Risk Management Tools and Techniques

Introduction

Risk management is a tool which is increasingly used in organizations and by public bodies to increase safety and reliability and to minimize losses.

French and Saward (1983) describe a tools as any device or instrument, either manual or mechanical, which is used to perform work.

Tools are the methodology which employs numerous techniques to achieve its aim.

Risk Analysis Techniques

Two main categories of risk analysis techniques:

Qualitative

Quantitative

Qualitative methods seek to compare the relative significance of risks facing a project in terms of the effect of their occurrence on the project outcome

Quantitative techniques attempts to determine absolute value ranges together with probability distributions for the business or project outcome and, consequently, involve more sophisticated analysis, often aided by the use of computers.

Choice of techniques

Norris (1992) and Simon et al (1997) management should consider:

1. The availability of resources for analysis – human, computational and time

2. The experience of the analysts with the different techniques

3. The size and complexity of the project

4. The project phase in which the analysis takes place

5. The available information

6. The purpose of the analysis

How organization deploy the tools

Organizations are using risk management concepts to consider a number of questions:

1. What risk am I facing, and how do they compare to those of my peers or competitors?

2. How are these risks changing based on changes in my business environment?

3. What level of risk should I take?

4. How should I manage those risks?

Categorization tools help organizations group and prioritize their risks, by industry or within an entity

Such tools help management to ensure that they have captured all categories of organizational risks, not just traditional, financial hazards

Risk Categories

Organizational Risks

Governance

Compliance

Information

Financial

Human Resources

Operational

Integrity

Organizational Approaches

Centralized risk management tends to focus on risks that affect the achievement of key corporate objective and strategies and significantly affect most if not all functions and processes.

Decentralized risk management pushes the responsibility of risk management to those who live with it day to day.

Key Actions to Embed a Risk Structure in an Organization

Board activities

Management Activities

Establish a common risk culture

Create risk accountability/responsibility

Embed risk activities into ongoing business process

Measure and monitor risk

Qualitative Techniques

1. Brainstorming

2. Assumptions analysis

3. Delphi

4. Interviews

5. Hazard and Operability Studies (HAZOP)

6. Failure Modes and effects Criticality Analysis (FMECA)

7. Checklists

8. Prompt Lists

9. Risk Registers

10. Risk Mapping

Quantitative Techniques

1. Scenario Analysis

2. Decision Trees

3. Controlled Interval and Memory Technique

4. Monte Carlo Simulation

5. Sensitivity Analysis

6. Probability-Impact Grid Analysis

Value Management

Value management addresses the value processes during the concept, definition, implementation and operation phases of a project. It encompasses a set of systematic, logical procedures and techniques to enhance project value throughout the life of the facility/project

Connaughton and Green (1996):

A structured approach to define what value means to a client in meeting a perceived need by establishing a clear consensus about the project objectives and how they can be achieved

Value is the level of importance that is placed on a function, item or solution. The four traits of value are speed, quality, flexibility, and cost

1. Speed how quickly a firm can deliver a product to the customer or design and produce a product

2. Quality how well a product meets a customer’s expectations

3. Flexibility how easily the firm can change a product to closely meet the customer’s expectations/wants

4. Costs elements to be included in a life cycle costing are – capital, finance. Operating, maintenance, replacement, alteration, expansion, and innovation costs, and residual values

Risk Attitude and Utility Theory

Risk neutral

Risk seeking (risk lover)

Risk averse

Country Risk Analysis

Political Risk

1. Government stability

2. Socio-economic conditions

3. Investment climate

4. Internal conflict and military intervention in politics

5. External conflict

6. Corruption

7. Religious and/or ethnic tensions

8. Policy system and management of economy

9. Law and order

10. Democratic accountability and quality of the bureaucracy

Risk Management is evolving

From To

Risk as individual hazards Risk in the context of business strategy

Risk identification and assessment Risk “portfolio” development

Focus on all risks Focus on critical risks

Risk mitigation Risk optimization

Risk limits Risk strategy

Risks with no owners Defined risk responsibilities

Haphazard risk quantification Monitoring and measurement

Risk is not my responsibility Risk is everyone’s responsibility

Role of the Risks Management Function

1. Setting policy and strategy for risk management

2. Primary champion of risk management at strategic and operational level

3. Building a risk aware culture within the organization including appropriate education

4. Establishing internal risk policy and structures for business units

5. Designing and reviewing processes for risk management

6. Co-coordinating the various functional activities which advise on risk management issues within the organization

7. Developing risk response processes, including contingency and business continuity programs

8. Preparing reports on risk for the board and the stakeholders