Best Practice Risk Management
Risk assessment and management should be an integral part of an organization's life cycle asset management. It is a vital part of any business plan for organizations.
The key quality areas include how well the organization:
- Identifies the risk (types) that their business faces
- Assesses the impact of these risks
- Manages the risks identified.
For most organizations, the key types of risk include:
- Commercial business risks (including regulatory risks)
- Customer expectations and political implications
- Product and service delivery failures covering quality and quantity, and degrees of failure.
There are a number of trends in the legal and insurance industries and in the wider community that are giving rise to increases in the costs of providing services. This is causing a growing interest in the application of best practice risk management. Factors that have contributed to these trends include:
- Better knowledge of claims and the real worth to businesses, customers and the community in general
- Awareness of the trend in legal judgments and contingency fee structures.
The failure of the asset or system has a cost to the organization and its customers. The failure can be represented by the cost of the consequences of failure. However, the risk to the organization is only the current risk cost, which is given by the following equation:
Current Risk Cost | = | Probability of Failure | x | Cost of the Consequences of failure |
Cost (benefit of avoiding loss) to the organization | | Estimate based on condition or performance of the asset | | Cost resulting from failure of the asset or failure for not supplying a new service |
This risk management evaluation technique can be applied to:
- The failure of an asset to continue to give service
- The failure to meet a new service or demand
- The identification of all assets that have a high probability of failure, or more importantly, those that represent the highest risk to the organization.
By taking into account all factors, e.g. financial, technical, social and political, this forms a logical way in which to address capital investment decision-making across a broad range of assets and systems.
The four main elements of the risk management process are shown below. They are risk:
- Identification
- Quantification
- Evaluation
- Control.