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Categories: Marketing and PR
Risk is an event that may affect the overall business objectives of an enterprise. It should be viewed as an opportunity rather than a threat that every enterprise should try to foresee so that the effects of the events can be optimized. Sometimes, risks make the organization more alert and responsible to create value for shareholders. If an organization is able to properly define risks and articulate them, then most of the objectives are achieved.To gain a sustainable competitive advantage, companies facilitate proper risk. Firms keeping its culture, strategies, and economic conditions in mind should develop a proper framework for management of risks. A framework gives a clear picture of the risks faced and the strategy to mitigate it.I am unable to show the picture of the framework as it does not support it.The five steps involved in preparing VOWEL framework for Risk Management are:
4.Exploiting risk opportunities.
5.Optimizing or mitigating risks.
The A, E, I, O, U framework takes into consideration various factors like Organization¬?s strategies, culture, objectives and various external and internal conditions. The proposed framework is the best approach as it helps the organizations in turning an uncertain event to an opportunity where it could reap the maximum benefits. The framework proposes Integration of Risks in exploiting risk opportunities.VOWEL Framework discuss in gaining the profits out of an event and then mitigating the negative effects. When the organization starts risk management process, influence of risks on the organization is high and the probability of returns is low but as soon as the process moves forward, influence of risks becomes low and probability of returns is high.
Proper understanding of risks is a pre-requisite for an effective Enterprise Risk Management framework. Understanding of risks doesn¬?t involve knowing the risks and its impact on the organization but assessing the historical and current performance along with focusing on future performance in the context of the risks.Understanding of risks also includes the risk appetite of an organization. If an organization is in profit for some years and have enough capital, then it can expose itself to greater amount of risks. Understanding of risks also involves evaluating company¬?s current strategy and management¬?s capability to implement a different strategy if the company faces some difficult situations due to risk exposure.
Identifying Risks:The next most crucial step in Enterprise Risk Management is identifying key risk areas in the organization. The risks faced by the organizations today are enormous, varied and of different frequencies. Involving employees from various departments in the organization helps in better identification of risks, as their involvement in the job and opinions about the future and current risks is known.The risk identification techniques adopted by organizations are Brainstorming Sessions,Questionnaires,Interviews, Feedback forms,Workshops and SWOT analysis.The organization can also take the help of external agents like risk consultants, consultancy agencies, auditors etc. Other alternatives like flowcharts, process mapping, scenario analysis helps a lot in identifying risks.
Analyzing Risks:Analyzing and assessing risks helps in understanding the effect of identified risks on the objectives of the organization. There are various techniques of analyzing risks. Some of the most effective ways are:
√?Probability-Impact Chart: Probability- Impact Chart is basically used for assessing hazard risks and operational risks, which occur due to, failed systems and processes and human errors. Before analyzing the probability and impact, organization should list down all the possible emergencies that may occur in a particular course of time and then make a chart of probability and impact.
√?Monte Carlo Simulation: Monte Carlo Simulation means analyzing a large number of market scenarios with the same underlying distribution. For each scenario the value of position is calculated. These are widely used in pricing and risk management of complex instruments.
√?Historical Simulation: Historical simulation is the simplest and most transparent method of calculation. This involves running the current portfolio across a set of historical price changes to yield a distribution of changes in portfolio value, and computing a percentile (the VaR). The Historical Simulation method requires that the user obtain historical information on the movement of market factors (share prices, interest rate yield curve, exchange rates, commodity prices etc), which determine the performance of the financial instruments that are in the current portfolio.
√?Stress Testing: Stress testing is a Risk Management tool used to evaluate the potential impact of a specific event on a firm. Stress tests generally fall into two categories: scenario tests and sensitivity tests. In scenarios, the source of the shock, or stress event and its effects on the financial risk parameters are well defined. In contrast, sensitivity tests specify financial risk parameters; the source of the shock is not identified. Moreover, the time horizon for sensitivity tests is generally shorter in comparison with scenarios. Stress testing is used by the organizations to:
¬∑Understand portfolio performance during abnormal market conditions.
¬∑Understand the risk profile.
¬∑Make proper decisions regarding the risk tolerance and allocation of capital to optimize risks.
¬∑Evaluate the business risks.
Exploiting Risk Opportunities:The term risk has two aspects i.e. risk as a threat and risk as an opportunity. Organizations are aware of the fact that viewing risk as an opportunity can give them a competitive advantage and can fetch rewards. Risks should be exploited in such a way that maximum advantage can be taken from any unexpected event. Exploiting risks can be done by:
1.Understanding the nature of the risks.
2.Responding to the risks
Every organization should adopt PEST approach for understanding the nature of risks. PEST represents political, economical, social and technological.Not only external factors play a role in understanding the nature of risks but also the organization itself can be a cause for the risks to arise. The business objectives, the skill set of managers and employees, mergers and acquisitions etc. can be a contributing factor to the evolution of risks in an organization. Continuous monitoring and review should be done for Enterprise Risk Management to be successful. Monitoring involves reviewing information and taking appropriate actions.
Monitoring processes include reviewing and acting on performance and risk information, auditing of control systems, processes and financial and operational information, self-assessments, updating the risk information. After the monitoring process, reporting should be done to management and staff, board of directors and regulatory agencies and other stakeholders etc. Monitoring ensures that the components of enterprise risk management are applied at all levels.One of the best ways to exploit risks is Integration of Risks. Integration gives an overall view of the risks faced by the company and their interrelation. Risks are interrelated and interdependent in some form of or the other. Integrating them under one platform and applying metrics to quantify those makes easy for the organizations to exploit the best from the uncertainty.
Optimizing Risks:Optimization of risks is done to minimize the effects of risks on the organizations. In this step the organizations try to lessen the negative effects of risks that may affect the business processes. Optimization of risks can be done in various ways:
√?The risks frequently faced by the organization and the solutions to mitigate should be properly documented and stored in the database so that every new employee joining the organization could know about it and make themselves prepared to face it.
√?The Senior Management should take a pivotal role in training every employee on the importance and understanding of risks. Transfer of knowledge is essential for Risk Management.
√?Proper metrics should be defined on how the organization mitigates the risks so that the employee can look forward to improve on the processes they use to minimize the effects of risks in an organization.
√?The employees should be encouraged to ¬?Change¬?. Sometimes, the employees are resisted to Change and want the things to happen in the same way. Sometimes, a major risk may force an organization to change its strategies, organization culture etc.
√?The organizations should have their processes and systems in place so that the risks can be mitigated immediately and business processes of the organization are not affected.
√?The shareholders should be notified of the risks faced by an organizations and the approach the organization follows in mitigating the risks so that they have faith on the organization and continuously show support and inclination towards the organization policies.
I think you would want to ask your prospects that. We can make educated guesses, but they are the ones who can answer out of their own experience. Have you talked to any prospects?