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Why Risk Management?

By Michael Vincent

28 December, 2006

Have you wondered why the words ‘risk management' are heard so widely today?  Have you considered what can be achieved with an understanding of the term?  Indeed, is the term used or misused in today's business world?

As Peter Bernstein showed in his history of risk, Against the Gods, risk became an acceptable term when the vast majority of people decided they could control their own future, and that God did not preordain every facet of human life.  Thus began the struggle to identify and mange risk.  Along the way risk has come to be many things to many people: from finance; to insurance; to occupational health and safety; to engineering tolerances; and all points in-between.

In the past, firms had the luxury of employing large numbers of people in middle management positions.  These managers ensured the needs and wants of the organisation's functions: from production, to quality control, to administration and management.

By having a large management structure that was used for checking and ensuring compliance, risk was contained and controlled in a simpler and more structured world.

The winds of change started to sweep the world in the early 80s, and continue to this day.  Competitiveness, efficiency and productivity have become the by-words of today's business environment.  Any country or business that ignores the pressures generated by the forces of change is only delaying the inevitable.

One of the more significant outcomes of the change process over the last decade is the virtual elimination of the middle management ranks that had grown to an enormous size since the end of the Second World War.  Without middle management, how can a business be effectively controlled?  That is the question that must be answered for business to survive into the future.

Australian business and government have made great leaps over the last decade but must continue to change and adapt for us to keep our regional advantage.  Understanding risk management and applying the principles of risk management (as discussed in previous issues) is a start.  However, a new paradigm must be accepted and adopted.  Risk managers have a duty to contribute to the development of risk management as a recognised and separate business discipline that enables a company to chart its future in an effective and orderly way.  Indeed the profession could argue it is in the same position that marketing was in the late 40s and finance was in the mid 70s: it is a new and emerging force in the effective management of a successful business.  What is needed is for the understanding of the term ‘risk management' to be greater than the current accepted meaning and for a more diversified theoretical approach to emerge.

One way of looking to the future is to look to the past for lessons.  In the 60s an effective management tool emerged called ‘project management'.  It was narrowly focused - implemented mainly by engineers in significant projects - and there it has remained.  The basis of project management was the understanding of the fact that a project had a beginning, a middle and an end.

A successful firm in the future will need to adopt the principles of project management, with teams forming and breaking up according to task in order to operate on a tactical level, with an effective holistic risk management process overlaid to ensure survival in a strategic sense.  Risk management must emerge as an effective management tool or one of three outcomes will eventuate:

About the Authors

Director

Australasian Risk Management Unit

Faculty of Business and Economics

Monash University