Five Key Risk Management Principles
By: Robert Guthrie
Tags: Risk Management, Analytics, Gsai

In every industry, there are certain risks involved. If you plan ahead, you might be able to mitigate and prevent risks before they ever happen. Whether you are in the travel industry or you are worried about supply chain disruption, make sure you know the core risk management principles, so you can best position your company for success and protect against the worst.

The Basic Risk Management Principles

You can’t prepare for every eventuality and you’ll drive yourself and your team crazy if you try, but if you prioritize mitigating risk and making the right decisions, you can consistently avoid the worst outcomes. Every industry needs risk management, and the risks are different depending on what your business is. Here are five core principles of risk management:

Risk Identification

This might seem obvious, but it’s a step that’s often neglected. You first have to start by identifying possible risks in your industry. You can’t prevent a risk you don’t know exists, so look at your competitors and review the recent history of your industry for crises, oversights, and foul-ups. It’s a smart business practice to learn from the mistakes made by others before you, and unless you’re inventing an entirely new business model, you don’t have to start from scratch. These risks can be small and simple — internet outages, theft, product shortages — to large and hugely threatening — political unrest, large-scale security breaches, major weather events, etc. Depending on your industry, some risks are going to be more concerning than others — if you’re a cloud storage company, a hack is one of the worst eventualities you are likely to face, but a bad storm might not impact your business terribly at all. If you’re a major airline, on the other hand, the weather is one of your primary risk factors.

Risk Control

Here you can look at things like avoiding or preventing the risk in the first place. To use the airline example again, you have identified that mechanical problems are a risk to your airplane, and now you can try to control that risk by scheduling regular and routine maintenance for each airplane to hopefully prevent any mechanical problems from occurring. While you can’t mitigate that nor’easter coming through your city, you can do everything you can to take care of your planes and prevent mechanical problems. Most travelers are understandable when the weather causes a flight delay, but less so when it’s a problem the airline can control, like a mechanical problem. Mitigate what you can ahead of time.

Scheduling routine maintenance is important for almost every business. Make sure your computers, machinery, and tools are all in working order so you can prevent as many accidents from occurring as possible. You wouldn’t go on a road trip with an empty gas tank, and you need to make sure all of your company’s equipment is ready to perform.

Analyzing Risks

This is where you can ask all the “what-if” questions you want. Things like — how likely is the risk and how bad is the risk? In other words, mechanical failures on your airplane are a lot worse if the failure is broken landing gear instead of a broken tray table. You want to make sure you prioritize mitigating your risks based on how likely they are to happen and how big of a problem it is if they do happen.

If you can knock off some low-hanging fruit and there are easy risks to prevent, do it. Safety should always be a top concern and you want to make sure you work to mitigate any risk that could cause catastrophic problems.

Claims Management

Think of this as the part of the risk where the customer makes a claim against you. This covers a broad category of events, not just actual claims. If you are running a supply chain organization, the complaint could be that the consumer never received the product he ordered because he got stuck somewhere in the production part of your supply chain.

You are not going to be able to mitigate and prevent every risk. Part of your company’s reputation is in how you process claims and deal with customers that have been affected by risks that came true. Accept responsibility and ownership for any problems or errors caused by your company, and work with the customer until they are satisfied their claim has been resolved.

How to Finance Risk Management

Whether you have insurance that covers your risks, or your company keeps a pot of money set aside, you will need a plan to finance risks after they happen. Maybe it’s as simple as giving an unhappy customer a 50% discount on the next product from your company, but it could be as complicated as offering free flights for stranded travelers who got stuck because of a problem with your airline.

Benjamin Franklin said, “failing to prepare is preparing to fail.” When you identify risks and determine which ones you think you can mitigate and prevent, you need to also plan for the risks that you just can’t prevent. Don’t let a risk coming to fruition sink your company financially or otherwise.

Automate Risk Intelligence

You do not have to do risk management all by yourself. There are tools available now that can help automate your risk intelligence and management. In the supply chain industry, considering using a tool like predictive analytics, which can help you forecast and decide how many items to keep in stock.

You never want to run out of stock, as that could lead to unhappy customers, but keeping too much in stock could put you in a financial hole until you make more sales. There are a lot of tools available to analyze that data and help you predict when people are going to purchase your goods and how many will be purchased. This is just one example of a type of tool that can help you with risk management.

It seems obvious to sell bikinis in summer and heated blankets in winter. But, if you make products that aren’t quite as seasonal — like a nice watch, for example, wouldn’t it be helpful to see analytical trends presented to you so you can make good supply chain decisions? Your company should absolutely use predictive analytics as part of your risk management process.

A tool like Hyperion can make this extremely painless, allowing you to identify stability from the city level all the way up to the global level, pinpoint hotspots, and even forecast trouble before it happens. In an increasingly complex world, having the right tools is essential, and more and more firms are going to want to invest in sophisticated risk intelligence platforms like what Geospark Analytics has to offer.

Putting Risk Management Principles into Practice

You’re ready to take the next steps and manage the risk that your company faces. There are a lot of ways to mitigate risk and to plan for risk, and every strong organization in every industry has a risk management team for these exact reasons. Reach out and contact us today to see how we can help you prevent and mitigate risks, which will set your company up on a plan for success!