Why Risk Management?

0

RISK MANAGEMENT WATCH

 By Robert Mbonu

There’s an old saying; ‘a stitch in time saves nine’ meaning that timely effort will prevent more work later. Another saying goes – ‘to dodge the tree branch jutting out and prevent it from gouging out your eye balls, you have to look at it from afar’.

So what is risk? Well, that depends on your perspective. Risk from near, like a jutting out tree branch, might not be visible at first sight. It might not mean the same to a short person as to a tall, nor might it seem the same to an ambling carefree walker as to someone who is fleeing a deadly danger. It all depends. But in simple terms, risk is the uncertainty that might change an expected outcome. Risk management is about being prepared to take action against risk.

Risk can be good, and of course, can also be bad, and that’s mainly how we think of risk. In many Nigerian languages risk translates as danger or havoc.

There is also a sense sometimes, when we are talking about risk, that we might confuse it with likelihood, chance or probability. Like saying that there is a risk of thunder tonight, or that there is a risk of the stock market falling.

In the risk industry, risk is couched in terms of a combination of likelihood and impact, or consequence. So a highly likely and high impact risk is a big risk. Most big risks that make the news tend to be big in impact but small in likelihood.

Was the risk of a recession in the Nigerian economy due to a drop in oil prices (high impact) considered low because it was a low likelihood?

Why do we drive cars knowing that the accident rate is high? We think that it’s unlikely that the impact will be serious, or it won’t happen to us, or can it?

We operate in an uncertain world. Whenever we try to achieve an objective, there’s always the chance that things won’t go according to plan. Every step has an element of risk that needs to be managed and every outcome is uncertain.

Uncertainty (or lack of certainty) is a state or condition that involves a deficiency of information, and leads to inadequate or incomplete knowledge or understanding. In the context of risk management, uncertainty exists whenever the knowledge or understanding of an event, consequence, or likelihood is inadequate or incomplete.

Here are my ten rules about risk:

  • Life’s uncertain – we don’t always know what will happen.
  • Stuff happens. The overall pattern of events can often be predicted surprisingly well but not the detail.
  • Rare events are more common than we think. There are so many possible rare events we know some will happen but not which ones.
  • Runs of good/bad luck happen. Positive outcomes might be as a result of good risk management, or it might be just good luck.
  • The past is past. Things change. Should werely entirely on predictive models that rely entirely on past data to predict the future?
  • Should we be concerned? How does the risk event relate to our circumstances?
  • Can we do anything about it?
  • What’s in it for them? Reflect on who is bringing us the news about the risk. Is it in their interest to create fear and uncertainty? What’s in it for them? It’s easy to jump to conclusions.
  • What are we not being told? The full story is about the opportunities as well as the threats. Whilst we may be being presented with realms of doom and gloom scenarios, what are the opportunities?
  • Size matters. A big increase in a very small risk may not be important – twice almost-nothing is still almost-nothing. So if we are presented with statistics that state that the threat of a risk event is increased by say 50%, is that 50% of a very small number or of a significant number?

This is why risk management is becoming more and more important – it’s about dealing with rising uncertainty.

This article is the first of a series about risk management. In subsequent articles, this column willprovide the answers and demonstrate how to get clarity on complicated situations, how to decide between options, but most of all how to embrace opportunities and to minimise threats.

Life is about taking chances and making difficult choices. Risk management provides the framework to enable difficult decisions to be made in a managed and structured way. We call this risk based decision-making.

So before you run into a tree and risk losing an eye, stand back and check for branches at eye level; think about the threat, and the opportunity presented and the likelihood and impact of each.

– Mbonu, a graduate Engineer, former Bank Executive Director and Enterprise Risk Management expert, can be reached on 09092092046 (SMS Only); email: rm4riskmgt@gmail.com