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.