Risk Management

Risk Management

Risk Management Jonathan Poland

Risk management is the process of identifying, assessing, and prioritizing risks in order to minimize their potential impact on an organization. It is an essential element of effective business planning and decision making, as it helps organizations to identify and mitigate potential negative consequences that could arise from their operations or activities.

There are several key steps involved in the risk management process:

  1. Identifying risks: The first step in risk management is to identify potential risks that could affect the organization. This involves looking at a wide range of factors, including the organization’s operations, the industry in which it operates, and the external environment.
  2. Assessing risks: Once risks have been identified, they need to be assessed in terms of their likelihood and potential impact. This involves evaluating the likelihood of a risk occurring, as well as the potential consequences of the risk if it does occur.
  3. Prioritizing risks: After risks have been identified and assessed, they need to be prioritized based on their likelihood and potential impact. This helps the organization to focus its efforts on the most critical risks and allocate resources accordingly.
  4. Developing risk management strategies: After risks have been prioritized, the organization needs to develop strategies to mitigate or minimize them. This may involve implementing new processes or procedures, introducing new technology, or other measures.
  5. Implementing risk management strategies: The final step in the risk management process is to implement the strategies that have been developed to mitigate or minimize risks. This involves putting the necessary measures in place and ensuring that they are effectively implemented and followed.

Effective risk management is essential for the success and sustainability of any organization. It helps organizations to identify and mitigate potential risks that could affect their operations, and enables them to make informed decisions that support their long-term goals.

Risk Management Plan

A risk management plan is a plan that outlines the steps to take to identify, assess, and mitigate identified risks. It is a proactive approach to addressing potential issues and is typically developed as the output of risk identification and analysis activities. The goal of a risk management plan is to minimize the impact of risks on an organization and its stakeholders. This is often done through the implementation of controls and other measures that reduce the likelihood of risks occurring or their potential impact.

The basic elements of a risk management plan are a description of each risk, an estimate of their impact and probability and an overview of the steps that are taken to treat each risk.

Risk Exposure
Risk exposure is a numerical estimate of the probable cost of a risk. This is calculated as impact × probability. For example, if there is a 10% chance that a million dollar house will burn down your risk exposure is $1,000,000 × 0.1 = $100,000. A more sophisticated analysis will also include the risk of partial losses such as a fire that only damages your kitchen.

Residual Risk
Residual risk is the risk that remains after risk treatment. This implies that you have accepted a certain amount of risk as part of risk management. In practice, most risks can’t be reduced to zero and this would seldom be desirable as you tend to get decreasing returns if you over manage risk.

Secondary Risk
A secondary risk is a risk that is created by risk treatments themselves. Risk management can go too far and cause more problems than it prevents. As such, measuring and communicating secondary risk has value in preventing overzealous risk management steps.

Risk Assessment

Risk assessment is the process of identifying and evaluating potential risks in a systematic and structured manner. It involves identifying the sources of potential risks, analyzing the likelihood and potential impact of these risks, and determining the appropriate course of action to mitigate or manage them. In risk assessment, probability refers to the likelihood that a particular risk will occur. Impact, on the other hand, refers to the potential consequences of a risk when it does occur. Probability and impact can be assessed using a variety of methods, including single estimates or probability distributions.

Project Management
A project team brainstorms risks with the input of the entire team and required subject matter experts such as an information security professional. They estimate probability and impact for each risk in a probability/impact matrix.

Program Management
An IT program composed of dozens of projects models the risk of projects being late or over budget using reference class forecasting, a method of comparing projects to historical projects with similar scope and risk profiles.

Equity Analyst
An equity analyst develops in depth knowledge about a company and its industry in order to evaluate risks and rewards associated with a stock. If they downgrade a stock they may provide a list of high level risks associated with the firm in a note to investors.

Risk Analyst
A risk analyst may use statistical analysis to evaluate the risks associated with a particular investment or class of investments. They may use a large number of variables to estimate the probability of losses as a probability distribution. For example, the probability of a 10% loss on a particular investment might be 3% and the probability of a 100% loss might be 0.3%.

Small Business
A small business lists out risks associated with a strategy to open a new retail location. They evaluate probabilities on a scale of 1-4 labeled as “very likely”, “likely”, “possible”, “remotely possible”. They evaluate impact on a scale of 1-4 labeled as “disaster”, “high”, “medium”, “low.” The business then uses the evaluations to prioritize efforts to avoid, transfer, reduce or accept each risk.

Learn More
Quality Requirements Jonathan Poland

Quality Requirements

Quality requirements refer to the specific standards that a product, service, process, or environment must meet in order to be…

Sales Goals Jonathan Poland

Sales Goals

Sales goals are targets for the revenue or units sold that a sales team or individual is expected to achieve…

Augmented Product Jonathan Poland

Augmented Product

An augmented product is a product that includes intangible benefits beyond the physical product itself. These intangible benefits may include…

Cultural Norms Jonathan Poland

Cultural Norms

A cultural norm is a shared belief or behavior that is considered to be acceptable or appropriate within a particular…

Knowledge Work Jonathan Poland

Knowledge Work

Knowledge work refers to work that involves the creation, use, or application of knowledge and expertise. It is characterized by…

Program Efficiency Jonathan Poland

Program Efficiency

Program efficiency refers to the effectiveness with which a computer program uses resources such as time and memory. In general,…

Latent Need Jonathan Poland

Latent Need

A latent need is a customer need that is not currently being met by the market and is not actively…

Capital Expenditures Jonathan Poland

Capital Expenditures

Capital expenditures, also known as capital expenses or capex, refer to the money that a company spends to acquire, maintain,…

Reputational Risk Jonathan Poland

Reputational Risk

Reputational risk refers to the potential for damage to an organization’s reputation as a result of its actions or inactions.…

Search →
content database

Search my thinking on business, finance,
and the capital markets or start below

Ecotax Jonathan Poland


An ecotax is a tax levied on activities that have a negative impact on the environment. It is intended to…

Fair Competition Jonathan Poland

Fair Competition

Fair competition refers to competition between businesses that is open and equitable, allowing all participants to compete on an equal…

Environmental Issues Jonathan Poland

Environmental Issues

Human activities have caused many environmental problems that are harmful to ecosystems, quality of life, and health. These issues have…

Market Development Jonathan Poland

Market Development

Market development is the process of entering new markets to expand revenue and reduce concentration risk. It involves identifying and…

Research Design Jonathan Poland

Research Design

Research design is the overall plan or approach that a researcher follows in order to study a particular research question.…

What is a Cash Cow? Jonathan Poland

What is a Cash Cow?

A cash cow is a business or product that generates a steady stream of income or profits for a company.…

Law of Supply and Demand Jonathan Poland

Law of Supply and Demand

The Law of Supply and Demand is one of the fundamental principles of economics. It states that the quantity of…

Process Improvement Jonathan Poland

Process Improvement

Process improvement is a systematic approach to identifying and implementing changes to processes within an organization in order to improve…

Risk Awareness Jonathan Poland

Risk Awareness

Risk awareness refers to the extent to which people or organizations are aware of risks and the strategies in place…