RISK: EYES WIDE OPEN OR EYES TIGHT SHUT?

14th February 2017

Most businesses have an element of risk, some evaluate it and some rely on the other spelling of risk – luck. Which are you?

I guess it all comes down to the potential harm encountering the risk presents, some companies carry little risk and if something goes wrong the outcome is relatively minor, other companies operate safety critical services so when things go wrong then lives are at stake, and everything in between.

Its probably best to know where you are in the scheme of things and put in place sensible mitigations, that’s the eyes wide open approach, though its astonishing how many chose the eyes tight shut alternative. I’m not convinced though that people chose to ignore risk its just the whole topic can be a little daunting. Some have chosen to exploit our fear of risk and made it a bit of a monster. Used constructively understanding risk can form the basis of much of our business thinking.

Types of risk, yes there are many types of risk and a risk expert for them all, but in general there’s three key ones, operational (your service or product could go wrong and create risk), occupational (how doing what you do can harm you and your employees) and financial (usually some form of finance related issue not as a result of operational or occupational risk events). There are some legislative requirements surrounding some types of risk – occupational being one of them – so ignorance (or eyes tight shut) is no defence.

There are lots of ways to evaluate risk and most rely on two factors – likelihood and consequence, ie how likely is it you will encounter the risk and how bad could the result be? These two indicators are usually added or multiplied together to get a risk ranking. High number results indicate a likely risk with a serious outcome (which would require immediate mitigation attention) low number results are usually considered low risk and acceptable. There are those results with a high likelihood score but with a low consequence (probably worth looking at some mitigation) and the more serious low likelihood high severity events that will need mitigation.

There are also lots of companies who will help you evaluate your business risks using the likelihood and consequence approach but we like to add a third measure – exposure. There are a number of difficulties with the traditional likelihood / consequence method that can lead to risk conundrums, ie an unlikely event with a severe consequence cant really be mitigated against (eg the severity reduced), and of course this process depends on you knowing all of the potential consequences of a risk! Better to work out the general likelihood and consequence rating and then understand where your exposure to these risks are and put your energy into ensuring your exposure is minimised. This is where understanding risk can really help your business, the exposure may be the competency of your or a supplier’s staff, so using the risk model you can determine what training these people and ensure your staff have the training, and you can also require your supplier to be able to demonstrate that they too have the correct training in place – its called supply chain management. Perhaps the risk lies with specific material specifications or process controls or compliance with legislation………………..

So if you would like to know more about how understanding risk can help your business be better give us a call and we can explain it to you for your specific business, if you don’t think knowing your business risks is ok then its back to trusting luck.