RISK MANAGEMENT BASICS FOR MBA

RISK MANAGEMENT BASICS FOR MBA

MANAGING RISK: YOU CAN AND SHOULD

VULNERABILITY ANALYSIS

INSURANCE

ACTIONS

TRAINING

MANAGING RISK: YOU CAN AND SHOULD

Manage risk to protect your company; in fact, many insurers make the development of a risk management process or plan: a condition of granting insurance coverage. No risk management process can prevent every possible setback from occurring. But a good risk management process can minimize the financial loss your business will suffer; as well as help prevent injuries and death.

You can take precautions in case something bad does happen and this section gives you some pointers including: how to create a risk management process; how to determine what risks You're vulnerable to and how to take action.

A formal risk management process greatly reduces your company's exposure to risk and undoubtedly saves your organization time, money and loss of employee productivity. Creating a risk management process requires the concerted effort of one or more employees during an extended period of time. These employees include: top management, as well as individuals tasked with leading the risk management process. Here are seven steps for developing a risk management process that really works:

1)     Get the commitment of top management

To create a risk management program that will work over the long haul, you must have the support of top management. An explanation of the potential risks to the company of ignoring this vital process supported with hard facts and figures, will generally be enough to gain the support of even the most reluctant manager.

2)     Assign one person to lead your company's risk management efforts

One person should have ultimate responsibility for your organization's risk management. Process such a policy ensures accountability and prevents finger-pointing if something goes wrong and the business isn't prepared for such an event. This individual will be in charge of leading and implementing the steps that follow.

3)     Establish a risk control committee

Employees can participate in the risk management process by helping to identify risks and by taking actions to minimize their potential impact on your organization. The committee should also track risk and employee injury, Trends and take action to reduce risks and injuries. Make sure that the committee includes a broad cross-section of employees from all levels and all parts of the organization.

4)     Create an emergency action plan

If the unthinkable: a fire and explosion; a natural disaster; a terrorist attack happens; will all your employees know exactly what to do and where to go to protect themselves and your organization's property from damage or destruction. An emergency action plan ensures that they will.

5)     Establish a formal self-inspection program

Is your workplace safe? Are you sure? A self-inspection program should identify potential safety hazards and take action to make repairs or Corrections. Conduct a vulnerability analysis and use members of your risk control committee to conduct inspections throughout your organization.

6)     Establish an accident and safety incident investigation program

The most well-protected organizations learn from accidents and incidents and they use this information to help prevent future accidents and incidents. Appoint someone in your organization to investigate every accident and safety incident to determine what lessons you can learn from the mishap.

7)     Develop a training and education program

Train and educate your employees to identify hazards prevent injuries to themselves and others and respond appropriately in case of emergency or disaster.

The previous steps are the basics of establishing a strong Foundation of risk management in your organization. You may wish to do even more; you may want to tap into the expertise of Consultants who specialize in Risk Management as you go through the process. Whatever you decide to do, don't forget that sufficient foresight and planning can help prevent losses and reduce risk.

 

VULNERABILITY ANALYSIS

Before you can effectively manage the risks that your organization is or will be exposed to, you need to understand the specific risks you're up against. The goal of vulnerability analysis is to assess the probability and potential impact of the different risks that you identify.

Use the vulnerability analysis chart to score your organization. The lower your score the better. If you identify risks with a high score, give them a high priority in your organization and address those risks immediately. If you haven't already taken care of them, make the following steps adapted from processes developed by the federal emergency management administration (fema) a part of your vulnerability analysis

·        Step 1 list potential risks

In the first column of the chart, list all the potential risks that could affect your facility and the people in it. Be sure to consider risks that could occur in your facility or within your community. Bring your risk control committee into the process to help ensure all possible risks are brought to light. As you consider the different risks that could possibly occur, think in terms of the following potential areas of risk:

¾    Human error

One potential employee error driven risks: are your business exposed to? Are your employees trained to work safely? Do they know what to do in an emergency? Consider potential risks as a result of poor training, poor maintenance, carelessness, misconduct, substance abuse, fatigue

¾    Business

What kinds of risks does your organization face that are uniquely business risks? The risks that a business faces can be quite different from the risks that an individual faces. Consider potential risks as a result of malpractice, embezzlement, product liability, fraud, loss of key person, errors and omissions, construction defects, worker injury and death, non-performance.

¾     historical

What types of risks have your community your facility and other business facilities in your area faced in the past. Consider potential risks as a result of fires, severe weather, hazardous material spills, transportation accidents, earthquakes, hurricanes, tornadoes, terrorism, utility outages.

