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.

Basic
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
Continuous Production Jonathan Poland

Continuous Production

Continuous production is a method of manufacturing in which materials and parts are continuously processed and kept in motion or…

Design to Logistics Jonathan Poland

Design to Logistics

Design for logistics involves designing products with the entire supply chain in mind, including manufacturing, packaging, shipping, warehousing, merchandising, and…

What is Food Sovereignty? Jonathan Poland

What is Food Sovereignty?

Food sovereignty is the right of peoples and countries to define their own food and agriculture systems, rather than being…

Deal Desk Jonathan Poland

Deal Desk

A deal desk is a team that is responsible for managing the sales proposal, negotiation, and contract process with customers.…

Economic Relations Jonathan Poland

Economic Relations

Economic relations between nations refer to the economic interactions that occur between them. These interactions can include the exchange of…

Financial Controls Jonathan Poland

Financial Controls

Financial controls are the policies, procedures, and processes that an organization puts in place to manage and protect its financial…

Workload Automation Jonathan Poland

Workload Automation

Workload automation is the process of automating the execution of routine tasks and processes in a business environment. It involves…

Ways of Thinking Jonathan Poland

Ways of Thinking

Ways of thinking refer to the mindsets and approaches that individuals use to form their ideas, opinions, decisions, and actions.…

Intellectual Capital Jonathan Poland

Intellectual Capital

Intellectual capital is the intangible value of an organization that is derived from the knowledge, skills, and expertise of its…

Content Database

Search over 1,000 posts on topics across
business, finance, and capital markets.

Employability Jonathan Poland

Employability

Employability refers to the value that an employee brings to an employer. It is the collection of attributes, skills, and…

Quantum Computing Jonathan Poland

Quantum Computing

Quantum computing is a fascinating and rapidly evolving field that seeks to harness the principles of quantum mechanics to perform…

Performance Feedback Jonathan Poland

Performance Feedback

Performance feedback is any type of communication that evaluates an employee’s work performance and provides them with guidance on how…

Information Security Jonathan Poland

Information Security

Information security is the practice of protecting information from unauthorized access, use, disclosure, disruption, modification, or destruction. It is a…

What is Cost Overrun? Jonathan Poland

What is Cost Overrun?

A cost overrun occurs when the actual cost of completing a task or project exceeds the budget that was allocated…

Economic Opportunity Jonathan Poland

Economic Opportunity

Economic opportunity refers to the support that a society provides to individuals that enables them to thrive in the economy.…

Risk Management Jonathan Poland

Risk Management

Risk management is the process of identifying, assessing, and prioritizing risks in order to minimize their potential impact on an…

Product Risk Jonathan Poland

Product Risk

Product risk refers to the potential for negative consequences that may result from the development, production, or use of a…

Sales Activities Jonathan Poland

Sales Activities

A sales activity is any action or task that a salesperson undertakes in order to achieve revenue. This can include…