Table of Contents
- Task 1
- A.C. 1.1 - Explain the Meaning of Risk Management to an Organization
- A.C. 1.2 - Determine the Roles and Responsibilities for Risk Management at the Senior Management Level
- A.C. 1.3 - Evaluate Risk Management Models
- Task 2
- A.C. 2.1 - Evaluate the Risk Management Criteria, against Which Risk Can Be Assessed
- A.C. 2.2 - Critique Techniques to Identify and Quantify Risks
- Task 3
- A.C. 2.3 - Develop Strategies to Eliminate, Mitigate, Deflect or Accept Risks
- A.C. 2.4 - Determine a Process for Communicating, Resourcing, and Managing Risk Management Strategies
- Task 4
- A.C. 3.1 - Evaluate the Outcomes of Risk Management Strategies
- A.C. 3.2 - Determine Actions to Respond to Outcomes of Risk Strategies
- Related Management essays
A.C. 1.1 - Explain the Meaning of Risk Management to an Organization
Risk management can be defined as a process of identifying, assessing, and controlling risks, which might harm the organization's performance and sustainable development. These threats come from a variety of sources, such as legal liabilities, financial uncertainty, some errors in strategic management, natural disasters, various accidents, fraud, data-related challenges, etc. By planning for these unexpected events, the company’s managers will ensure that the firm is prepared to properly respond to them. Accordingly, in order to handle potential threats, the organization will be able to identify, mitigate, and avoid any issues, thereby ensuring the achievement of its strategic goals.
Moreover, it is evident that it is better to manage risks before their occurrence instead of addressing their negative consequences, which might be significantly more expensive. Thus, risk management in the organization is a necessary element of ensuring that the company acts confidently on its future business decisions. Furthermore, appropriate risk management is beneficial for each enterprise. It provides various options on the way how not only to prevent potential issues but also cope with them in the case of occurrence. Consequently, risk management is necessary for each organization since it makes it possible to define its strategic objectives for the future and prevents the risk of losing the appropriate direction where any of these challenges take place.
A.C. 1.2 - Determine the Roles and Responsibilities for Risk Management at the Senior Management Level
Senior leadership plays a major role in implementing appropriate risk management programs in the organization. The general goal of senior managers is to create a strong quality culture in their company, driving processes, practices, and policies, where the risk management will be playing a critical role. Next, senior executives are responsible for building capability for risk management. For instance, they provide resources (financial, labor, material, etc.), educational materials, and training; also, they ensure an appropriate organizational structure. Further, executives are responsible for developing strategic directions of the risk management process, i.e. risk assessment, control, review, etc. Besides, they provide a support and control for risk management activities. In order to ensure appropriate risk management companies might add a special risk management team into their structure. This community is responsible for identifying challenges, developing strategies for their management, and executing these actions. The team will consist of several responsible managers, such as a chief risk officer, a chief financial officer, a chief legal officer, and a chief audit executive.
A.C. 1.3 - Evaluate Risk Management Models
In view of the type of the activity, different risk management models can be implemented. To complete the purpose of this paper two models have been taken for assessment. The first template is premised on five steps that should be taken during a risk management process, which was described by Jisc (2014). The first step is related to risk identification. The second and third stages are grounded on conducting the qualitative and quantitative risk assessments respectively. Further, this model assumes that after the risk evaluation it is necessary to develop a plan of responding to risks. Finally, risk monitoring and control should be constantly conducted.
The second risk management model has been described by the Public Risk Management Association (2010) and Vollmer (2015). According to it, there are seven elements of the risk management: risk recognition; risk evaluation and ranking; developing a plan for responding to significant challenges (tolerate, treat, transfer or terminate); providing resourcing controls; developing a plan for reacting at significant threats; ensuring constant monitoring and reporting about a risking environment; and constantly reviewing the risk management framework.
Consequently, these risk management models provide similar steps and approaches that should be taken while implementing the risk management practice. Accordingly, risk identification and assessment will allow the company to determine types of risks, their likelihood, and potential impact. Next, a risk responding plan is necessary for reducing the downside and balance costs of handling risk and ensure better coordination, communication and risk reporting. Finally, constant review of the risk management strategy will help to optimize internal control frameworks.
