Craig Ferri, Managing Director at leading Risk and Decision Analysis Software Company Palisade
London, UK — The recent turbulence in the global economy has projected the word ‘risk’ into many everyday conversations, both commercial and personal: the unacceptable risks taken by fund managers which led to the collapse of major financial institutions; companies risking bankruptcy as a result of recession; the risk of people losing their jobs – and potentially their homes; and so on. As a result there is also increased talk of risk analysis, which in turn has bought ‘quantitative risk management’ (QRM) and ‘decision making under uncertainty’ (DMU) firmly into the business zeitgeist.
In boom or recession, businesses make decisions every day – and each one has an associated level of risk e.g. where to invest, what product to produce and in what quantity etc. Examining business decision-making in detail however illustrates that most enterprises could benefit from making the link to risk analysis, and from there taking a more strategic approach to the discipline – any part of the business where there is uncertainty can all be made more robust and meaningful by risk analysis.
Recession may have brought the idea of QRM and DMU to the forefront of business owner’s minds, but they must do more than pay lip service to QRM and DMU if they are to reap the rewards. The following tips offer businesses basic guidelines on how they can maximise their risk management programmes:
- Get buy-in
Risk management is not an optional extra. It is a business critical tool that is an asset and an integral part of the project. The company culture must be developed to embrace QRM and DMU in order that everyone understands their benefits and therefore accepts the need for them.
- Get budget
Business tools cost money, but managing risk is an investment – not an overhead – and must be regarded as such. Allocating resource and making it a formal business process should be seen as an insurance policy. Not only will it help organisations make better decisions that will save them money in the long term but, by identifying potential risks and adverse events, it can protect them against unexpected costs in the future.
3. Get words
As with any organisational change, it is essential that everyone is clear on the new processes. Therefore a common risk language – or ‘glossary’ – needs to be developed to avoid misunderstanding and to ensure a consistent approach to QRM and DMU.
4. Get numbers
Qualitative assessment is essential, but numbers are more powerful – for example the percentage chance of meeting a deadline or budget. Monte Carlo random sampling provides the margin of error for a venture and is a good way to illustrate the consequences of different courses of action. Risk managers must ensure everyone understands these figures, and accepts them.
5. Get structure
Managing risk in order to make better informed decisions requires an appropriate organisational structure. Individuals and groups need clearly defined roles, and must then each take responsibility for their own area of expertise.
6. Get lateral
Every organisation has risks that it deals with on a daily basis and which must therefore be factored in to the decision-making model. However, no enterprise operates in isolation, so other external variables must be included. For example, even a small rise in fuel costs could have a major effect on revenues if raw materials need transporting long distances.
7. Get perspective
Political, cultural and social risk factors can be explored by involving all stakeholders. Investing time and money in consultation and research ensures that businesses have a clear idea of the complete environment in which they operate, and therefore minimise the chances of products and services failing.
8. Get reporting
Risks, and the management of them, must be reviewed regularly – and the programme amended if necessary. This requires a regular reporting process, in which risks are clearly identified and prioritised.
9. Get with it
Being risk aware does not mean being risk averse. Businesses should guard against rigidly adhering to ‘the way we’ve always done it’ approach, instead keeping up-to-date, learning new tricks and not being afraid to be bold. Although risky on the surface, these tactics prevent being left behind – much of the potentially uncertainty can also be removed with QRM and DMU.
10. Get it documented
Back up the commitment to a thorough QRM and DMU programme with documentation. This validates the budget and buy-in requested at the start. And it’s good for business – organisations this thorough are guaranteed a competitive edge.
About Palisade Corporation
Palisade is the market leader in risk and decision analysis software for Microsoft Excel and Microsoft Project: 93 percent of Fortune 100 companies and 76 percent of Fortune 500 use Palisade tools to make better decisions. Headquartered in Ithaca, New York, where the company was founded, Palisade also maintains offices in London, England; Sydney, Australia; and offers special services to Latin American customers. Palisade users can be found in over 100 countries, and include the likes of AT&T, Hewlett Packard, Hitachi, IBM, Proctor & Gamble, Dow Chemical, Citigroup, Bristol Myers-Squibb, PricewaterhouseCoopers, Unilever, London Underground, Infineon and Statoil.
For further information:
Kate Alexander / Nicola Males
Vanilla Public Relations Ltd
Tel: +44 (0)20 8543 8481 / +44 1932 847322