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Business owners and managers will do well to make a risk analysis as it will help to make important and strategic decisions, prevent problems and to be ready for the otherwise unexpected. It may be helpful to use a case study and try and fill in a risk analysis tool as an example. Risks are classified into the following categories:
Strategic risks are 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 risks or 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.
A simple case study: Getachew is head of the maintenance department of a factory in Addis Abeba. He prepares the annual budget for maintenance and repairs, approves maintenance activities to be carried out and he prepares the spare parts purchase requests, which is sent to accounts for approval. Spare parts are purchased from a list of preferred suppliers, which is reviewed annually and approved by Getachew as well. Maintenance activities are carried out effectively for a number of years now and Getachew’s supervisor is pleased with the performance of the department, even though costs are high. He fully trusts Getachew and leaves him free to manage the department.
What risk is the company exposed to in this case? Because there is no separation of roles and supervision is minimal, Getachew is in a position and may be tempted to manipulate the system and benefit from it. He may inflate the budget to the advantage of the preferred suppliers. Preferred suppliers in their turn will be tempted to pay the kick backs that Getachew may be looking for to remain on the list of preferred suppliers and to be rewarded contracts. The company loses money as a result as it continues to pay prices that are too high. According to the classification above, the risk the company is exposed to is an operational risk. It is almost certain to happen and probably with a moderate financial loss. The risk is therefore high and something needs to be done. The tools below may help:
Admittedly, the case is not spectacular but it is my guess that many companies face similar situations and that such fraud is almost routine. Interestingly enough, most risks that we run are not so much the rare and dramatic but smaller and more regular incidents. That doesn’t mean they are low risks though. Remember that many small holes can sink a big ship.