When faced with a threat, our natural response is fight or flight â€“ whether to address a risk head on or to run away from it. Risk response is the implementation of actions to respond to risks, including decisions to ensure objectives are met with a high level of certainty.
The federal government is currently in the process of developing a National Economic Recovery Growth Plan (NERGP) as a response to the threat of the current economic recession. The questions are: Will the plan succeed? What will the implementation of the plan portend for the Nigerian economy and its people?
The success of the NERGP being developed through the Ministry of Budget and National planning, will depend on how well Risk Management is integrated into the overall process. It must be applied with full commitment and attention. The decisions should be made with an understanding of the risks involved.
Imagine we are driving along a busy express road and there is an oncoming vehicle in our lane. This presents a threat to which we need to quickly respond. What would you do?
Having identified the risk, in the context of the objectives, and evaluated it on the basis of likelihood and impact, we have also to evaluate the risk against our risk appetite, which is the amount and type of risk we are willing to pursue or retain.
The oncoming car presents an immediate threat. Our objective is to arrive safely and on time at our destination. The imminent threat presents a major uncertainty in our ability to achieve our objectives. The likelihood and impact of an accident is likely to be high.
Traditional risk managers are taught the five â€˜Tâ€™s of risk response;
TERMINATE â€“ stop the activity giving risk to the event. In the case of our driving dilemma (with the other car coming towards us in the road), we cannot just stop driving; this will not be a likely response in this case.
TAKE â€“ increase the risk to which we are exposed, perhaps increasing our speed in order to maximise on an opportunity to overtake another car in front, or to get past the obstacle because there is a space on the other side of the road.
TREAT â€“ minimise either or both the likelihood and the impact of the risk by taking avoiding action, which might include applying the brakes, flashing our headlights, warning the passengers to brace themselves, or steering away from the danger.
TRANSFER â€“ the usual risk transfer method for vehicles is insurance. Having a great insurance policy might give you small comfort in the next two or three seconds, but for sure you wonâ€™t have time to increase your coverage in the time allowed.
TOLERATE â€“ this is an action that is used when the risk is within risk appetite.
So letâ€™s look at some of the possible actions in turn;
Can we TAKE more risk – is there an opportunity here?
Can we TREAT the risk by reducing the likelihood instead?
Or perhaps we can TREAT the risk by reducing the impact?
In business we are faced with many risks and if we were to put into place actions for all of them, we are likely to go bust. The key is to determine those risks that need the most attention and therefore the most investment. Thus our risk action planning needs to be business related and each expense subjected to a rigorous business case. There is no sense in spending N5m to deal with a risk that is only going to cost us N1m, but there might be some sense in spending N100k for that N1m risk.
Likewise for the NERGP to succeed, an independent Risk Management unit must be established reporting to the Presidents (CEO) office, to oversee its activities. Historical evidence from other developed countries suggests that implementation of major reforms is better served with a small and efficient Risk Management team, staffed with the right professionals in this field. The Unit should submit regular reports to the President, and spearhead the reform process by identifying possible obstacles, and streamlining the implementation of the plan initiatives by Ministries, Departments and Agencies.
Whilst a welcome development, the planned NERGP must be successful. It cannot be hit or miss. It proposes several initiatives to identify and harness potential revenue sources that will address the growing fiscal budget deficit. It sets out goals to reform varying economic sectors that will not only take the country out of recession, but will foster long term sustainable growth.
For our imminent car accident, we donâ€™t have the time to deal in business cases; we just have to respond on instinct and experience. We tell everyone to brace, get down and check seat belts, while we firmly apply the brakes and take whatever avoiding action is open to us without exposing the car to an impact. If we can achieve all of that and live to tell the tale afterwards, then we will have done well.