¾     geographic

What can happen as a result of your facility's geographic location? Consider potential risks as a result of: your proximity to floodplains, seismic faults and dams; your proximity to companies that produce, store, use or transport, hazardous materials; your proximity to major transportation routes and airports; your proximity to nuclear power plants.

¾    Technological

What could happen if you experience a process or system failure? Consider potential risks as: a result of fire, explosion or hazardous materials incident; safety system failure; telecommunications failure; computer system failure; power of failure; heating or cooling system failure; emergency notification system failure.

¾    Physical

What types of risks does the design or construction of the facility pose? Does the physical facility enhance safety or detract from it? Consider potential risks as a result of the physical construction of the facility, hazardous processes or byproducts, facilities for restoring combustibles, layout of equipment, lighting, evacuation routes and exits, proximity of shelter areas.

·        Step 2 estimate the probability of the risks

In the probability column of the chart, rate the likelihood of each risk's occurrence by using a simple scale of one to five with one as the lowest probability and five as the highest. You need to rely on your own experience and the experience of others in your company or industry to develop reasonably accurate numbers.

·        Step 3 assess the potential human impact

Analyze the potential human impact of each potential risk: the possibility of death or injury. In other words, assign a rating in the human impact column of the chart by using a one to five scale with one is the lowest impact and five as the highest. Again, draw on your experience or on the experience of others in your company or industry to develop reasonably accurate numbers.

·        Step 4 assess the potential property impact

In the property impact column of the chart, consider the potential for property losses and damage assign a rating by using a one to five scale with one being the lowest impact and five being the highest. Consider potential risks in terms of cost to replace, cost to set up temporary replacement, cost to repair. For example, although a utility outage will likely have a low probability of property loss or damage perhaps a one or two; a terrorist attack resulting in physical damage would score higher perhaps a four or five.

·        Step 5 assess the potential business impact

Consider the potential laws of market share, due to the potential risks you identify. Assign a rating in the business impact column, by using a one to five scale with one being the lowest impact and five being the highest. Consider potential risks in terms of business interruption, employees who can't report to work, customers who can't reach your facility, company in violation of contractual agreements, imposition of fines and penalties or legal costs, interruption of receipt of critical supplies, interruption of product distribution (for example, an earthquake could potentially result in your offices being made off limits by authorities for days, weeks or even months creating a major and potentially long-lasting business interruption).

·        Step 6 assess internal and external resources

Assess your company's resources and your ability to respond to situations. Assign a score to your internal resources and external resources by using a one to five scale, with one representing a lack of resources to respond and five representing more than sufficient resources to respond. To perform this evaluation consider: each potential risk from beginning to end and evaluate each resource that you need to respond. For each risk, ask these questions:

¾    Do we have the needed resources and capabilities to respond

¾    Will our external resources be able to respond to us in adverse times as quickly as we may need them

¾    Will they have other priority areas to serve

If the answers are yes you, can move on to the next assessment. If the answers are no, identify what you can do to correct the problem. For example, you may need to develop additional risk management procedures, conduct additional training, acquire additional equipment, establish mutual aid agreements, establish agreements with specialized contractors.

·        Step 7 add the columns total the scores you've rated for each potential risk

The lower your score, the better risks. With a high score, should be given a high priority in your organization and addressed immediately. Although this is a subjective rating exercise, the comparisons help determine your risk planning and resource priorities.

 

INSURANCE

When you buy insurance for your business, you shift the risk of loss to a third party. In this case, an insurance company. The insurance company essentially is betting that you won't suffer a loss due to the risk. It hedges its bets by collecting a sufficiently high premium at rates, based on the statistical predictions of actuaries (people who specialize in the mathematics of risk), to make money off your business even if you do suffer a loss at some point down the road.

Here are the most important and common kinds of insurance to consider buying and maintaining for your business.

·        Liability

If someone is injured or has property damaged or destroyed while on your premises or while using your product or service, your organization may be sued for millions of dollars in damages. Liability insurance protects your organization from these kinds of financial losses. If you lease your office or manufacturing space, your landlord probably requires you to carry a certain amount of liability insurance for protection.

·        Property

Natural disasters such as earthquakes, floods and tornadoes wreak billions of dollars worth of property damage every year. But an estimated 70% of all business property losses happen not as a result of natural disasters, but because of employing negligence, errors or lack of planning. Property insurance generally covers the risk of property loss due to fire, smoke, wind and other sources of damage or destruction.

·         business interruption

If property damage or another situation forces your business to close until you can repair or rebuild your facility, business interruption insurance covers you for the risk of lost sales.

