Risk management: Discipline with many faces
Risk management: Discipline with many faces
By Michael Sinjorgo
JAKARTA (JP): Risks are a fact of life for everyone. How one
deals with these risks determines the quality of one's life.
Business has its own risks. How risks are managed has a direct
impact on everyone dealing with a company: clients, employees,
creditors, owners, suppliers and neighbors.
Therefore, socially responsible companies and government
agencies must have proper risk management strategies in place to
foresee and minimize situations and activities that can aversely
affect goals and objectives.
This article focuses on risk management in the business world.
In Indonesia, risk management has been formally practiced in only
a few industries, such as banking.
In other countries this discipline considers all risks: theft,
destruction, political risk, cash, environment, employee health,
product liabilities, professional liabilities, weather, etc.
Very sophisticated financial and electronic tools have been
developed to evaluate and manage risks both nationally and
internationally. The impact on the balance sheet of companies
using these tools is dramatic.
What is risk management and how did it develop? It is the
discipline of looking ahead to discover what may prevent a set
objective from being accomplished and how these events can either
be eliminated or impact controlled.
Mankind has been obsessed with this discipline for as long as
we walked the earth and designed many techniques to deal with it.
Most businesses in the past centuries have transferred some of
their risks to insurance companies.
The risk management discipline is the process of objectively
determining all the risks associated with a particular program or
development project, then evaluating, prioritizing and solving
them. This process may or may not involve insurance or transfer
of risk, i.e.: proper maintenance proceedings may be more
practical than solving your problem by buying insurance for such
risks.
The business world brought the management of their risk "in
house" with this realization and the need to react positively to
the ever-increasing demands of better-educated consumers and
employees.
They hired and trained employees to handle all aspects of
their risks, rather than contracting to commission driven
marketing people.
Professional risk managers must be completely independent from
the insurance industry in order to provide advice and solutions
in the best interest of those they serve. This is obtained by
either bringing the service "in house" or hiring consultants on a
fee for service basis.
Any capable risk manager can earn this fee back for their
employer/client in a short time by improved protection and lower
insurance costs.
The Risk and Insurance Management Society based in New York,
is one of the most prestigious international organizations in
this field. It celebrated its 50th anniversary this year. Their
annual conventions gather some 15,000 people, active in
international risk management.
Risk management in Indonesia has unfortunately never fully
developed as elsewhere in the world. There are several reasons
for this phenomenon.
1. The government's protective attitude towards the insurance
business -- protection always limits knowledge, development,
competition and products needed to remain competitive.
2. The monopoly of only a few large insurance brokerage firms
in the country -- monopolies everywhere prefer status quo, not
development.
3. Collusion and illegal payoffs between buyers and sellers --
collectively, these practices have kept the Indonesian business
world from staying in tune with international developments in
this area.
A properly functioning risk management program should
encompass the following procedures: prepare an inventory of all
possible risks the company may encounter with its proposed
project development; prioritize them; determine how to deal with
them; select risks that will be retained and those that are
better transferred; determine clauses for the insurance contract
for those transferred risks; prepare specifications and tender to
reputable insurance companies; evaluate bids and draft the
contract.
This process provides the company with a transparent,
comprehensive and very cost-effective plan to deal with
unforeseen liabilities.
Risk cannot be eliminated, but with proper planning, risks can
be contained.
The monetary crisis has forced Indonesian businesses to open
up to more international ownership and requires that companies
adjust to international business practices, including proper risk
management.
The substantial cost savings should be enough incentive for
Indonesian businesses to take the initiative and make the
necessary steps. No business can afford to pay for risk
protection leaving some of the most damaging risks exposed, while
providing too expensive a protection for the less important
risks.
Modern technology is rapidly changing the business landscape
and forging one international market place, including Indonesia.
To remain competitive in this market place one has to make the
best use of available business systems and practices.
To conclude, risk management is an international business
discipline to either wholly prevent risks or prevent them from
becoming disasters. Government agencies and private businesses
should accept their social responsibility by adjusting their
operations to internationally accepted practices.
The writer is president director of PT Usaha Tepat Guna, an
independent Indonesian Management Consulting company
(mgtcons@cbn.net.id). He wrote Succeed in Business: Indonesia.