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How to manage risk (but don’t stifle innovation)

Written by: Gerry Maguire

Article Overview: Mining is a capital intensive industry and a lot of money is spent to reduce the risk of making wrong decisions on investments and to reduce the risk of investments not delivering what was promised to shareholders. The same principle applies to any sized business. Every business wants to make the right investment decision and increase the likelihood of the business of delivering what is expected. When evaluating a new business good risk management tools and techniques can assist the decision making process and increase the likelihood of business success.

How to manage risk (but don’t stifle innovation)

My years of working in large mining organisations allowed me to see great risk management techniques and tools that can be applied to any size business.

Mining is a capital intensive industry and a lot of money is spent to reduce the risk of making wrong decisions on investments and to reduce the risk of investments not delivering what was promised to shareholders. The same principle applies to any sized business. Every business wants to make the right investment decision and increase the likelihood of the business of delivering what is expected. When evaluating a new business good risk management tools and techniques can assist the decision making process and increase the likelihood of business success.

Before outlining some of the tools and techniques I will outline a principle that my Engineer friends tell me is crucial. The principle is that the ability to influence a project or business or contract negotiation is at it’s greatest during the feasibility stage. That is it is during the time when you are analysing an opportunity that you have the greatest power in influencing the outcome. Once a contract has commenced or a new business has started it gets costly to make significant changes. This suggests that the most efficient time to do risk management is during the feasibility stage.

For the purposes of risk management, risk is defined as an event that could prevent you from achieving your objective.

The risk management process for evaluating a new business opportunity is:

1. Identify Risks

2. Analyse Risks

3. Evaluate Risks

4. Treat Risks

The type of risks will depend on the business being evaluated but once identified a good tool to assist with the analysis of the risk is the likelihood and consequence matrix. The matrix parameters are

Consequence

1 Insignificant


2 Minor


3 Moderate


4 Major


5 Catastrophic

Likelihood

5 Certain


4 Likely


3 Possible


2 Unlikely


1 Rare

Each risk event is analysed as to its likelihood of occurring (from certain to rare) and the consequence of it occurring (from catastrophic to insignificant). The event is then categorised in the appropriate section of the matrix.

The definition of the consequence categories will depend on the business opportunity and whether a dollar impact can be measured. For example it may not be possible or appropriate to have a dollar impact of a safety or environmental risk event occurring.

One way of defining the likelihood categories is to analyse how often the event is likely to occur. For example if an event occurs daily it would be classified as certain and if an event has never happened but is possible it would be classified as rare.

The risks have now been analyzed and, to an extent, evaluated by using the likelihood and consequence tool. To complete the evaluation of the risk events a decision needs to be made on whether the risk is acceptable or not.

Finally for those risk events that are not acceptable a decision needs to be made on how to treat the risk. The three main treatments are to:

1. Reduce the likelihood

2. Reduce the consequence

3. Transfer the risk via insurance

If none of these treatments are possible or are too costly to implement you may decide not to proceed with the business opportunity.

Managing and mitigating risks will increase the likelihood of business success.

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Article Tags: business opportunity, business success, contract negotiation, decision making process, engineer friends, feasibility, intensive industry, investment decision, investments, likelihood, management risk, new business, parameters, principle, risk management techniques, risk management tools, shareholders, size business, sized business, wrong decisions



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