Risk management is a significant expense for any company. There are several skilled professionals that need to be recruited and maintain in order to ensure that the risks inherent in the business are being mitigated efficiently. The expense can be significant. This expense is often a deterrent for smaller firms to not implement risk management. However, the larger firms understand that the value created by risk management activities far outweighs the costs.
In this article, we will have a closer look at how risk management creates value i.e. the various benefits provided by risk management.
Forecasts Probable Issues
One of the benefits of risk management is that it changes the culture of a business organization. Companies that tend to focus more on risk management tend to be more proactive as compared to other companies which can be reactive. Risk management forces the companies to take a hard look at each of their business processes and decide what can possibly go wrong. This detailed what-if analysis helps companies become more proactive and forecast probable issues.
Companies that extensively use risk management have fewer business disruptions as such issues are foreseen and taken care of at an early stage. The proactive approach is very helpful since it helps companies to identify failed projects at an early stage. The continuous feedback helps companies to decide whether investing additional money in a failed project will help it turn around or whether it is just throwing good money after bad!
Avoiding Catastrophic Events
Risk management prepares the companies for all kinds of shocks. Risk managers try to foresee the small shocks which affect the day-to-day business of any firm. However, they also try to focus on catastrophic events. Such events have a very low probability of occurring. However, if they do occur, then companies need to be prepared to deal with them without going bankrupt. Such events have gained prominence in recent years. These events are called black swan events.
Prima facie, risk management sounds like a defensive business activity. It has a negative connotation and the assumption is that the activity is performed to avoid losses. However, during risk management, companies are forced to study their processes and risk factors in detail. The management is aware of all the possible things that can go wrong.
When new products have to be launched or when new markets have to be entered, companies have a ready framework that can be deployed in order to avoid these risks. Hence, in a way, risk management ends up enabling companies to take calculated risks and expedite their growth. Extensive risk management processes mean that the company has a lot of data. This data can be mined in order to gain meaningful insights which ultimately leads to better decisions.
Helps to Stay Competitive
Risk management helps companies to minimize their losses at critical times. These are the times when poorly managed companies struggle to stay afloat. On the other hand, companies that have risk management processes in place tend to minimize their loss. Hence, the competitiveness of such companies stays constant. In fact, it may improve also.
It is a known fact that when adverse events such as recessions occur, companies with better risk management practices continue to stay afloat and have a lot of cash. This is the reason that during a crisis some companies seem to have the extra cash required in order make acquisitions. Risk management processes also force different departments as well as different stakeholders to actively communicate with each other. This communication is helpful since it increases the competitiveness of the company.
Business Process Improvement
The day-to-day processes of risk management force companies to collect more and more information about their processes and operations. As a result, companies are able to identify the parts of the process which are inefficient or where there is scope for improvement.
Risk management departments are supposed to continuously monitor the working or various departments in relation to external entities and look for things that can go wrong. The end result is that during the process many opportunities are identified and processes are improved. Risk management processes often work hand in hand with business process reengineering and quality improvements in the process.
Enables Better Budgeting
Companies that have risk management processes in place have better control of their finances as opposed to other companies. This is because they often have a close look at their financial numbers and try to trim any waste. The end result is that these companies have a better knowledge of their processes. As a result, these companies also have a better knowledge of their budgets. They can create more efficient budgets wherein funds can be allocated to achieve the goals of the company in the most optimized manner possible. In such companies, budgets do not have to rely on guesswork.
The bottom line is that the risk management process is highly beneficial. In the short run, it might seem like these activities only incur additional costs. However, over the course of time, these activities save the company significant sums of money. The benefits far outweigh the costs associated with these activities. Hence, considering them as a cost center is a myopic view that could cost the organization dearly in the long run.
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