Is the Risk Management Process the Same at Operational and Strategic Levels?

The conventional wisdom suggests that risk management processes vary between strategic, operational, and project levels. But here’s an RM2 twist—none of this is true! Let’s say this upfront: the idea of differentiating risk management by organizational levels is fundamentally flawed.

Risk management is not about fitting into a hierarchical structure; instead, it is driven by decisions. Each significant decision demands its unique risk management approach, methodology, and criteria. Whether it’s a strategic decision, budgeting, or investment management, the core of risk management is tailored to the specifics of these decisions.

“The levels of organization don’t matter because risk management is different not by level, not by hierarchy, not by organizational structure, but by type of decision.”

Reimagining Risk Management: A Decision-Centric Approach

Forget the RM1 nonsense—strategic vs. operational—and focus instead on what truly matters: the decision-centric approach. Here are some examples to illustrate how risk management changes to fit various significant decisions:

Strategic Decisions

Strategic decisions often employ sophisticated tools like scenario analysis, decision trees, or Monte Carlo simulations tailored to address the specific strategic questions at hand. These methodologies consider a broad spectrum of potential outcomes, enabling decision-makers to foresee and plan for various future scenarios.

Budgeting and Investment

In budgeting and investment management, Monte Carlo simulations are frequently used to calculate budget contingencies or cashflow@risk. Typically, these simulations are built atop influence diagrams, providing a robust framework to account for the myriad factors influencing financial decisions. This helps in forecasting and managing the financial risks associated with capital investments and budget allocations.

Procurement and Production Forecasting

Depending on the risk profile and intricacies of the decision at hand, procurement and production forecasting might lean towards scoring methods or, once again, tailored Monte Carlo simulations. These methods are used to navigate the uncertainties in supply chain dynamics, demand variations, and production capacity, ensuring that resources are optimally allocated to manage risks effectively.

Fire Safety

Fire safety risk management requires a wholly different methodology, usually driven by local safety regulations and compliance necessities. The focus here might be on scenario modeling, regulatory checklists, and rigorous adherence to safety standards to mitigate risks associated with fire hazards.

In essence, while the techniques like Monte Carlo simulations may remain constant, the methodology is anything but uniform. It’s shaped by the contours of each decision’s risk landscape.

Operational Risk, Risk Management Services, Risk Management Consultant

The difference in application again shows the fundamental difference between RM1 and RM2 thinking. RM1 risk managers try to treat risk management like a product, while in the RM2 world, risk management is just a step to making a better decision. I hope this discussion sheds some light on RM2 and the future of risk management.

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Join RAW2024 and explore how adopting an RM2 approach can transform your organizational decision-making and risk-management practices. Together, let’s redefine risk management beyond traditional confines, recognizing it as a dynamic, decision-centric process that evolves with the complexity and specificity of each significant decision.