Risk management is a critical tool that helps companies and projects to see and address potential issues before they occur. It uses a structured approach to identify and examine a potential issue from the perspective of how likely they are to occur (likelihood), how big the problem will be if it does occur (consequence). This information is then used to undertake appropriately scaled actions to minimize the chance it will occur and the damage if it does occur. The bigger the potential problem, the more emphasis placed on avoiding it and/or minimizing its impact if it does occur.
Large companies rely on risk management to provide the framework to analyze a risk and take steps to make it less likely to occur and minimize damage if it does occur. They face so many risks that it is critical they analyze them and focus on the ones with the potential to cause them the biggest issues. They also rely on risk management to develop a corporate culture where staff consider likelihood and consequence for most of the tasks they undertake rather than just blindly doing what believe they were told to do. This approach to work is good for the company – having employees thinking of what can go wrong and how to avoid it reduces problems. This culture is even more important in Small to Medium-sized companies and projects (SMs).
Addressing risks helps SMs increase profit and improve financial stability – which is why risk management is a required practice in ISO 9001 and various other management and contract frameworks. Risk management is critical for SMs since they often to not have the depth and history needed to absorb major cash and reputational losses and in projects, anything that delays completion or increases the cost of the project typically results in exceeding the project budget.