Introduction
Throughout Life, be it of a person or event of an entity is usually characterized by uncertainties regarding the future. Indeed, there may be future events happening, and according to many research findings, these future events maybe success factors or they may lead to succumbing.
The future events that have the ability of making the life of a person or an entity to be jeopardized are commonly referred to as risks (Baik 7). Literally, risk is termed as the potentiality of a chosen event will surface a loss or even an outcome, which is not desirable.
Contemporarily, almost have realized the benefits of implementing risk management strategies in an effort towards mitigating losses that may be presented by the risks. As defined in ISO 31000, risk management is the process of identifying, assessing and prioritizing risks.
The sources of risks are inexhaustible. This implies that risks can be surfaced by any situation and that any event has its risks. According to Vaughan, risk management is a process constituted of four stages (66).
These stages include; risk identification, analysis of probabilities in addition to consequences, establishment of most viable risk mitigation strategies and control and documentation. Risk management can be described as an aspect of strategic management because, when practiced, the effects of risks are marginally felt (Baik 18).
Thesis Statement
The purpose of this paper is to identify and critically analyze risks as presented in most books covering the same topic. In addition to this, the paper will also establish ways in which risks can be mitigated, controlled as well as documented.
Discussion
In the risk management process, the risks are identified in the first phase, which is risk identification. Risk identification refers to the risk management process where the specific risk factors are identified. However, since not all risks apply, only those that are capable of reasonably affecting a specified project are identified. In order to come up with the most effective risk identification strategy, it is necessary that a person come up with a likely risk classification scheme (Kerzner 11).
The second phase involves the analysis of the risk identified. In this phase, depending on the probability of the risk occurring, estimates are attached thus forming a matrix. The matrix serves to reflect each and every identifiable project risk prioritized according to the size of the occurrence probability. The matrix also reflects the potential consequences to not only the project but to all the parties involved, as well. This analysis is particularly essential as it presents the general impact of the risk (Kerzner 15).
The third phase involves establishing the mitigation strategies. This phase involves coming up with the most viable steps aimed at reducing the potential effect of the risk factors perceived to be a threat to the life of a project. Usually, four alternatives can be adopted in mitigation of risks.
They are; accepting risks, transferring risks, sharing of risk, in addition to minimization of risks. A majority of organizations utilize these methods alongside practical approaches such as creation of systems where members can be effectively trained (Vaughan 69).
The fourth and final phase of risk management entails control in addition to the documentation. Putting a focus on the future projects, this phase involves the creation of the knowledge base for projects to be initiated in the future while making the lessons learning as the guiding factor (Kerzner 20). Some of these risks include technical risks, operating risks, in addition to political risks.
Technical Risks
These risks represent the likelihood of a project not performing according to the expectations or according to the required technical standards. Further, they represent the likelihood of the project producing unqualified products or services, in addition to consuming a heavy outlay of operating costs.
In this case, factors that surface technical risks include; inadequate Equipment Quality, depreciation, inadequate Organization Systems as well as facility infrastructure.
Analysis of probability and consequences
Likelihood vs. Consequences
Technical Risk Mitigation Strategies
In technical risks, the most viable risk mitigation strategy includes risk transfer as well as risk minimization. However, more practical approaches such as, mentoring the managers of the newly initiated project, as well as the team members, can be used in these types of risks.
Further, project team personnel can be cross-trained in an effort towards ensuring that they have the capability to fill in for one another especially incase of unforeseen events or situations (Broder & Gene 3).
Risk transfer
Risk transfer refers to the act of shifting the risk, which should be insurable, to another party usually an insurance company through an insurance policy.
Technical risks can be transferred to the insurer such that, if the specified risk actually happens the insurer will make good of the loss and, therefore, the owner of the project will continue to enjoy the economic benefits he was previously enjoying before the occurrence of the loss (Broder & Gene 8).
Risk transfer is the best option since the owner of the project can insure the whole project or can opt to insure different parts of the project. As such, if the whole project is insured, once a risk occurs and there is a loss, the owner will be compensated.
Similarly, where the owner insures different parts of the project, if a loss is caused by a risk factor in any one of the specific parts insured, the loss will be made good of by the insurer (Crouhy, Dan & Robert 600).
Risk minimization
Risk minimization involves putting in place devices that can reduce the extent of the loss if a risk actually occurs. In addition, it involves building structures that are able to resist losses or reduce the loss extent.
For instance, fire extinguishers need to be put in place so that if the risk of fire actually occurs, they will help in mitigating the loss by helping put out the fire. Also, buildings and structures need to be put up in areas that are free from risks or where the probability of risks occurring is quite low.
The standard work processes, as well as equipment, should be used in setting up the project, and this mitigates the occurrence of technical risks (Crouhy, Dan & Robert 655).
Mentoring
The individuals who have been mandated with the responsibility of running the newly initiated project ,as well as members of the team assigned with project work processes, can be mentored such that if anything has not been installed properly and has the capability of surfacing technical risks, it will be noted and corrections made. In turn, this will ensure that the occurrence of the risk is mitigated and if a loss actually occurs, the effects will not be materially felt (Golub & Leo 315).
Technical Risk Control Plan
From the above risk analysis, it is evident that the order of ranking of risk factors is equipment Quality followed by facility infrastructure then organization systems and finally depreciation.
Technical Risk Documentation
Generally, the level of technical risk is generally low and, therefore, the best control action is transfer of the risk in addition to risk mitigation. Risk transfer will not affect any work activity. However, risk mitigation will require extensive training of the project team and this will reduce the working time (Golub & Leo 326).
