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ADMISSION: HDE314-C007-3163/16



Importance of Risk Management to Organizations

Risk management is simply the identification, assessment and prioritization of risks, followed by
occurrence and the impact of negative events, as well as to maximize the realization of
opportunities. What is considered a risk? Risks can come from uncertainty in financial markets,
project failures, legal actions, regulatory liabilities, accidents, and natural disasters as well as
simple human error. The definition of risk is generally compartmentalized based upon whether
the risk is in the context of business continuity, project management, security, engineering,
industrial processes, financial portfolios, actuarial assessments, or public health and safety. The
potential list is finite, but is certainly overwhelming. Within the context of Reliability Excellence
and effective continuous improvement, risk management can be limited to two major categories:
business and asset risk.

The primary objective of any company is to maximize shareholders wealth. The shareholders
appoint agents who take various investing and financing decisions to achieve the firms
objectives. The main criteria are to maximize returns and minimize risks related to any decision.
Meidelland Kaarboe (2017)define risk management as the entire process of identifying,
evaluating, controlling and reviewing risks, to make sure that an organization is only exposed to
those risks that it needs to take to achieve its primary objectives. Risk management, then, is an
integral part of managing a business because risks cannot be cannot be eliminated but can be
transferred, reduced, avoided, retained, or shared.
Operating in a dynamic environment, corporations are faced by various types of risks. Some may
be external in nature, which are not under the direct control of the management, like political
environment, changes in exchange rates or changes in interest rates (Carvalho& Junior, 2015).
Others may be internal in nature which the management can control to a great extent, for
example risks associated with non-compliance in financial reporting or non-compliance with
labor laws (Spurgin&Stupples, 2016).
The uncertain economic times of the past few years have had a major effect on how companies
operate these days. Companies that used to operate smoothly with the help of forecasts and
projections now refrain from making business judgments that are set in stone. Now, companies
have a renewed focus: to manage risk. Risk is the main cause of uncertainty in any organisation.
Thus, companies increasingly focus more on identifying risks and managing them before they
even affect the business. The ability to manage risk will help companies act more confidently on
future business decisions. Their knowledge of the risks they are facing will give them various
options on how to deal with potential problems. Corporations operate in a dynamic environment.
Hence the future remains uncertain to a large extent, allowing for fate to play a part in the results
that are achieved by the companies. However, the role of fate has reduced considerably over the
years. With the help of probability theory and careful evaluation of the environment, companies
are now able to predict, to some extent, the various risks that may have a critical impact on their
business. The primary objective of any company is to maximize shareholders' wealth. The
shareholders appoint agents (read managers) who take various investing and financing decisions
to achieve the firm's objectives. The main criteria are to maximize returns and minimize risks
related to any decision.

According to a survey conducted by advisory firm PPB, risk is defined in this manner:

Organizations face internal and external actors and influences that make it uncertain whether,
when, and the extent to which they will achieve or exceed their objectives. The effect this
uncertainty has on the organizations objectives is risk.

'Risk management' therefore is an integral part of managing a business. From the recent
devastation in the United States, we have come to realize that companies like Wal-Mart and
Home Depot, which have active risk management programmes in place, were much better poised
to deal with hurricane Katrina than the government or other companies who have not yet
embraced the advantages of risk management.

Risk management is important to an organization in a number of ways.

Foremost, without risk management, a firm cannot possibly define its objectives for the future. If
a company defines objectives without taking risks into consideration, chances are that they will
lose direction once any of the aforementioned risks hit home (Hopkin, 2017). Secondly, the
ability to manage risk helps companies act more confidently on future business decisions
(Tavana, 2014). Knowledge about risks gives corporations various options on how to deal with
potential problems. This is because risk management team in an organization help identify risks,
come up with strategies to guard against these risks, execute these strategies, and motivate all
members of the company to cooperate in these strategies (Spurgin&Stupples, 2016). The risk
management team also assesses each risk and determines which of them are critical for the
business. Critical risks are those that could have an adverse impact on the business (Carvalho&
Junior, 2015); these should then be given importance and should be prioritized.
In recent years, many companies have added risk management departments to their team. The
role of this team is to identify risks, come up with strategies to guard against these risks, to
execute these strategies, and to motivate all members of the company to cooperate in these
strategies. Larger organizations generally face more risks, so their risk management strategies
also need to be more sophisticated. Also, the risk management team is responsible for assessing
each risk and determining which of them are critical for the business. The critical risks are those
that could have an adverse impact on the business; these should then be given importance and
should be prioritized. The whole goal of risk management is to make sure that the company only
takes the risks that will help it achieve its primary objectives while keeping all other risks under

Due to the prevailing focus on risk, risk management jobs have opened up. Risk management
jobs are usually considered as financial careers because most of the risks that businesses face are
closely tied to the companys financial standing.

