Plato is quoted as saying that “The problem with the future is that more things might happen than will happen.” Or as Pliny said, “The only certainty is that there is nothing certain.” Nowhere is this more evident than in the ever-changing world of business. Today’s managers are faced with a bewildering array of uncertainties as their business environments change at an increasing rate. Many are looking for a solution to the problem of uncertainty, wondering whether it’s possible to find a safe path through the fog. But is business really an act of blind faith? Or is there an alternative approach, one that takes a more responsible stance toward uncertainty?
All business enterprises are inevitably subject to uncertainty, including internal and external threats arising from technical, management, operational, and commercial issues. But uncertainty can also be positive. It can lead to opportunities — opportunities that can only be exploited if they’re recognized early enough. Indeed, it can be argued that business exists to take risks (avoiding threats while exploiting opportunities), since rewards can only come through successful risk-taking. This is why risk management has developed as an important weapon in the manager’s armoury. The aim of risk management is to deal with uncertainty by reducing threats and maximizing opportunities, vital requirements in today’s business world.
Most business decisions are affected by uncertainty. Resource and skill shortages, supplier problems, use of novel technologies, changing requirements, weather and environmental concerns, exchange and interest rates, marketplace developments: all conspire to make the world of business an uncertain place. Many believe that these uncertainties are unfortunate but unavoidable; that we must take our chances while hoping for the best. Proponents of risk management, however, take a different view. They say that risks (both threats and opportunities) are there to be managed, and that effective risk management is one of the key determinants and discriminators of business success. How is risk management linked to success?
Common definitions of risk link uncertainty to objectives. For example, the international risk standard ISO 31000 defines risk as “effect of uncertainty on objectives.” The direct relationship between effective risk management and business success is clear: risks are measured by their potential impact on achievement of business objectives, including delivering value, competitive advantage, reputation enhancement, environmental impact, or regulatory compliance. Failing to manage risks effectively will inevitably lead to failure to meet some or all of these objectives. Conversely, a comprehensive approach to dealing with risk will increase the chances of meeting objectives and enhance the likelihood of business success.
Effective management of risk involves a simple five-phase process:
1) A definition of the objectives and scope of the risk process
2) A comprehensive identification of all risks
3) An objective assessment of the significance of each risk
4) Planning & implementation of appropriate responses
5) Regular review of changes in risk exposure to ensure that progress is being made
These five steps constitute a simple, common-sense, structured approach to dealing with uncertainty and ensuring that proper account is taken of every foreseeable risk. The aim is to allow proactive management in advance, rather than waiting for threats to mature into problems which require a crisis response, or watching possible opportunities vanish without being grasped.
A structured approach to risk management produces hard benefits to the bottom line. It mitigates risk exposure, and unused contingency turns into pure profit. This structured approach also contributes to softer benefits, including improved communication and morale, common understanding of the business and its key challenges, and an increased awareness of risk. Some businesses have developed a risk-aware culture, using proactive risk management to identify and develop business plans, manage programmes and projects, recruit and manage staff, or determine investment priorities.
In reality, risk management isn’t an option: it’s just a matter of how well it’s done. All business decisions are subject to uncertainty, and this requires a response. Business managers might choose to respond in ignorance, or rely on intuition and good luck. Ignoring risk, however, does not make it go away. Intuition, even for an experienced manager, can’t be relied on, particularly in a business world characterized by innovation and change. Relying on good luck is hardly a professional approach to be recommended.
The intelligent and professional response to business uncertainty is to adopt a structured approach to risk management. Incorporate risk management into corporate culture and processes so that it becomes built-in, not bolt-on. This proactive approach will improve decision-making by minimizing uncertainty while maximizing the chances of business success – a clear win-win. When done effectively, risk management can become the single most critical factor in achieving business success.