategic decisions involving big risks are taken by the entrepreneurs with their intuition and business acumen. These entrepreneurs are called trendsetters in a market. In a dynamic environment, swift business decisions are required to be taken in response to the fast changing environment. This adaptability is essential for the survival of the business. Risks in a business cannot be avoided. Is the management risk averse? Risk is inevitable in a business process and it is involved in every activity of the business, though the degree of the risk is insignificant in many cases. Therefore, the approach should be: Is a particular risk tolerable, considering the willingness and ability of the management to take risk? The business decisions need to be consistent with the management’s policy with regard to risk. In all other cases, the management has to decide whether the risk is acceptable at all. Therefore, risk identification is a continuous process in an organization to evaluate the risk potential of the business decisions, its impact on the business in the worse scenario and the risk reward ratio. Risk Analysis If risk identification or analysis is considered as an art, the passion and ability for analysis on the part of the personnel is important, and the management’s recognition and support for this function should form the basis for its efficient and successful functioning and contribution to the business development. Risk analysis or risk identification in this sense is as a continuous process as a part of the management function with necessary authority at its disposal and suitable place in the management structure. Risk analysis calls for collecting information from external and internal sources. The analyst needs to possess the analytical ability and proficiency in using various analytical tools for the purpose of analysis. Collection of information from the internal sources through various periodical reports, surveys, job cards and other records is a regular process. Classification of this information for various analytical purposes for the current use or storage of the classified information for future use is important. The information has to be cross-verified for its correctness and reliability by using various auditing and other techniques. The information is analyzed for abnormalities or other indications and recorded either for future use or further action by the different departmental heads. Barron and Barron (2011) suggest keeping the management informed of project risks and potential impacts at all times. The understanding of the business by the analyst in this process is enhanced and it would be useful in evaluation of the strengths and weaknesses in the system. Strengths and Weaknesses of the Organization Analysis of the internal strengths and weaknesses of the organization is the first step in risk identification because opportunities and challenges in the environment have to be analyzed in relation to the strengths and weaknesses of the organization to evaluate the preferred course of action or to formulate adaptive strategies. Starr et al. (2003) state, ‘Enterprise resilience is the ability and capacity to withstand systemic discontinuities and adapt to new risk environments. A resilient organization effectively aligns its strategy, operations, management systems, governance structure, and decision-support capabilities so that it can uncover and adjust to continually changing risks, endure disruptions to its primary earnings drivers, and create advantages over less adaptive competitors’. External environment The changes in the political, economical, social and technological environment throw opportunities or pose threats to an organization and analysis of these factors is called PEST analysis. According to Bryant and Mark (2011), leaders are compensated and operate in conditions of risk and the risk assessment tool is based on identification, information, interests, incentives and infrastructure. Changes in monetary policies, taxation, changes in tastes and fashions of the people and technological developments in various sectors, especially information technology and telecommunications, have changed the structure of businesses drastically, paving the way for online trading and use of different modern gadgets in the business and personal life. Kendrick (2009, p. 2) states, ‘In projects, a risk can be almost any uncertain event associated with the work. There are many ways to characterize risk. One of the simplest, from the insurance industry, is: “Loss” multiplied by “Likelihood.”’ Risk encompasses a whole host of business operations which include banking, software, engineering and security services. Cooney and Lang caution that in the domain of environmental management, there has been a sustained effort to construct new approaches, which are based on expectations of surprise and unpredictability and which take into account the potential for abrupt, unpredictable, and irreversible change, and which are sensitive to interactional and system-wide effects.  