Wikipedia of Finance - e-learning course on Risk Management Wikipedia Chapter - What is Risk Management Process Overview, Definition, Steps

What is Risk Management Process? Overview, Definition and Process Steps


An Overview – Risk Management Process Definition:

Out of many overview and introduction definitions, one of the well accepted descriptions of risk management is the efficient approach to locating the optimal course of action under ambiguity by identifying, recognizing, assessing, considering, acting on and communicating concerns related to risk. An effective and efficient risk management process demands a developed risk management culture. The risk management culture sustains the entire vision, mission, goals and objectives of a company or project. Restrictions and confinements are set as perimeters and acceptable risk practices and outcomes are communicated.

Risk management process involves making decisions that contribute to the accomplishment of a business’ objectives and goals by pertaining it at the functional areas as well as at the individual activity level. It also enables the management team to make decisions such as the resolution of science-based substantiation and other factors namely, capital costs with advantages and expectations in investing restricted public resources; and the ascendancy and control structures required to support due diligence, accountable, risk-taking, novelty and responsibility.

Risk Management Process Steps:

The strategy of risk management process involves a certain sets of pre-defined steps. The first stage is known as establishing goals and context.  It facilitates the management team to comprehend with the operating environment of the organization. This entails a thorough appreciation of the peripheral surroundings and the internal ethnicity or the cultural environment of the organization. Practicing the tactical strategies, organizational and risk management framework of the organization, further identifying the limitations as well as the opportunities of the operating environment are the fundamental foundations of this analysis.

The risk management framework and culture establishment is commenced during numeral environmental analyses, and this entails the appraisal of the regulatory and dictatorial necessities, policies and standards, industrial principles as well as the pertinent corporate documents and the last year’s risk management and business plans. The developed criterion is supposed to replicate the defined framework that also depends on desired goals, objectives and internal policies of the organization and the benefits/interests of stakeholders. Perceptions of project heads, stakeholders and by legal or regulatory requirements are capable of amending the criteria.

Identifying risks with the help of best available information is the second stage in risk management process and is likely to impact the accomplishment of the desired objectives and goals of the organization, activity or projects. It should also be emphasized that a risk can serve as a chance, opportunities or strength that has not yet been comprehended. Some of the significant questions that assist the risk management process in risk identification are −When, why, where and how will the events of risk will occur and their impact on the desired goals of the projects? Each of our priorities is associated with what degree of risk? What are the risks involved if these priorities are not achieved? Who and how might be involved in the risk management process, for example the role of suppliers, contractors and stakeholders?

The apt risk identification approach will depend on the application area i.e. nature of activities and the hazard groups, the project phase, necessities and client necessities as to desired objectives, the nature of the project, resources available, regulatory outcome and the required level of detail.

Analyzing the identified risks is the third stage or step of risk management process. Contemplation of the source of risk developing events and situations, the outcomes and probabilities to approximate the intrinsic or vulnerable risk without administration in place is termed as risk analysis. Also, it entails classification of the controls, an assessment of their efficiency and the ensuing level of risk with controls in place (the secluded, enduring or controlled risk).

Depending on the level of risk involved, the rationale of analysis and the amount of information available, the analytical techniques namely – qualitative, semi-quantitative and quantitative techniques are practiced. In order to screen the risks, generally qualitative or semi-quantitative techniques are practiced. On the contrary higher risks are managed by expensive quantitative techniques. Risks matrix is the most common tool that is used to estimate risk, both qualitatively and semi-quantitatively. Other instruments for analyzing risks are risk graphs, hazard matrices, risk matrices or monographs.

After the identification and analyzing the risks involved, they are supposed to be compared in opposition to the formerly acknowledged and accepted bearable risk criteria. When using risk matrices this tolerable risk is usually acknowledged with the risk matrix. Should the secluded risk be more than the bearable risk then the explicit risk requires supplementary organized procedures or enhancements in the efficiency of the accessible controls.

Treating or managing the risks that are of high intensity and are unacceptable. As much as this stage is essential the defined purpose of this particular stage of the risk management process is to generate cost efficient opportunities for managing and treating the risks. This stage entails avoiding the risk for as long as possible, then scrutinizing or mitigating the impact of risk, transferring or sharing the risk based on priorities and subsequently accepting the risk.

 Monitoring and reviewing the risks and the risk environment regularly, and continuously communicating with stakeholder, project heads and other authorized personal, consulting with experts, clients (with the management head) and the management team (with the client) and regularly updating the risk management plan by timely reporting the progression.

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