Risk Management - Tools and International Standards - Essay Example

Risk Management Customer Inserts Name Customer Inserts Tutor’s Name 2nd November, 2014 Introduction Risk management is an important task that needs a lot of skill and understanding to make sure that business continuity is undertaken in a proper manner. Risk management has been applied and used in different industries due to the multi-faceted nature of risks which are present within different sectors of the economy. Risk management assists in reducing losses and ensuring future activities or actions are weighted or implemented in a right manner. Risk management requires monitoring, understanding and controlling different set of risks from diverse fields. This analysis will look into different risk management tools, standards and application of risk management techniques in different sectors globally. Risk Tools Risk management involves a lot of techniques such as risk analysis and control which utilizes the application of different strategies to ensure these risks are controlled and managed. Consequently, several tools and strategies have been adopted and deployed by organizations in the process of analysing, controlling and monitoring risks as outlined; a) Decision Trees: several risks present different challenges which require complicated and combined strategies of solving these inherent risks. The use of decision trees presents an opportunity for risk managers and other stakeholders to identify and prioritize risks depending on course of action and remedies for these risks. Decision trees have a mechanism whereby all risks are weighted and arranged in terms of their occurrence and impact (Hillson 2010, p. 78). In the process of drawing a decision tree, the risk should be listed and its possible solutions are also weighed. Therefore, a person draws the risk in a box and therefore, we draw out all the possible solutions from this risk. This process is undertaken for all risks and then the evaluation of the best solution/option is chosen through assignment of a score of cash value for each solution. Each solution or combination of solutions is calculated and then the most cost effective solution is adopted (Borek 2013). Decision trees simplify the tasks of risk management since it allows stakeholders to come up with swift decisions. b) Monte Carlo: Risks occur due to uncertainties which may cause serious damage to a lot of organizations or institutions. As a result, the Monte Carlo simulation is of one the tools used in calculating the impact and solution ranges for certain selected risks. Monte Carlo undertakes risk analysis through building models of possible results and substituting ranges of values in a probability distribution method. The probability distribution method utilized by Monte Carlo simulation recognizes that variables used in risk analysis could have different probabilities of occurrence (Mun 2010). These probability distributions are best used to explain the uncertainty of the occurrence of risks. There are different types of probability distributions depending on the data or values which are being utilized in the calculation. These distributions include Normal, lognormal, uniform, triangular and PERT which are used in the determination of the best solution and method of ensuring risks are managed. Monte Carlo simulation is best suited for projects with unrealistic project costs and deadlines (Hopkinson 2012). c) NPV: this technique has been deployed in understanding financial aspects and costs associated with the occurrence of certain risks. NPV is an acronym for Net Present Value which tracks all the cash flows including inflows and outflows for an organization (Borek 2013). NPV is used in project management whereby the costs of long-term projects are cost and therefore, the time value for money has to be appraised (Close 2008). NPV is effective in calculating financial risks for projects and therefore, decision making process will be simplified. Risk and NPV are related in the sense that calculating the current value of a project is used in projecting the value or success of a project. For instance a positive NPV outlines the aggregate inflows of cash in the future is greater than the prices paid for an investment done today (Hopkinson 2012). Application of Risk Management Risk management is applied in various fields and sectors since all sectors are not risk averse and therefore risk management strategies have to be applied. For instance, the risk of a debtor defaulting due to increases of financing costs affected by factors such as inflation are risks which cannot be anticipated. Depending on the situation, sector or project, risk management tools and strategies can be utilized in these diverse situations as outlined; a) Finance: the finance sector relies heavily on risk management due to volatility of factors which affect finance such as inflation, cost of credit and fiscal changes which are unpredictable in measuring (Hulett 2009, pp. 5-7). As a result, risk analysis, monitoring and control strategies have to be adopted to ensure stability and future stability of the sector. b) Project Management: Projects rely heavily on risk management to ensure successful completion of project since these projects are risk adverse activities. Risk management techniques such as PERT, NPV are utilized within project management. Project managers and stakeholders must undertake risk management to ensure viability and successful implementation of projects (Chapman 2009). c) Insurance: this industry is solely based on assessment of risks and thus it relies on strategies of risk management. As a result, risk analysis in this sector is undertaken to understand strategies of mitigation or compensation for future occurrence of risks (Mun 2010). Risks management lies strategically at the heart of this industry and therefore, risk management strategies and activities are vital for the operations of this sector (Close 2008). d) Manufacturing: Manufacturing processes and activities are guided by protected by regulations and bodies which ensure risk management procedures have been adopted within the sector. Numerous risks are present within manufacturing facilities such as fires, occupational hazards and other capricious risks. Consequently, risk management tools, techniques and strategies need to be adopted