Identification of Risks Identification of risk is really an art as it brings out the analyst’s talent in visualizing the future which keeps him in the position with an advisory role in an organization. This involves understanding of the business, and he gains this experience through analyzing the internal records and activities. His ability in correlating this information to the external factors and finding out the ‘cause and effect’ relationship between these two for identifying the opportunities or threats and the attendant risks involved. Identification of risk logically leads to quantification of the outcome or impact of the risks on a business decision. According to projectcontrolsonline.com, in risk quantification ‘Risk Analysis and ranking is performed. Risk Analysis is done by identifying the nature of risk (Increase or decrease the cost), location of risk (unaccounted cost or extension/reduction of schedule), magnitude of risk (based on risk register, and estimating the range), distributing the risk (apply varying PDF's) and performing distribution (usually Monte Carlo technique).’ The positive and negative impacts of the risks involved in a plan of action is quantified and mapped out to find out the risk reward ratio of a proposal. ‘Risk identification involves determining which risks might affect the project and documenting their characteristics’ (Burtonshaw-Gunn, 2009, p. 38). Stability in operations and the organization should be given more importance in risk identification and any threat to the stability is required to be reported to the management immediately. In financial management, budget is used as a tool for identifying risks by analyzing the variances between the actual performance and the planned performance. Conrow (p. 189) suggests that ‘After performing a comprehensive risk identification activity, determine which issues 1) require additional information, 2) are interrelated to other risk issues, and 3) overlap with other issues. Obtain additional information as needed, note interrelationship with other issues, and carefully reduce overlapping risk issues as warranted’. Risk Identification Opportunity Reward Threat Risk Predictability of the Outcome If the environmental factors are not clear or confusing, predictability becomes difficult. In the international trades, the risks are compounded on account of jurisdictional issues. For example, ‘Australia lifted its ban on Californian table grapes, following negotiated agreement on a series of risk management procedures, to be re-evaluated after one year’ (Lang & Scot, 2009). Since there is accountability on the part of the analyst with reference to his predictions, in such an unpredictable situation, a good analyst carefully analyzes the situation and comes out with the proposal which might be constructed on the basis of minimum reward and the maximum risk. This may satisfy the management on account of its conservatism considering the prevailing circumstances. Risk identification is essential in all facets of the business. Zaruzelski et al. (2011) state that the goal of agile product development is to achieve rapid and frequent iterations with multiple design options up front – driven by continuous testing and granular customer analyses – in order to optimize, balance, and prioritize requirements and identify risks earlier. The call for environmental protection by the social groups and corporate social responsibility (CSR) regulations of the government has been seriously viewed by the public in the recent decades. This might create legal hurdles in getting approvals for various projects. Therefore, the risk identification should comprehensively cover all these issues related to the business. Conclusion Identifying risk in a business situation is a very challenging task to the professionals as it involves analytical ability, flair for communication and presentation skills, and this art which calls for intuition and imagination on the part of the risk analyst needs to be cultivated in an organization through conscious efforts for the development of the business. Under the convergence of technologies, information flow is very fast and the companies are required to adjust their operations through adaptive strategies in tune with the changes taking place in the world. Also, the globalization and liberalization drive in many countries have given rise to immense potential for opportunities equally associated with the risks. Therefore, the management needs to recognize the importance of risk identification for a sustainable development of the business in the long run. References Barron, M & Barron, A 2011, ‘Project stakeholders’, The Project Management Hut, retrieved from http://www.pmhut.com/project-stakeholders-2. Bryant, M & Mark, K 2011, An overview of risk and risk management, Harvard Business Publishing, W11080-PDF-ENG, Apr 15, 2011. Burtonshaw-Gunn, SA 2009, Risk and financial management in construction, Gower Publishing Limited, Surrey, England. Cooney, R & Lang, ATF 2007, ‘Taking uncertainty seriously: adaptive governance and international trade’, European Journal of International Law, vol. 18, no. 3, pp. 523–551. Conrow, EH 2003, Effective risk management: some keys to success, AIAA, Reston, Virginia. Kendrick, T 2009, Identifying and managing project risks, 2nd ed., Tom Kendrick. Lang, A & Scot, J 2009, ‘The hidden world of WTO governance’, European Journal of International Law, vol. 20, no. 3, pp. 575–614. Starr, R, Newfrock, J & Delurey, M 2003, ‘Enterprise resilience: managing risk in the networked economy’, strategy+business, retrieved from http://www.strategy-business.com/article/8375. Jaruzelski, B, Holman, R & Daud, O 2011, ‘Next-generation product development’, strategy+business, retrieved from http://www.strategy-business.com/article/00076?pg=all. Projectcontrolsonline.come, 2012, ‘Risk analysis and quantification’, http://projectcontrolsonline.com/InfoPad/ReferenceZone/PractitionersGuide/RiskAnalysisQuantification.aspx Read More