Risk management experience

This is my first hand experience in area of risk management. Risk management has been researched and practiced by companies in American and European countries. Even after putting in various processes and mitigation techniques financial crisis could not be avoided. At same time even though Indian companies do not have formal enterprise risk management practice in place, they are not in that trouble. So does that mean risk management is of no use and entire work done in that area has no value? Is it mere exhibition of mathematical supremacy of some geeks? Are those models part of problem or solution to today’s problems?

The answer I found when I started working for developing risk model for my company. After few days at work I was taken aback when there were no formal strategies in place nor any guidance or processes in area I was working. To start my work I decided to talk to various stakeholders and quickly realized that how could they manage without knowledge of risk involved and still earned profit. The answer lies in first blog post of mine. We Indians by nature are risk averse. In initial part of my career when I was involved in software development I had to estimate the effort for the development. I always use to pad it up by 20-30% to ensure timely delivery. But when my lead forwarded that estimates she would further pad it up by other 10% and so on till entire estimates gets padded up by almost 200%. Then client would negotiate and we would end up having at least 100% padded estimate. Though we did not have formal project risk management practice in place we ensure timely delivery. The same is true with most of Indian companies. They have mostly hierarchical organization structure rather than flat one and further at each level each one of them adds its own estimate of risk premium which ensures sufficient buffer, in fact more than required. Thus they have been able to withstand any deviation from expected.

Risk management is thus very important for Indian companies since it would free up lot of capital (or bring down estimates to appropriate level) and would help them to be more competitive. It would help them to improve their estimation. So unlike western countries where risk management increases capital requirement, eastern countries it might have opposite impact. But the fact remains risk management would certainly be of importance to both of them.

I had gained similar learning from my experience with startup. They were quite successful growing at almost 20-30% a year. They also did not risk management practice in place and neither believed in that. After detailed study of their company for a year or so I realized the risk aversion and management was inherently in culture and style of the entrepreneurs. All that I could suggest as part of process was indirectly implemented by them as part of their business.

Sometimes after learning lot of complex stuff, models we might miss out these socio-cultural factors that are very important for risk consultants. They might look silly but can have important consequences if you are working as risk consultants in different countries across the globe with companies of different size. Today I realized that small company without any knowledge of risk could have better risk management practice ingrained in its business than billion Dollar Company armed with professional from best of the B-schools.