Management of risks. Part 1

“All life is risk management, not risk elimination.” Walter Riston

Each of us regularly faces risks in everyday life and at work. Today we will talk about a common systematic approach to risk. Where to implement it - in a separate project, in your own business or for domestic solutions - your business, but we hope that this information is useful to you.

Management of risks- This is not just a theoretical and abstract topic of corporate meetings, not just a conditional abstraction from the world of management. When applied properly, risk management is a decision-making tool. This tool is often and undeservedly neglected when making decisions based on intuition or other factors. Risk assessment often boils down to “yes what to discuss, the risks are minimal” or vice versa: good ideas are rejected because of the big risks. But what does this mean in practice? What risk is considered large or small? What do you do with these very risks?

The risk management process consists of the following steps:

• risk identification;
• risk assessment (this includes both gross and net assessments, which we will discuss below);
• defining a risk response strategy;
• regular change tracking.

Definition of risks

“Every noble business involves risk” Michel de Montaigne

The first thing you need to do to manage your risks is to determine what risks actually await you.

Here you can help:

• Environmental analysis - for a new business it will be an analysis of the market, demand, existing products, competitors. For an internal project, this will be an analysis of the need for this project, the willingness of users to accept the project. For your household decision to take a mortgage or not to take it, you should start by understanding how much and what kind of apartment you need, what mortgages are and what banks offer what.
  
  
• Analysis of similar situations - very rarely in this world something happens for the first time. Usually someone has already gone this way to you. Even if it’s something unique, try breaking your task down into subtasks. Perhaps some of the subtasks have already happened. If you are trying to identify the risks of transferring production to China, read the experience (or rather talk) with those who have already done this. Listen carefully for problems that went wrong. If you are considering whether to give your child to a private kindergarten or to a local kindergarten, talk to the parents of those who go there and there that they are faced with. Read the financial statements of companies that release a product similar to yours.

• Discussions with experts - this follows from an analysis of the environment and an analysis of similar situations. Talk to those who claim to understand the issue. Read what they write. Do not take everything on faith, but do not reject everything that is told to you. Now it is important for you to collect all the possible information. If you plan to build a warehouse in the suburbs and local grandmas tell you that the place is cursed - add this to the list of risks.
  
  
• The study of legislation is a part that is often forgotten and then come across with pain and loss. If you want to release a new clone of a popular game - it is worth analyzing how much your clone is similar to the original. If you want to expand the delivery market of your online stores, check the export / import rules of those countries from where and where you want to deliver. If you decide to glaze your balcony - find out if your house is not an architectural monument. Moreover, it is worth considering - the legislation has an unpleasant habit of changing. Your favorite delivery or payment methods may suddenly be banned or fall under new rules or requirements. For competent risk management, you need to not only understand where the legislation is now, but also where it is moving:
  
  
• Brainstorm - together with your bosses, team, colleagues, wife and even yourself - get together and throw in a variety of ideas, voice all your fears. No idea is stupid or forbidden at this stage. The landing of aliens in the midst of a conference organized by you, the abdication of the padishah, who is your regular customer, from the throne, your mother-in-law’s allergy to cats — everything that can somehow influence what you do should be listed. Think about what is happening right now and what might happen in the future.

Since we are talking about the future, it is important to note also the planning horizon. A single recipe does not exist here - it depends on the timing of your project. If you are deciding on a mortgage, then 25 years is a normal horizon for you. If you are releasing a new casual, one year of planning will be quite enough for you. Opening a new business will be optimal for 5 years, but it depends on what kind of business it is: rocket science and a flower stall also differ in horizons. For an average project in a stable business, it is best to take three years.

Example from the project:

You decide to start production of the Superdevice. Here it’s worth starting with an analysis of the market, demand for a Super device, a search for analogues, a history of the start of production of any device, an analysis of the legislation for certification of Super devices, discussions with industry experts.

