Risks affecting businesses can have consequences in terms of economic performance and professional reputation, as well as environmental, safety and societal outcomes, according to ISO 31000. This means that, managing risk effectively helps businesses to perform well (economically) in an environment full of uncertainty.
Cost of Risk Management
Risk management can be a simple activity such as ensuring that all computers of the business are password protected, to very complex and expensive ones which involve outlay of millions of dollars such as procuring new and improved assets (efficient processing plant, software, environmentally friendly manufacturing processes etc) and hiring particular caliber of staff. Companies also invest heavily in training programs to keep their staff up-to-date on risk identification, monitoring and control, because risk management is an entity-wide activity, and not a delegated function of just the risk management department. The cost often depends on the size of the business, nature of risk, expected impact among others.
The Cost of Failing to Manage Risk
The cost of risk to a business can come in various forms such as claims, fines, strike costs, legal battles, returned or rejected goods and others. Added to these are other intangible costs such as reputational damage, which in many cases can have the biggest impact. Severe reputational risks which drag over a long period (unrepaired) often lead to decline in sales and eventually the collapse of many businesses.
Invest in Risk Management and Save Money
Businesses (whether startups or big multinationals) which take risk management seriously as an ongoing practice often avoid fines, strike costs, legal battles and other unnecessary spending which could have been avoided in the first place. You are better off avoiding or limiting the effects of risks by spending a few dollars than later engaging in what many call ‘damage control’. Why control the damage when it could have been minimized or avoided altogether.
In my view, every dollar spent on proactive risk management is at least 5 more saved in the management of the impacts of risk. Proactive risk management does not only save you money, but saves you time to attend to the core business rather than dealing with the effects of crystallized risks.