Fundamentals of Risk Management: Understanding, Evaluating and Implementing Effective Risk Management

Realizing, learning and managing risk is one of the most fundamental aspects of modern business. Quite a new aspect in Botswana but through a comparative analysis with other sovereign states it has been found that companies and even governments have fallen, all because they failed to manage their risks.

When one looks at the names of these companies and how big they are, the footprints they have left across the whole world, one would then proceed to wonder, what would happen if an organisation like our own, which at only 2 years in, is still growing and climbing up the ladder in the tourism and hospitality industry would survive if it failed to manage its risks. “A string of large and highly public organizational and Governmental failures over the past 10 years (Woolworths, Golden Wonder, Northern Rock, Citigroup, Enron and even the entire banking system of Iceland) has focused the attention of investors, customers and regulators on the way in which directors, managers and boards are managing risk.”

Business is dynamic and never stagnant, if the organization wants to lead from the front in the hospitality industry and achieve the goals it has set for it has to move with the times, that means understanding what ERM is and integrating it into the organisation. As an organisation we have set our own objectives such as increasing profits, pride in cleanliness, having one of the best gardens to host social events, providing the best quality food at an affordable price and so on, to get the best out of these objectives it is fundamental that we follow ERM. As thus;Enterprise Risk Management (ERM) is described as, "The process by which organizations in all industries assess, control, exploit, finance and monitor risks from all sources for the purpose of increasing the organization's short and long term value to its stakeholders." From the description alone one can tell that enterprise risk management is realizing, managing and exploiting organizational risks to better the value of the organization in the prospects of making it profitable and in overall taking it to greater heights which is one the key objectives of any organization and fundamentally one of Yalots Guest House.

ERM classifies risk into 4 type’s hazard, financial, operational and strategic. Hazard risks are those risks that have traditionally been addressed by insurers such as fire, theft, liability, business interruption which as Yalots Guest House have taken an insurance policy over. Financial risks are potential losses due to changes in financial markets, commodity prices such as fluctuations in shampoo prices and currently in Botswana the halt in importation of bottled water and what effect that has in the prices of bottled water prices which is one of the commodities we sell at Yalots Guest House and so on and so forth. Operational risks cover a wide variety of situations, including customer satisfaction, product development, product failure, these are what would happen if a customer did not like the service provided for at Yalots such as food offered, state of room, state of cleanliness and if the beds are comfortable or not. Strategic risks include such factors as completion, customer preferences, technological innovation and this means whether the WIFI at the guesthouse is good and reliable, how beautiful the garden is to host social events which basically are the strategies to pull in more clientele.

A common thread of enterprise risk management is that the overall risks of the organization are managed in aggregate, rather than independently. “The level of decision making under enterprise risk management is also shifted, from the insurance risk manager, who would generally seek to control risk, to the chief executive officer, or board of directors, who would be willing to embrace profitable risk opportunities” Which is the whole idea of ERM, to create a risk aware cultureand distribute risk across the whole organization to make sure that the whole organization is fully exploiting its resources and opportunities in connection with the fundamental objective of growing the organization and making it profitable. Risk awareness, the embedding of risk management into the organization has been undertaken by following three routes: a risk awareness campaign; the implementation of new risk identification processes at directorate level, and the ongoing development of existing risk processes at a strategic level. The primary aim of the awareness campaign was to make staff realize their responsibilities towards risk, whilst at directorate level the introduction of risk registers has been collaborative and inclusive. Strategically, further development of the corporate risk register aims to bring tighter control of risk and provides comprehensive evidence and assurance to the board that risks are managed.

ERM is about how maximize the productive efficiency of the enterprise as risks should be managed in a comprehensive manner, and not simply insured. Thus as an organization ERM will help the organization become more efficient and exploit the above mentioned objectives as a whole as they cannot all be insured against but fully exploited and managed. An example can be drawn from how the objective of cleanliness, if the organization fails to guard against this and a client finds the bed unmade and the dustbin not emptied then it compromises the objective and to guard against this risk is to hire a person who is in charge of cleaning all the rooms before and after they are made available to a client and to check right before a client is issued a room key. This person then becomes the risk owner and their job is dedicated in managing this risk which would be an operational risk, this person would be answerable to the Risk Manager and he/she is in charge of managing all the risks of the company and reporting to the management and or board who deal with all the 4 types of risks as classified above. As they are in charge of exploiting and managing risks to make the organization profitable and more efficient.

Often when one hears of the word risk they often think of something bad or something that could affect an organization negatively as can be seen in this definition by the Oxford Dictionary “chance or possibility of danger, loss or other adverse consequences”. While enterprise risk management sees risk as a potential profit opportunity, rather than as something simply to be minimized or eliminated. COSO in its definition of risk states that failure to exploit opportunities is also viewed as a risk, thus if Yalots Guest House does not exploit its opportunities then it faces a risk in that it misses the opportunity to grow the organization. An example can be drawn on the fact that there are not a lot of conference facilities in Molepolole and if Yalots Guest House fails to build a conference facility then the organization has failed to exploit this lacunae and has decreased its profit margins as it would only have focused on accommodation. Conference facilities bring in another source of income and a whole new diversity of clients which if they enjoy the use of, it becomes highly likely that they will also make use of the accommodation facilities and this becomes a one stop shop for business people in and around Molepolole. This is what ERM focusses on, exploiting the lacunae as failure to do so is seen as a risk to the organization. David Griffiths states “an organization that understands its risks, understands its opportunities. However: If it doesn’t know its risks, it doesn’t know the risks it can accept, if it doesn’t know the risks it can accept, it doesn’t know the risks to take, if it doesn’t know the risks to take, it doesn’t know how to grow. If it doesn’t know how to grow, it will wither away. If it does not understand its risks, ‘Events’ will knock the organization back; missed opportunities will hold it back.” Which is the whole point of ERM and its selling point, this makes it a fundamental need to Yalots and implementation into this organization will make Yalots a tycoon in its own right in the tourism and Hospitality industry.