Effective risk management strategies allow you to identify your projects strengths, weaknesses,
opportunities and threats. By planning for unexpected events, you can be ready to respond if they
arise. To ensure your projects success, define how you will handle potential risks so you can
identify, mitigate or avoid problems when you need to do. Successful project managers recognize
that risk management is important, because achieving a projects goals depends on planning,
preparation, results and evaluation that contribute to achieving strategic goals.

Risk management plans contribute to project success by establishing a list of internal and
external risks. This plan typically includes the identified risks, probability of occurrence,
potential impact and proposed actions. Low risk events usually have little or no impact on cost,
schedule or performance. Moderate risk causes some increase in cost, disruption of schedule or
degradation of performance. High risk events are likely to cause a significant increase in the
budget, disruption of the schedule or performance problems.
To ensure that projects run smoothly, effective project managers communicate their plan to the
project sponsors, stakeholders and team members. This sets expectations to people who provide
funding and are affected by the outcomes. It ensures that the project runs smoothly so one step
proceeds to the next without disruption. By identifying, avoiding and dealing with potential risks
in advance, you ensure that your employees can respond effectively when challenges emerge and
require intervention.

By defining risk management processes for your company, you make success more likely by
minimizing and eliminating negative risks so projects can be finished on time. This enables you
to meet your budget and fulfill targeted objectives. When you dont have risk management
strategies in place, your projects get exposed to problems and become vulnerable. Effective risk
management strategies allow your company to maximize profits and minimize expenses on
activities that dont produce a return on investment. Through detailed analysis, effective leaders
prioritize ongoing work based on the results produced, despite the odds.

To evaluate your projects success so you can use the best practices on your next project, assess
the impact of your activities on mitigating exposure to problems and exploiting opportunities that
capitalize on your companys strengths. For example, if you develop and deliver a training
program that creates awareness about internet security, including phishing, viruses and identity
theft, measure the number of help desk calls received about these problems. If they go down, you
can reasonably assume your risk management initiatives have contributed to success. If not,
revise your training program

Opportunities for identifying risky situations

There are six key ways that an organization can employ to identify opportunities in risky
To begin with is the identification of opportunities and risks in operations. Risk identification
provides organizations with opportunities, indicators, and information that allow organizations to
raise major risks before they adversely affect operations and hence the business (Hopkin,
2017).The second step way is to analyze and prioritize risks. According to Meidell and Kaarboe
(2017), risk analysis converts opportunities identified in the step one above into decision-making
information. This step involves the risks and/or opportunities probability, impact, and exposure.
These elements allow operations staff to rank opportunities and risks, which in turn allows them
to direct considerable energy into managing the list of top opportunities and risks.
The third step involves planning and scheduling risk actions in order to help realize the benefits
of opportunities. The planning activities translate the prioritized risks and opportunities list into
action plans. Planning involves developing detailed strategies and actions for each of the top
opportunities and risks, prioritizing opportunities and risk actions, and creating an integrated
opportunity and risk management plan (Paraschivescu, 2016). Scheduling involves integration of
opportunities available and tasks required to implement the risk action plans into day-to-day
operations activities by assigning them to individuals or roles and actively tracking their status
(Tavana, 2014).
The fourth stage involves tracking and reporting the opportunities and risks. During the risk
tracking step, information is gathered about how the opportunities can be carefully be embraced.
The information obtained supports the decisions and actions that will be made in the next step
(risk control) (Paraschivescu, 2016). Fifth is controlling opportunities against risks and lastly
leaning from the opportunities and risks that were encountered.

In conclusion, the purpose of risk management is to: identify possible risks, reduce or
allocate risks, provide a rational basis for better decision making in regards to all risks, plan,
assessing and managing risks is the best weapon you have against project catastrophes.
Additionally, continuous risk management will ensure that high priority risks are aggressively
managed and that all risks are cost-effectively managed throughout the project. Lastly,
continuous risk management provides management at all levels with the information required to
make informed decisions on issues critical to continuous risk management n organizations

Carvalho, M. d., & Junior, R. R. (2015). Impact of risk management on project performance: the
importance of soft skills. International Journal of Production Research, 53(2), 321-340.
Hopkin, P. (2017). Fundamentals of Risk Management: Understanding, Evaluating and
Implementing Effective Risk Management. New York: Kogan Page.
Meidell, A., &Kaarbe, K. (2017). How the enterprise risk management function influences
decision-making in the organization A field study of a large, global oil and gas
company. The British Accounting Review, 49(Accounting and Risk), 39-55.
Paraschivescu, A. O. (2016). Risk Management and Quality Management an Integrate
Approach. Economy Transdisciplinarity Cognition, 19(1), 55-61.
Spurgin, A. J., &Stupples, D. W. (2016). Decision-Making in High Risk Organizations under
Stress Conditions. Boca Raton: CRC Press.
Tavana, M. (2014). Developing Business Strategies and Identifying Risk Factors in Modern
Organizations. Hershey, PA: IGI Global.