In 2007, when Tony Hayward was named CEO of British Petroleum (BP), he promised that delivering safety is his top priority. The provisions that all workers use lids on coffee cups while walking and refrain from texting while travelling were among the new guidelines he introduced. Three years later, the Deepwater Horizon oil rig collapsed in the Gulf of Mexico on Hayward's watch, causing one of the worst human-made accidents in history.
The U.S. inquiry commission related the Deepwater Horizon oil rig tragedy to organizational deficiencies that crippled "the capacity of the people concerned to recognize the threats they posed and to analyze adequately, coordinate, and resolve them."
In this article, we propose a new risk categorization that helps executives to identify which external risk management solutions can be formulated using modelled guidelines and which internal risk management solutions need alternate approaches.
Controlling The Unmanageable
External risks cannot usually be minimized or eliminated by the methods that are used to handle preventable and strategical risks. External risk management solutions are generally outside the reach of the company; businesses will concentrate on recognizing them, analyzing their possible consequences, and determining how to minimize their effects if they occur.
Many future risk incidents are inevitable, which directs the administrators to handle them as they handle their strategical risks. Take Infosys, for instance, they identified a new challenge related to the company's aim of building a global workforce during the economic downturn following the global financial crisis. An increase in protectionism which could lead to strict restrictions on work visas and permits for foreign nationals in several OECD countries (Organisation for Economic Co-operation and Development), where Infosys had significant client obligations.
Although protectionist legislation is essentially an external risk since it is outside the reach and control of the company, Infosys viewed it as a strategic risk. They created a risk event card for it, which included a new risk indicator: the number and percentage of its workers with dual citizenship or current work permits outside India. Unless this figure were to collapse due to workforce attrition, it could jeopardize Infosys 'global strategy. Consequently, Infosys adopted recruiting and management strategies as one of their risk management solutions to reduce the implications of this external risk situation.
The New Categorization Of Risks
Most external risk occurrences need a distinctive theoretical methodology while formulating risk management solutions, either because their chance of occurrence is minimal, or because executives find it impossible to visualize them during their usual planning processes. We also have identified these external risk sources:
Natural and economic disasters which have immediate consequences
Such risks are usually predictable in a general way, but their occurrence is not. These risks can only be anticipated by relatively subtle indications. When such risks arise, the consequences are typically drastic and severe. Like we saw the 2011 devastation from the Japanese earthquake and tsunami.
Geopolitical and environmental changes with long-term effects
These risks include political movements such as significant changes in policies, economic reforms, coups, protests and wars; long-term environmental issues such as global warming; and loss of vital natural resources such as freshwater.
Competitive threats which have medium-term implications
These risks include the advent of revolutionary technology (such as the Internet of Things, smart devices, bar codes) and progressive strategic shifts (such as Amazon's foray into book retailing, and Apple's entry into the smartphone and consumer electronics industries).
For each of these external risk factors, businesses use specific methodological and analytical strategies as their risk management solutions.
The Management Challenges Of Risk Management Solutions
Formulating risk management solutions is somewhat different from strategy management. Risk management solutions focus on the negative aspects of risks and failures, rather than prospects and success. It runs precisely counter to the 'can do' ethos most management teams try to cultivate when executing strategy. And many management executives tend to underestimate future implications. They are doubtful to invest time and money in the present to prevent an unknown future crisis that might or might not occur down the line. In fact, risk management solutions usually require resource dispersal and investment diversification, which is the counter of a focused strategy solution.
The potential of an organization to endure harsh conditions and risks is directly dependent on the management's seriousness to formulate and execute risk management solutions, even before the occurrence of risks. This is what separated the banking institutions that failed in the financial crisis from those banking institutions that survived it. The failed institutions reduced their risk management solutions to a regulatory compliance function. Hence, the risk analysis managers had restricted access to senior management and their executive board.
How TRC Helps You With Risk Management Solutions?
At TRC, we firmly believe and understand that risk assessment is not intuitive. It goes against the prejudices in individuals and organizations. Governance and compliance regulations reduce some but not all of the essential risks. For the same, we formulate risk management solutions that are aggressive and cost-effective to allow you, as an administrator, to continually learn about the different types of risks that your business poses and set up suitable preventive procedures for each.
Many insurers, financial institutions, and organizations trust our risk management solutions model to gain insight for recognizing and mitigating risks. Partner with us to lay a solid comprehensive risk management foundation for your business. For any queries about our services, contact us!
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