risk management framework

risk management framework

Developing an Effective Risk Management Framework: Principles, Strategies, and Implementation

1. Introduction to Risk Management Frameworks

First, here is an introduction to the risk management framework and its salient and essential features and concepts. The importance and need for risk management in general and in specific organizations are also discussed. The paper also gives an overview of the case organization and the impetus for their interest and implementation of a comprehensive risk management framework. The introduction is made complete by an outline of and commentary on the research scope and methodology of this report and global organization trends that warrant the implementation of a comprehensive organizational risk management framework.

This paper provides a strategic overview and practical introduction to developing a comprehensive and effective risk management framework in a mixed-method organization. It outlines and discusses the principles and strategies that guide a deliberate implementation of the essentials comprising the generic aspects and its implementation in a case organization. An overview of deployment approaches and other design strategies and their likely linkage to the governance model of an organization is also covered. Relevant comparisons to existing and related risk management initiatives are underlined.

2. Key Principles of Risk Management

First, risk management involves looking ahead, and understanding the various ways in which the future may unfold and its effect. This in turn may imply looking back at the past, and thus, understanding fundamentals, which could be both economic and structural in the sense of key parameters that will influence project impacts. If markets misprice risk, then we need some understanding of why this arises and what effects it may have on capital investments in infrastructure. While our principal focus is on the actions to manage the overall effect of risk – loss and suffering – we also wish to highlight the continuing importance of traditional ‘mitigation’ strategies, such as information gathering, early warning, and preparedness. Such strategies obviously carry a direct and self-evident pay-off. As recent conflicts have underscored, they may also offer a longer-term pay-off in peace over the course of generations.

Before analyzing specific risk management tools, we provide a short set of principles of risk management that would be common to most models. The first part of the list is adapted from World Bank (2003). The remainder of the list reflects our own thinking and more recent literature. It is structured with a view toward applications in three broad areas – specific policy domains, general development planning, and private sector risk. These principles are meant to be general. They span all scales of assessment (project to global), actors (public, international organizations, local), and types of interventions. And, we believe that they not only reinforce but are entirely consistent with having a narrow focus on reducing expected losses. If one moves from the mean to distributions of possible outcomes, effects on different groups can be assessed (with poverty always a potential concern), distortions narrowed, and risk management can even still be a function of some consistent and utilitarian social value functions.

3. Strategies for Implementing a Risk Management Framework

The relationship between the performance of the internal control system inside an organization and many powerful consequences of the day-to-day work of risk management may not be easily understood by all directors of public companies. There is a plethora of risk management models and solutions that exist in the market today which can help companies accomplish things better, faster, safer, and more economically. It is up to the wise directors of public companies to orchestrate the governance with leadership as the key point. True leaders are the ones whose spirit contributes to the practices that encompass governance operating as intended. Adopting—and sustaining—a philosophy and methodology as wise leaders do is necessary in recognizing the considerable benefits of good corporate governance within an organization. Only through the unrelenting commitment to excellence in corporate governance can the firm truly benefit from the high degree of confidence about the reliability of the internal control structure.

Wise leaders focus on the corporate governance that benefits all stakeholders through the implementation of effective risk management. With proper risk management, the company provides an early warning system capable of signaling the need to take a new course of action, enables senior executive management to know that failures of controls were identified and corrected promptly, and provides independent information regarding compliance with applicable laws and regulations. These form some key risk management principles that should be used to develop an effective framework for the risk management and internal control of an organization.

Plan, Do, Check, Act. The PDCA cycle can be used to guide risk management and internal control. This framework improves not only the effectiveness but also the efficiency of the internal control system within an organization. However, in applying the PDCA cycle, it is important to be patient, to have commitment, and to avoid a mentality of wanting to see instant results of the cycle. This system might be slower in appearance at the beginning, but gradually, the results will be seen. The PDCA cycle should be the management’s mentality and adopted by all members within an organization.

4. Measuring and Monitoring Risk in the Framework

A strategy needs to be supported by a robust risk measurement and monitoring framework. A flexible and dynamic approach to performance monitoring is necessary. It allows stakeholders to adapt to changing circumstances and new information about the effectiveness of the disaster-related interventions implemented and to the inherent uncertainty of risks. A monitoring and evaluation system that allows for progressive learning and clear measuring of progress is important elements of the strategic framework. The existence of a flexible, risk-informed performance monitoring framework creates an incentive for consistent and better-informed planning, funding, and implementation across agencies and between the government and its NGO partners. It also ensures that at the program project level there are mechanisms in place to provide feedback on what works and to enable learnings from disasters to be used.

Creating a risk management framework is necessary to measure and monitor the risks associated with disaster prevention, preparedness, response, and recovery plans. A distinct, iterative process can be effective if aligned with existing national monitoring and evaluation capacities. The framework should pay attention to four key components: measuring the effectiveness of strategy at various levels within the institutional and operational structures, risk assessment severity, likelihood and location of hazard risks, and national and international risk monitoring and assessment efforts, with the experiences of non-governmental organization partners.

5. Case Studies and Best Practices

Pakistan has embarked on an ambitious program of sector reforms and privatization, aimed at comprehensive structural and organizational growth and development, set within a macro-economic stabilization program. The infrastructure sector represents a vast and diverse field consisting of a wide range of activities that meet the basic needs and support the foundation for development. The challenge for the developing countries lies in stepping up and expanding these activities to enhance the welfare levels of the masses.

One of the key reasons for the increased attention given to the subject of risk management is the need to curtail the monstrous losses that could arise if adequate risk management techniques are not considered. Every country, at one point in time, has to embark on a journey of nation-building. The development stage spans across the initial phase of realizing the vulnerabilities and understanding the implications of these weaknesses, followed by the creation of a robust strategy to address these issues and finally, to ensure that the planned strategies are implemented effectively through meticulous monitoring and a flexible approach to new developments.

This case study focuses on the best practices in several key sectors that are of utmost relevance when considering effective risk management in a nation-building process. Lessons are drawn from the experiences of both developed and developing countries. In the telecommunications sector, the emphasis remains on liberalization and privatization of the sector, while ensuring the introduction of competition rules and setting up a strong and credible regulator. Secondly, a case study on the power sector gives us an idea about the different regulatory strategies that could be established and the impact of these strategies.