Life example:

you decide to move to another city. What awaits you along the way? It makes sense: find out the stories of others who have moved. And do not neglect stories that are outwardly unlike yours — for example, those who moved to another country or to another region — you can draw from them what you would miss in another case.

The result of the risk collection exercise should be a list of risks. It’s best to start right away by categorizing the risks: financial, reputational, strategic, legislative, managerial, environmental, etc. There are a huge number of drawer categories into which you can put your risks, but we dare to express the following thought here - almost everything is measured in money. Yes, and the strategically important new region of big business and the reputational risk of a well-known blogger and the environmental risk of a new component in bleach - all this is ultimately expressed in money. So any risks if we discard the romance of categorization are financial risks. But categorization can help you identify new risks. You can forget about the legal risks of your production if you do not include this category in the analysis first. Therefore, it is important to look at the categories, but you should not focus on them.

So, here is a list of your risks. Perhaps at this moment (especially if you just finished the brainstorming, where you were bombarded with new ideas of risks) you will be overcome by despair: what have I signed up for?

DON'T PANIC

Because there will be an important stage of risk assessment that will put everything in its place.

Risk assessment

“Life is full of risk. Don't be afraid of it. ”Lindy Lohan

Risk assessment consists of two steps:

• initial risk assessment (gross assessment)
• final risk assessment (net assessment)

Why do you need to evaluate the same risks twice? In short: not to overestimate.

The initial risk assessment consists of two parts: exposure calculation and probability assessment. The calculation of the impact is a complicated thing, there are many mathematical approaches and models that we will not dwell on now - this is a topic for a separate article, or even a series of articles, or even a book. The simplest methods are either expert or historical assessments of the consequences of the event. For example: the customer does not accept the object we built and we will have to finish it. For this, we will need, according to the Chief Architect, two hundred human hours at a price of one hundred money per hour and one hundred bags of materials at a price of two hundred money. This is an example of peer review. An example of historical assessment: in our previous warehouse one of the buildings burned down and we lost three times three hundred thousand money. Statistics,

Returning to the previous thought that all risks are financial: that is why you can express all of them in money. Environmental fines for pollution of the river will be so much. Changes in export laws will increase duties by so many. The departure of the chief expert in the project will lead to a delay in the delivery of the product (can be expressed in money), the search for a new expert (also money), the training of existing employees (and this is also money).

Assessing the consequences, whatever they are, is almost always money when it comes to business.
And here it is very important again not to get scared, but calmly express all the risks in the maximum amount of money spent and lost. Because then comes the turn of the second step: an assessment of probability.

A meteorite falling at your plant can result in very significant financial losses, but the probability of this event is vanishingly small, so you can neglect this risk based on the analysis. But we will come to what to do with the results of the assessment. Now it’s important to evaluate the probabilities. It is important to correctly formulate the question: what is the likelihood that the event that has occurred, the realized risk will lead to the fact that here is so much money, how much did you evaluate it, you have to give / spend / lose? Once again: we are not talking about the likelihood that an event will happen. We are talking about the likelihood that its result will be the completeness of the financial loss that you estimated at the stage of calculating the impact.

That is, a meteorite fall is a probable event. They fall to the ground daily. But so that a meteorite would fall enough to destroy your plant and so that it would fall precisely on your plant and bring such significant damage - here we are already talking about fairly small values.

What is this for? To understand how everything is running. Remember, we are still talking about an initial risk assessment.

To understand the initial risk assessment, you now need to multiply the impact assessment by the probability assessment.

Risk assessment = Impact assessment * Probability assessment

Example: the risk of a gearbox breakdown in the car you plan to buy = repair cost * probability of breakage
That's how much this risk costs you at this stage.

The total initial cost of all risks is an assessment of your project / business / idea before you do something with them. This is a gross estimate.

Here again, it’s important not to start to panic. Haircut has just begun! (c)

We will discuss how to stop worrying about these risks and start managing them in the next part.

“In their disasters, people tend to blame fate, the gods, and anything else, but not themselves” Plato