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In order to be able to reduce risk and to know what to do if things begin to go wrong, it is important to carry out a risk analysis, and draw up response plans. We will look into the concept of risk analysis and discuss how being aware of risks can help to develop a risk response plan, or plan “B”.
Risk is sometimes calculated as the product of the chance that something bad may happen and the volume of loss this may cause. The higher the chance that something may happen and the bigger the effect this will have, the higher will be the risk. The level of risk may be reduced again by dividing the product by the capacity of an organization or community to deal with events. The equation looks as follows:
Risk = Chance x Effect
For example, the likeliness of the flooding of major rivers in Ethiopia seems to be increasing every year, resulting in sometimes quite serious damage and losses.
river banks will therefore be at a risk, which by the way seems to be increasing as we have been witnessing over the past few years.
Risks may be classified into the following categories:
Strategic risks may be defined as risks to the organization’s objectives, arising from adverse business decisions or improper implementation of those decisions. Key elements of strategic risks are the business’s strategies to achieve the objectives, the resources deployed to achieve the objectives, the quality of the implementation, and security issues.
Operational risks are the risks of direct or indirect loss resulting from inadequate or failed internal processes, people & systems or from external events. Key elements are the administrative organization of the business, financial management, accountability & compliance, internal control and again security issues.
Reputation risk is the potential that negative publicity regarding an institution’s business practices, whether true or not, will cause a decline in the social base, costly litigation or revenue reductions. Key elements of reputation risks are communication with all categories of stakeholders, strong and consistent enforcement of compliance, ensuring ethical practice and code of conduct.
Now, the essence of risk management or risk reduction is to be aware and act in time. How? By structured brainstorming (What if?), making a so called SWOT analysis (SWOT = Strengths, Weaknesses, Opportunities, Threats) and finally drawing up a risk management plan.
An effective risk management plan will basically consist of three components: A qualitative risk analysis, a detailed risk description and the risk response. Here follow templates of each of these components which may be of help in carrying out the risk analysis.
I’d like to encourage the readers of this column to try and work out a risk analysis of their business, using these templates and draw up a response plan. You may look for examples in the chances of fraud affecting your business (an operational risk). While doing this you may find that carrying out a risk analysis is actually an exercise that will provide you with more insight in the kind of things you can prepare yourself for, take corrective measures and have a Plan “B” in place.