in this sector (Hillson 2010, p. 77). e) Professional fields: Professionals such as accountants, engineers, doctors and pilots need risk management skills, tools and techniques to solve unpredictable risks within their fields. For instance, engineers in the USA are guided by the guidelines contained in the IEEE to guide the conduct of engineers and ensure risk management techniques are adopted in their work (Zhang 2013, p. 59). f) Policy Makers: Law makers and stakeholders within different sectors need to utilize safeguards that ensure the well being of the general population. International bodies such as the ISO, the Institute of Risk Management (IRM) and other professional or governmental bodies rely on risk management to ensure better standards are adopted in undertaking several tasks (Hopkin 2012). For instance, if engineers were not guided by the IEEE standards, risk management activities would be chaotic and lack proper direction. International Standards Standards have been adopted by various fields and jurisdictions which assist in the regulation of different practices and activities. ISO (International Standards Organization) is responsible for the regulation and standardization of several globally accepted standards. ISO standards are applied in various regions especially Europe where several jurisdictions and organizations have adopted these standards. The ISO 31000 is a group of standards which related to risk management and include ISO 31000:2009 which define the principles and implementation to these set guidelines (Borek 2013). While, ISO/IEC 31000:2009 which looks into risk management techniques and ISO Guide ISO 73:2009 which looks into the language to be used in defining risk management activities. The adoption of ISO risk management standards depends on different organizations and some jurisdictions such as the USA, China and UK. These countries utilize different standards whihc differ from the ISO 73:2009 and other globally accepted standards. For instance, the United States has adopted different sets of standards which include the ISO 27001, the BS OHSAS 18001 (Occupational Health & Safety Advisory Services) and the IRM (Institute of Risk Management) Guide. These standards are different in terms of defining various risk terms, tools and strategies. However, the OHSAS and other state agencies are mandated to regulate risk management standards adopted in the country (Condamin 2007). Moreover, the US adopts different standards depending on industry such as the IEEE (Institute of Electrical and Electronic Engineers) is widely adopted by engineer s in the US. The United Kingdom has a country came up with a regulatory body, the Risk Management Authority (RMA) whihc guides the implementation of risk standards within the region. The IRM (Institute of Risk Management) standards have been well adopted in the country and continue to guide the implementation of risk management activities in the country. Other bodies in the UK include the BSI (British Standards Institution) which helps in the adoption of standards in the country. China has adopted various risk management standards for different sectors whihc are regulated by the Standardization Administration of China (SAC). The SAC in conjunction with other state and independent bodies are responsible for development of the Guobiao standards (GB Standards) which are the formally recognized standards in the country (Zhang 2013, pp. 58-61). The GB standards are wide ranging and cover all industries in China and businesses are required to meet the requirements of these standards to ensure their businesses are licensed (Chapman 2009). Although, ISO standards have been adopted in major global jurisdictions, they have not been adopted in these countries leading to difference in approaches to risk management tools, approaches and management. The adoption of different risk management standards depends on the culture, business environment and governmental operations in these countries (Hopkin 2012). Conclusion Risk Management has transformed since its adoption within different sectors and organizational bodies such as the ISO. Risk management involves monitoring, estimating and controlling risks which could have negative and adverse effects on organizations. Therefore, risk assessment tools have been developed for easier management of these undefined risks. These tools have been tried and tested within diverse situations and they allow stakeholders and managers to understand risks while at the same time looking for solutions for these risks. Although, risk management is an unpredictable task, techniques such as NPV, PERT and Monte Carlo simulation allow researchers to come up with the best results and solutions for diverse set of risks. Due to the nature of operations several organizations such as the ISO and IEEE have standardized risk management activities. These standards differ based on regions and jurisdictions due to cultural and business operation differences. References Borek, A, Parlikad, A, Webb, G and Woodall, P 2013, Total Information Risk Management: Maximizing the Value of Data and Information Assets, Newnes, Boston. Chapman, C and Ward, S 2009, Managing Project Risk and Uncertainty, Wiley, Chichester. Close, B and Wallace 2008, Project Risk Management: Processes, Techniques and Insights, Springer Science & Business Media, New York. Condamin, L, Louisot, J and Naïm, P 2007, Risk Quantification: Management, Diagnosis and Hedging, John Wiley & Sons, New York. Hillson, D 2010, “What Is Risk? Towards a Common Definition”, InfoRM, Journal of the UK Institute of Risk Management, Vol. 23(1), pp. 75-79. Hopkin, P 2012, Fundamentals of Risk Management: Understanding, Evaluating and Implementing Effective Risk Management, Kogan Page Publishers, Chicago. Hopkinson, M 2012, The Project Risk Maturity Model: Measuring and Improving Risk Management Capability, Gower Publishing, Ltd., London. Hulett, D and Kohl, R 2009, “Defining Risk: A Debate”, Cutter IT Journal, Vol. 15(2), pp. 4-10. Mun, J 2010, Modeling Risk: Applying Monte Carlo Risk Simulation, Strategic Real Options, Stochastic Forecasting, and Portfolio Optimization, John Wiley & Sons, Lowell. Zhang, H 2013, “Risk Management in China: Trends and Challenges for Banks, Asset Managers, and Securities Firms”, Journal of Risk Management, Vol. 67(2), pp. 56-62. Read More