The project risk manager will be accorded with the responsibility of overseeing the successful implementation of the risk control action plan. The implementation of risk control plan is not supposed to consume a lot of project’s time.
Generally, the risk control plan is designed such that there will be no instance that the project will not be operational or perform below par since each and every risk will have been catered.
Operating Risks
There is a likelihood that the project, once it has been completed, will not perform as expected or will not perform to its full capacity. Also, it may be that the project will fail to generate the expected output units. Further, it may be that the project consumes resources excessively.
These are what are referred to as operating risks. The risk factors bringing rise to operating risks include; type of business, mergers and acquisitions, the financial conditions, capital expenditure, impacts of newly established accounting standards, in addition to currency fluctuations (Matt 10).
Analysis of probability and consequences
Likelihood vs. Consequences
Operating Risk Mitigation Strategies
Risk transfer
Just like technical risks, operating risks can be transferred to an insurer. The type of the business, in addition to mergers and acquisitions, risk factors can be transferred to another party to make good of the loss if it eventually happens out of these risk factors (Young 45).
Risk acceptance
Risk factors as financial conditions, currency fluctuations, as well as newly established accounting standards, are beyond the control of an entity and therefore, it necessitates accepting them and therefore establishing contingencies to absorb the impact of the loss emanating from them (Matt 14).
Risk reduction
These risk factors can be effectively mitigated or reduced if viable and effective strategies are put in place. For instance, the impact of currency fluctuations can be absorbed by providing an allowance for the fluctuation during the budgeting decision-making.
Similarly, a business can opt to make a large reserve of finances if such financial conditions as financial crisis arises and, therefore, the business will be able to minimize the impact of loss surfaced by this risk factor (Heinze 5).
Risk avoidance
Risk factors such as the type of business, in addition to mergers and acquisitions, can be avoided. A business, in order to avoid these risks completely, can decide to engage in businesses or choose mergers and acquisitions that present a less degree of risk. The operating risk control plan
Operating Risk Control Plan
From the above risk analysis, the order of risk factors from the highest to the lowest is; currency fluctuations, financial conditions, type of business engaged in, newly established accounting standards and lastly merges and acquisitions (Heinze 15).
Operating Risk Documentation
There is a substantial likelihood of operating risks surfacing and as such, businesses, as well as organizations, should make use of control strategies such as transferring the risk, mitigation in addition to risk avoidance. Risk transfer will not affect any work activity.
However, risk mitigation will require extensive training of the project team and this will reduce the working time. On the other hand, risk avoidance is likely to affect a wide scope of work.
For instance, by avoiding certain types of business endeavors, it follows that several work activities, which would have been beneficial, will be forgone (Carroll 10).
Just like in operating risks, the project risk manager will be mandated with the responsibility of with the responsibility of ensuring that a successful implementation of the risk control action plan has taken place. Effecting this risk control plan will take a considerable amount of time due to the processes involved.
In general, the operating risk control plan will be established in such a way that all the risk factors presenting operating risks will be adequately covered and all the possible control strategies identified (Matt 18).
Political Risks
These are the probabilities that the returns of a corporate could be adversely affected due to changes in political aspect or even political instability.
Usually, there is a difficulty associated to quantification of these risks owing to limited case studies, in addition to few sample sizes. Political risk factors include; the government, foreign policy makers, legislative bodies and the military (ExonMobil 25).
Analysis of probability and consequences
Likelihood vs. Consequences
Political Risk Mitigation Strategies
Accepting the risks
This involves accepting the political risks and therefore establishing contingent strategies.
Risk transfer
The political risks can be transferred to another party in order to make good on the loss.
Political Risk Control Plan
From the above risk analysis, the order of risk factors from the highest to the lowest is; legislative bodies, the government, legislative bodies and the military.
Political Risk Documentation
Generally, the likelihood that political risks will happen is moderate. This implies that a business, as well as an organization, should come up and implements control strategies such as transferring the risk in addition to the acceptance of political risks.
As a trend, transferring risk to another party not affect any work activity. On the other hand, accepting these risks as inevitable is likely to affect the majority of work processes.
Just like in operating in addition to technical risks, a project risk manager will be assigned with the responsibility of making sure that a successful implementation of the political risk control action plan has successfully taken place (ExonMobil 56). Effecting this political risk control plan will take a considerable amount of time due to the processes involved as well as the formalities and legal systems to be complied.
Conclusion
From this analysis, it is evidently clear that the future events that have the ability of making the life of a person or an entity to be jeopardized are commonly referred to as risks. Literally, risk is termed as the potentiality of a chosen event will surface a loss or even an outcome, which is not desirable (Carroll 24).
Contemporarily, almost have realized the benefits of implementing risk management strategies in an effort towards mitigating losses that may be presented by the risks. Several risks can befall a project making it lose its economic value.
Some of these risks include political risks, operating risks, in addition to technical risks. However, several risk factors give rise to these risks.
For instance, considering the operating risks, the risk factors would include such things as type of business, mergers and acquisitions, financial conditions, currency fluctuations as well as newly established accounting standards. Several strategies can be used to mitigate the occurrence of these risk factors.
Strategies such as risk transfer, risk avoidance, risk mitigation, as well as risk acceptance, are some of the most viable strategies that can be implemented to curb or absorb the loss.
Risk analysis is a decisive phase of risk management as it is through this phase that risks with a high degree or most likely to occur are identified. Further, it is through this risk management phase that the possible impact of the risk is identified.
Risk analysis is an important phase of risk management as it is through this phase that risks with a high degree or most likely to occur are identified. Further, it is through this risk management phase that the possible impact of the risk is identified (ExonMobil 67).
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