A.C. 2.1 - Evaluate the Risk Management Criteria, against Which Risk Can Be Assessed
As it has been mentioned before, risk assessment is one of the major elements of risk management. In general, each threat can be characterized by six criteria, which will be further used for planning of the risk response. First, risks can be characterized by their origin. It includes the primary source of an issue, i.e. employees with low qualification, competitors, governments, and others (OECD, 2014). The second criterion for the risk assessment is a particular activity, incident, or event. For instance, it will include a potential appearance of new data protection regulations or a new marketing policy deployed by competitors. The third criterion includes the consequences, results or impacts of challenges at the organization. For instance, risks may result in the loss of the company’s profits or significant penalties from inappropriate practice and increased competitiveness. The fourth criterion assumes the specific reason for the risk occurrence. For instance, it might be a human intervention into the IT system, a failure to predict correct market trends or a competitor’s activity, and some errors in designing a product. The fifth factor is grounded on determining the protective mechanisms and control actions. For example, it includes market research, security training, and employment of detection and access control systems. Finally, the sixth criterion for the risk assessment is the time and place of its occurrence. For instance, threats might occur during any extreme environmental conditions or the period of the end of the financial year.
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A.C. 2.2 - Critique Techniques to Identify and Quantify Risks
In order to develop an appropriate risk response plan it is necessary to correctly identify and assess threats. For this purpose, multiple techniques can be used. The most common ones include Delphi technique, documentation reviews, brainstorming, interviewing, and SWOT analysis. Documentation reviews are premised on assessing documents related to the certain organization practice with the aim to identify any potential issues. A brainstorming method is conducted within a group of people that provide their assumptions about potential challenges and further choose the most appropriate ones. Next, unlike brainstorming, the Delphi Technique is done anonymously; and a final list of risks is made after reviewing the responses of experts. The latter ones have compiled them anonymously. Further, in order to identify any challenges managers could conduct interviews with stakeholders, experts, project participants, etc. Comparing with the previously mentioned methods, the SWOT Analysis seems to be the most appropriate technique for risk identification. It provides a clear framework for associating the company’s strengths and weaknesses with potential risks (threats) and opportunities.
Next, after risk identification, it is necessary to properly quantify them. For this purpose, the statistical analyses and calculations are implemented, which combine the impact and likelihood of any issue. In order to estimate their values a risk manager could consider the following information sources: data records, market research and analysis, international standards or guidelines, economic, engineering or other models, experiments, prototypes, and others. Therefore, the following assessment methods can be implemented. The first method is the Expected Monetary Value Analysis, which is applied to establish the overall ranking of threats. According to it, the expected monetary value of risk can be calculated by multiplying its probability at its overall impact on the organization’s performance. The next assessing method uses multivariate statistical models, which are premised on historical data. Its main benefits are that it is not dependent on subjective probability distributions and gives the opportunity to develop independent benchmarks for evaluating challenges. The next technique is the sensitivity analysis, which assesses a change in outcomes regarding a shift in the appropriate input. This method is useful for the cases, when the probability of the particular issue is hardly to be determined. Thus, the sensitivity analysis gives the opportunity to define variables, which have the greatest influence on the threat.
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A.C. 2.3 - Develop Strategies to Eliminate, Mitigate, Deflect or Accept Risks
The first strategy of risk management is the risk elimination, which is grounded on refusing to do any task or take a project, which in future might result in a significant issue. For instance, in order to avoid the financial issue the company might refuse to invest into a risky investment activity related to building new facilities in the country with the unstable policy atmosphere.
The next possible solution for managing risks is to mitigate them. This solution is usually taken for those challenges, which cannot be avoided or deflected. Therefore, the organization is trying to keep the possible loss on the acceptable level and, thereby, reduce the impact of the threat. For instance, the company has discovered some fraud made by its employees in regard to communicating with consumers and shareholders and providing the wrong information about the already launched product. In this case, the firm cannot eliminate or transfer the reputational risk, since the actions have occurred so far.
The third method of managing risks includes their deflection. In this case, the organization transfers a threat to another party, typically by a contract. Insurance is the most evident example of risk transfer. For instance, in order to pass the liability threat, the firm might consider insuring its contract. Thereby, if any problems occur, i.e. the company damages the property of its contractor or breaks the deadline, it will not be required to pay significant fees for these activities.
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Finally, the organization could accept a challenge. It usually is conducted for the issues, which have the comparatively low negative consequences on the company’s performance. It should be noted that the firm’s tolerance to risks depends on the level of challenges it is willing to accept in order to achieve its business objectives (Crane, Gantz, Isaacs, Jose, & Sharp, 2013). For instance, the company takes into consideration that various catastrophes, such as flood and earthquakes, have a very low probability of occurrence. Thereby, the organization accepts these threats and does not purchase any insurance for such events.
