The importance of process in risk management

Australia has more than 2 million small businesses, and every day as much as 75% of these businesses — some 1.5 million SMEs — open themselves up to risk. Research from the Australian government found that 26% of these businesses have a lack of risk awareness altogether, so it’s no surprise that when compared to the more mature policy environment you find in larger organisations the risk management procedures of Australia’s SMEs are lacking somewhat.

Aon’s 2015 ‘Global Risk Management’ survey found that one in four small-to-medium enterprises had developed risk management procedures and that’s the most flattering figure. The majority of small business owners are aware of risks to their business however that awareness isn’t translating into clear and defined processes and procedures, and that is worrisome. The importance of process cannot be understated and it’s time to get yours in order.

There are benefits to employing a stricter procedural environment, such as increased efficiencies and improved productivity as it reduces or eliminates wasteful crossover and duplication. Procedure shortens training time for new employees, aids with the learning curve, and gives companies great ability to track KPIs and measure performance.

Having a process to follow also enhances accountability, which returns a lower rate of errors or non-compliance as well as giving a more consistent customer experience.

Scientific management is another term for this kind of procedural environment and, for those who don’t know, was first advocated by Frederick Taylor in the first quarter of the twentieth century. The basic principle was to simplify tasks and closely measure employees’ work in order to boost productivity. The key advantage of scientific management is the process and repetition encourages efficiency and improves work-rate. The main disadvantage is antiquated application can sometimes discourage lateral thinking and companies can be slow to react to change as they are over-reliant on old process.

The cost of developing standard operating procedures can put many small business owners off at first but the medium- to long-term benefits are indisputable. Scientific management is implementable across so many industries and many recognisable and highly successful businesses have borrowed elements of it when defining their procedures.

Internet retailer Amazon and fast-food giant McDonald’s are just two companies who use scientific management to good effect. The portioning of tasks, regular performance measurement, standardised operating procedure, and separation of duties has increased efficiency, produced a consistent customer experience, and grown market share for these companies.

McDonald’s in particular is a great example because the products and service are almost identical wherever you go despite the majority of McDonald’s restaurants being franchises. Scientific management in Amazon’s warehouses has allowed them to offer a reliable next-day delivery service and in some areas, same-day delivery service. This would not be possible without defined process and is arguably Amazon’s most attractive selling point.

Detailed procedures are not only good for efficiency but also a worthwhile exercise in the quest for fraud prevention. Organisations employing a separation of duties matrix are better protected against the risks of theft and fraud than those who do not. There are so many practical applications of separation of duties from McDonald’s ensuring their food, preparation, and cooking areas and facilities meet the most rigorous health and safety standards, to most postal services requiring electronic signing from drop off to delivery to track the chain of custody. Businesses use it every day, to make sure that the approvals are not made by the requestor, and protocol is followed by two-tick checks.

Scientific management, process, and procedure is often criticised for human automation and creating ‘robots’ and while that may have been valid in the 60s as the old, industrialised application started its descent, it is unfairly attributed to the modern interpretation. Scientific management in the digital age encourages creativity and lateral thinking, and is designed to enhance motivation and complement the modern, dynamic business environment.

Process is important for maintaining rigidity in risk management and a well-thought-out approach to defined process and standard procedure will positively impact the ability of teams, managers, and executives to respond to external change.