·        Technology risk

Most businesses today have information technology exposure to their business operations. Companies are at risk from invasion by electronic intruders whether the damage occurs on an external website or an internal internet accompany network. Cyber insurance describes a group of insurance policies that protect a company against losses from hacked computers, virus attacks, copyright infringement, web content liability and other technology related risks.

·        Environmental

If your business has anything to do with construction landfills, underground storage, tanks chemical production, recycling facilities, maintenance facilities or anything else that may have or come into contact with a negative environmental impact, environmental insurance designed to protect your company if it's found responsible for damaging the environment is right up your alley.

·        Malpractice

Also known as errors and omissions (e and o) or professional liability insurance. Business malpractice insurance covers professionals who give advice during the normal course of business, doctors, lawyers, consultants, accountants and stock brokers are among those who need malpractice insurance in case their clients are injured physically, financially or emotionally as a result of their work errors and omissions. Insurance have received much greater attention as a result of the financial misdeeds of enron, tycho and other companies similar to them.

·        Fidelity bond

This is a specialized but widely used form of insurance that protects employers from theft, larceny or embezzlement, committed by covered employees. Ocean marine, the oldest form of insurance in existence. Ocean marine insurance covers four key areas pertaining to transporting goods via ship. The vessel or hull the cargo earnings such as freight passage, money, commissions or profit and liability, also known as protection and indemnity.

·        T person

Smaller businesses that depend on one person perhaps the founder or chief executive to lead the organizations and bring in business, usually carry key person insurance. In the event of this person's death or incapacity, key person coverage pays a fixed amount to the business. Much as a life insurance policy pays a fixed amount of money to a surviving spouse or other beneficiary.

 

ACTIONS

After you've assessed your potential risks and prioritize them by their urgency and potential impact, you need to take action to reduce them or eliminate them entirely. Consider four basic strategies when selecting your risk management tools. Keep them in mind as you decide what strategies you'll pursue to reach your risk management goals.

·        Shift the risk

One way of dealing with the risk of loss is to shift the risk to someone else: when you buy an insurance policy, you shift the risk to the insurance company; when you draft contracts with subcontractors that require them to carry liability insurance, you shift the risk to your subcontractors and their insurance companies.

·        Avoid the risk

By identifying and correcting hazardous situations, say for example, by repairing the brakes on a company delivery truck, you can avoid potential risks altogether.

·        Reduce the risk

Although you can't entirely avoid some risks, you can reduce them. For example, training your employees in the proper techniques for lifting heavy objects, substantially reduces the incidence of back injuries which result in loss productivity.

·        Assume the risk

In some cases, an organization may decide to bear the financial burden of a risk by self-insuring for workers compensation claims for example or by paying higher deductibles on insurance policies, an organization assumes all or part of a risk of loss. This course of action should be taken only after a very careful assessment of the risk, along with a detailed cost benefit study

Remember! Whatever you do to address risk, do something after you've determined that a potential risk of injury or loss exists. You have to take action by shifting, avoiding, reducing or assuming the risk. Don't waste time hoping that the risk will go away. If you just ignore it, it won't.

 

TRAINING

Employees are some of the most powerful tools in the toolbox of any company that's looking to reduce its risk of loss. Employees can not only proactively identify and cure potential risks, but also can train others to do the same. The result is a much safer workplace, with improved employee morale and productivity.

Safety training can cover any potential risk in the workplace. Because each company and industry is different, you should tailor your employee training to the exact needs of your organization. Typical topics include: bloodborne pathogens, correct lifting techniques, ergonomics, adapting working conditions to better suit employees, respiratory safety, forklift safety, electrical safety, office security, first aid and cpr evacuation plan.

The key to employee safety is the behavior of the employees themselves. Human error is reported to be the single largest cause of workplace emergencies. Incentives can play a role in rewarding safe employee behavior, thereby decreasing the amount of incidents that take place. Here are some guidelines for using incentives to encourage safe behavior at work.

·        Customize the incentives for your organization

What works for one company may not work for yours. Each organizational culture has its own unique needs and motivators. If you pick the right incentives: things that your employees themselves value, your safety program will be much stronger than a program that uses no incentives or the wrong incentives.

·        Distribute the incentives fairly

Incentives must be distributed fairly, avoid contests that reward only a few people or that reinforce the view that safety is a matter of chance or luck

·        Make your incentives meaningful and timely

Incentives are meaningful when they're well-proportioned to specific behaviors or results. In other words, employees who exhibit safe behavior during the course of an entire year should receive a more significant reward than employees who exhibit safe behavior for only a month. Although you should still reward and encourage these employees for their safe behavior, also give rewards whether they're material gifts or verbal acknowledgments in a timely manner. Soon after employees reach their goals. Doing so, boosts the impact of the incentive