Risk management
Risk management

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Risk management

Session 3: Risk identification

Introduction

Watch Video 1, which covers when to start risk management.

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Transcript: Video 1 When to start risk management

SPEAKER 1
Risk management can scale up and down depending on the size of your business or organisation. What's suitable for a FTSE 100 business under the Corporate Governance Code for the UK is not suitable for a small, owner-managed business. It's about making sure you understand what those risks are that you face as a business and then taking action accordingly.
That may be there's a formal risk register, at a point that you need to go and maybe take some capital or some investment into the business, or it may be to avoid getting hit by incidents, you might have had experience with incidents in the past. And actually, you want to understand how to avoid those incidents in the future.
SPEAKER 2
It's always really challenging to know at what point do you start to put more deeper consideration of risk in place. Because what you don't want to do is stop the pace of those really exciting opportunities. But at the same time, it really comes back to what we call risk appetite. How much are we prepared to take on in terms of the risks that we face?
What can we afford to lose, potentially, if some of those risks happen? And how do we make sure that we have the right conversations happening at the right time so that we are moving forward to go for those really exciting opportunities, but at the same time, we're not doing that at any cost and taking all sorts of risks onboard?
Generally, I would have said if it's really thinking about ideas, that probably isn't the time to be putting really structured risk management in place. But as soon as you're starting to make some external commitments, you're starting to get stakeholders onboard, to give those stakeholders confidence that actually, you're thinking things through, you're thinking about what could happen, and any kind of events that could mean that those objectives that you really want to achieve might not be achieved, that's really probably the time to be putting some good, structured risk management in place. But it's really about the type of organisation and the type of people.
End transcript: Video 1 When to start risk management
Video 1 When to start risk management
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In Session 1 you looked at some definitions of risk. Revisit these for a moment:

A situation involving exposure to danger, the possibility that something unpleasant or unwelcome will happen, a person or thing regarded as a threat or likely source of danger, a possibility of harm or damage against which something is insured, a person or thing regarded as likely to turn out well or badly in a particular context or respect, the possibility of financial loss.

OED source [Tip: hold Ctrl and click a link to open it in a new tab. (Hide tip)]

So, as discussed in Session 1, a risk must have some degree of uncertainty. In the risk process identifying that uncertainty takes place in the risk identification phase:

Described image
Figure 1 ISO 31000 diagram – risk identification

Activity 1 Uncertainty statements

Timing: Allow approximately 10 minutes

For each question below select the statement which relates to a current business uncertainty (as opposed to a fact or a concern about a possible emerging risk).

Question 1:

a. 

In the last 5 years a supplier has only had a delivery issue once and this was due to factors outside of their control.


b. 

There is a possibility that a key supplier may fail, leading to raw materials not being supplied.


c. 

Cyber actors are increasingly looking outside of their primary targets for ways in, including the supply chain.


The correct answer is b.

Question 2:

a. 

A competitor has just launched a new product ahead of us that is more advanced and it looks like it uses our intellectual property.


b. 

At some point a technology company will create an offering that will side step our main product range and could leave us as a niche player.


c. 

Because of strong competition the business might not win the contract with a big customer.


The correct answer is c.

Question 3:

a. 

Our main warehouse is built on a flood plain, there have been two floods in the town in the last 20 years.


b. 

A fire could break out in one of our facilities, if we don’t take the right precautions.


c. 

Automation of the workforce is something we will have to manage in the next 10–20 years.


The correct answer is b.

Question 4:

a. 

There is a chance that the government may introduce new regulations that would limit how the company could trade.


b. 

There has been a coup in a country we operate in, leading to civil unrest in major towns and cities.


c. 

Climate change will impact the market for our product, how we produce and where we can sell.


The correct answer is a.

Question 5:

a. 

Sometimes our sales team make mistakes and this, if not properly managed, can lead to errors in the order processing system.


b. 

There is an error in our order fulfilment system that leads to some lines going to the wrong dispatch centre; we don’t fully understand the scale of this yet.


c. 

The internet will change how our customers place orders in the future.


The correct answer is a.

Answer

These were the uncertainties (simple risk statements) all focused around tangible activities that the company presently facesThese were ‘facts’ that related to ‘incidents’ (either recent or historic) that may require action or give an insight into risks that may need to be managedThese are sometimes referred to as ‘concerns’ that are potential areas for risk where the concepts are broad and the company may want to undertake further work to understand the risks faced. These are often referred to as emerging risks. (See horizon scanning in Session 8.)
Question 1There is a possibility that a key supplier may fail, leading to raw materials not being supplied.In the last 5 years a supplier has only had a delivery issue once and this was due to factors outside of their control.Within the next 10 years we will have to shift our supply chain away from the current raw materials to remain cost competitive.
Question 2Because of strong competition the business might not win the contract with a big customer.A competitor has just launched a new product ahead of us that is more advanced and it looks like it uses our intellectual property.At some point a technology company will create an offering that will side step our main product range and could leave us as a niche player.
Question 3A fire could break out in one of our facilities if we don’t take the right precautions.Our main warehouse is built on a flood plain, there have been two floods in the town in the last 20 years.Automation of the workforce is something we will have to manage in the next 10–20 years.
Question 4There is a chance that the government may introduce new regulations that would limit how the company could trade.There has been a coup in a country we operate in, leading to civil unrest in major towns and cities.Climate change will impact the market for our product, how we produce and where we can sell.
Question 5Sometimes our sales team make mistakes and this, if not properly managed, can lead to errors in the order processing system.There is an error in our order fulfilment system that leads to some lines going to the wrong dispatch centre; we don’t fully understand the scale of this yet.The internet of things will change how our customers place orders in he future.

By the end of this session, you should be able to:

  • construct a meaningful risk statement (Cause / Event / Consequence)
  • understand methods of identifying risk – brainstorming, interviews, checklists, PESTLE, SWOT
  • understand different types of risk
  • understand risk registers.

Now begin Session 3.

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