A.C. 2.4 - Determine a Process for Communicating, Resourcing, and Managing Risk Management Strategies
In order to ensure the effective implementation of the chosen risk strategy, it is essential to ensure an appropriate communication relating to it. Risk management strategies should be communicated to all persons, engaged into the organizational processes: the executive board, employees, visitors, clients, and other persons (Broadleaf, 2014). During the communication process, the following elements of the risk strategy should be directed: its objectives, the elements of the risk management process, required actions, and the desired output (Berg, 2010). In overall, the firm could use the following three methods of telling about threats, i.e. the preparation of a risk management training curriculum; creation of risk management communities of practice; as well as building and employment of risk liaisons (Shinkman & Young, 2016). Therefore, in the case of the first risk elimination strategy, the executive board should communicate with the financial specialists and determine whether the chosen investment project is applicable for the organization. In this case, no additional sources are required, since the project has been concerned too risky, and the firm will refuse it. In the second case of mitigating the reputational issue, the executive board will be responsible for providing necessary financial resources in order to provide compensation for customers. The third matter of risk deflection requires communicating with the insurance company and looking for financial sources that will be further paid as the insurance fees. In this case, a chief financial executive will be responsible for evaluating threats and looking for the necessary costs. The final case of risk acceptance does not require any additional causes, since the company will not take any steps for preventing it, as in the previous steps.
A.C. 3.1 - Evaluate the Outcomes of Risk Management Strategies
Provided risk management strategies should help the company to optimize the expected risk consequences and organization’s risk tolerance. It, in turn, is necessary for avoiding the significant business disruption. Accordingly, the first risk management approach of eliminating financial threats caused by investment in new facilities includes the option of not performing this activity. In fact, the avoidance of risky actions that might cause significant financial losses to the firm should allow it to carry threats at all. Such strategy appears as the best solution for addressing such challenges since the company performs no actions that might potentially harm its financial stability. However, the other outcome of this concept is related to the fact that the organization will lose the potential revenue that retaining the risky investment may have allowed.
The second risk management strategy was focused on mitigating the reputational threats. They could appear when the company’s executives discover that some of the project managers provide the wrong information about the new product characteristics. Since the goods have been already launched on the market and advertising is active in the market, the only way to handle the reputational issue is to mitigate it and, thereby, achieve the reduction of its negative impact. The main outcome of such approach is that the company will be able to save its image by providing the truthful data to the community. Moreover, since the organization will confess the fraud existence, it will show its consumers and shareholders that the mistake has been made against the real organizational culture and ethical principles (Cotton, Johnigan, & Givarz, 2016). Therefore, it will be able to make the reputational risk smaller than in case of negation any fraud.
The main outcome of the third strategy, which is premised on transferring the liability risk by the contract at the insurance firm, is as follows. The company will not be able to repay the cost of financial losses of its contractor. Instead of it, the insurance organization will be responsible for covering the cost of failure made by it during the contract performance.
Finally, the strategy of accepting the risk has been proposed to manage the challenge of the natural disasters’ occurrence, such as the flood and earthquake. By accepting such risks, the company shows that it is taking a change that these issues will not occur. As a result, it will help to save money, which will be provided for other projects instead of financing the risk management process of the issue with the low probability of happening.
A.C. 3.2 - Determine Actions to Respond to Outcomes of Risk Strategies
In order to respond to potential outcomes of proposed risk strategies, the company’s executives should take several actions. Accordingly, in order to correct the results of avoiding the financial threat, the firm’s executives should firstly calculate the costs of investment and forecast its future cash flow (NPV, IRR, and other ratios). Next, it is necessary to assess the probability of risk occurrence, i.e. the likelihood of losing money on investment and the overall impact on business. While mitigating the reputational issue the enterprise should provide compensation to customers, dismiss the persons responsible for fraud, and ensure the fact that in future it will not allow such unethical behavior again. Further, in order to transfer the liability concern to the insurance organization, the firm should pay insurance premium. However, comparing with the potential financial fees that the company would be ought to repay to its contractor, these expenses seem to be comparatively minor. Finally, while accepting the threat of the flood and earthquake the enterprise actually should not take any actions while preparing for them. However, it is also necessary to assess these challenges and determine their likelihood and potential impacts in order to be completely aware about the correct choice of such strategy.