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Posts Tagged ‘Enterprise Risk Management’

Why Understanding of Risk Management is Important for Managers?

In Uncategorized on September 17, 2015 at 4:25 am

Understanding of risk is complex which scare people to develop its understanding. Michael Power, Professor of London School of Economics (LSE), has brought attention to different boundaries of risk management from ‘Risk Management of nothing’ to ‘Risk Management of Everything’. This can be interpreted: one cannot totally avoid the risk management and cannot claim to include all existing risk. Inclusion and exclusion of risk depends upon the understanding of risk itself within management.

In this blog, first I will discuss what a manager is supposed to do and why he/she faces dilemmas in management of risks. Then how those dilemmas can be tackled through better understanding of risk management.

A manager does not supposed to do all work by himself/herself rather he/she engage in planning, organising, directing and controlling. The management major role is to enhance motivation of the team to deliver work in timely and effective manner with agreed quality to achieve organisational objectives.

Risk navigation can be a tight rope walk

Several questions arise when management process actually followed during practice at grassroot level.

  1. How to estimate the risks during planning of management activities
  2. How to organise work so that it can get complete on time with agreed quality without operational errors?
  3. If I pass on the information to my colleagues, how I will make sure it is understood same and performed in the same manner as directed?
  4. There is a likely chances of realizing a gap between the expectation set and the actual results? How to control the risk to achieve organisational objectives?

Management knowledge of risk should not only confined to resolving dilemmas but also to enhance strategies. A better planning, organising, directing and controlling can only be achieved if management understand their own risks. For example, if a company would like to construct a building and have experience of 5 years. The company recorded its own risks for example 100 risks related to construction in particular geography and use industry risk data. This company can better estimate the risk from a new company in the market having no experience of handling construction risks.

All companies face operational errors whether they are large or small. Understanding of the operational risks can make safety systems more profound and robust to deal with possible errors. It is observed that corrections of errors do not pose much issues rather repetition of errors make blunders and cause failures.

The understanding of risks also support managers to grow in their career path. Board of the director, CEO of the company has to deal with risks at strategic level which have higher impact though, general management has to face only day to day risks. Expectation of understanding of risk from an agent of the company and director would be substantially different. Risk Management is an important part of Management at all level and cannot be separated. Don’t, get frighten from risk just learn to deal with it, the benefits will follow you.

“A ship is always safe at the shore – but that is NOT what it is built for.” – Albert Einstein

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Does Enterprise Risk Management add any value to traditional risk management?

In Uncategorized on April 27, 2014 at 12:06 pm

There has always been a debate over the requirement of ERM specialist when the same work can be done by a risk manager in traditional organisations.  The debate poses questions in our mind – Does ERM make any sense in cost benefit analysis? and How to check that risk is truly embedded in the organisation?

There is high cost, time and money involved in implementation of ERM while under traditional risk management, each unit manager is responsible to manage their own unit risk.  Traditional risk management does not provide interaction among the various risks which is seriously reflected in corporate decision making. It is a small example of how corporate fails if they don’t understand the problems and risks within their own units. This lead to genesis of idea of ‘Enterprise Risk Management’. ERM is an umbrella term which considers all risks in the organisation in holistic manner and helps companies to achieve their objectives within their risk appetite.

The next question that needed to be addressed is What is the right time to implement ERM? The industry realize the value of ERM only in hard times when some CAT event happen, or major regulatory penalty occur. These event wipe out major reserve of the insurance companies if not adequate risk management has been taken care of.  In hard market, the corporates have no money or very less money to spend on procedure for implementation of ERM, so, it is only the good time (soft market), when companies can invest on implementation of ERM.

In the last few weeks, I have visited many insurance companies in Indian insurance market and found that they are still in the position of understanding the value of ERM.  ERM has only positive and negative aspect – if perceived value of ERM is not understood, it will be looked certainly as a cost to the company and if understood it creates efficiency and reduce cost. The common and most adopted approach is defensive approach to tick mark the risk management options which is required by the regulatory bodies. Other developed markets have learnt their lessons in recent financial crisis and realized the value of ERM but now they face problem of understanding of ERM and benchmarking. My next blog will discuss the stages of development of risk management throughout the world. 

Feel free to contact me for any consultation or discussion of ERM in your organization. “ruchi(dot)agarwal at-the-rate cgpworldwide.com”