Risk management - American businessAfter a huge marketing campaign, a computer company sends out a defective game. The same people who stood hours in line to be the first to own it cram the stores demanding their money back. The company loses millions of dollars.
A professional bungee jumper using a brand new bungee cord makes a flawless jump from 500 feet in a televised extreme sporting event. The cord breaks and she falls, injuring her ribs and breaking her nose. She sues the bungee cord manufacturer.
A fire whirls through a textile mill. During the event, five employees are injured and require hospital care. Afterward, the company can’t deliver the 500 bolts of cloth it promised in writing to another business. The injured employees and the other business sue, the employees because they had complained for years about the sparks coming from one of the weaving machines, the other company because the loss of the cloth will put them out of business.
A hospital patient is given 100 times the amount of medication he should have received. It turns out that the pharmacy staff could not accurately read the handwriting on the original prescription. The patient dies.
The above scenarios are business risks. In order to understand what risk management is, it is important to understand what risk is. Used in the business sense, the word risk means something that in some way poses a threat to the stability and well-being of an organization.
There are as many types of risks as there are types of businesses. However, some broad categories apply to many businesses. Some common examples of risk include
- when a business loses money unexpectedly
- when the business incurs damages to its physical or electronic products
- when employees are injured on the job
- when a business’s client or clients are injured or suffer a loss as a result of using the firm’s products or services
Risk management is the specialty of trying to minimize risks to businesses. Risk managers—people who specialize in the field of risk management—do four basic things. First, they try to identify the risks that are common to their type of business before risky events happen. Second, they work on strategies to prevent risks they know about, and if they can’t prevent them, they try to lessen the impact of risk on the business.
These first two aspects of risk management, which are very positive for businesses, are known by many different names, such as performance improvement, continuous quality improvement (CQI), total quality improvement (TQI), or total quality management (TQM). Basically all of these names mean that businesses encourage their employees to look for ways to improve how the business operates. Employee suggestions for improvement are welcomed, and there is often a special committee formed to discuss risks and explore suggestions. This committee then writes plans and policies regarding how the company will deal with risks.
The third aspect of a risk manager’s job comes into play when something actually happens that causes a serious problem. In some cases this is called an untoward event or a sentinel event. To deal with it, risk managers try to figure out exactly what happened and will ask a lot of questions. Who was involved? What happened? When did it happen? Where did it happen? Why did it happen? How did it happen? They try to get to the bottom of the problem without blaming those involved. By asking questions, particularly WHY, over and over again and stressing that their purpose isn’t to get anyone in trouble, risk managers get beyond employees’ fears of being fired because of what happened, and they find out the truth. The process is a lot like peeling an onion. Risk managers peel back the layers of the problem to expose its root cause, or what made the problem happen in the first place. Once they gather all of the information, they can study it and then find ways to fix the problem so that it doesn’t happen again. This is called rootcause analysis.
Finally, risk managers help clean up messy situations in the sense that they handle claims, which are the legal obligations a business has to pay to correct a problem when it occurs—that is, its liability. Liability and risk management go hand in hand, and risk-management people must understand the way the law works.
Risk management is a critically important aspect of business practice. Without diligent people on the lookout for the bumps in the road of business life, businesses would be in serious trouble. No one wants their business to lose money, which leads to worker layoffs and other drastic measures. No business wants to injure anyone or even to be forced to close as the result of a lawsuit. By taking a proactive approach and tackling risks before they happen as well as looking at serious problems honestly, businesses can avoid very serious consequences.