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Risk Management Definition

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Risk Management Definition

  • Introduction to Risk Management:

 All types of organizations or businesses, face some form of risk, which may affect their chance of success in their business.

Understanding the risks, and in the most effective manner of managing these, will greatly help the organizations, in achieving the long term success.

Risk Management can be an essential tool, to eliminate conceivable problems in an organization.

Even though the current version of ISO 9001, does not most importantly require the use of risk management.

In the clause of preventive action, some of the industry-specific standards require it.

For example, 

The quality management standard for the aviation industry, and the healthcare industry.

To have a risk management requirement, included in the preventive action clause.

The topics covered in this article are in the following manner:

1.)What is Risk? 

2.)What is Risk Management?

3.)Risk Management steps 

  • Plan Risk Management
  • Identify Risks
  • Analyze Risks
  • Plan Risks Responders
  • Monitor and Control Risks

First, we will understand the definitions of risk and risk management.

Then we will look at five key steps for managing risks.

  • What is Risk?
  • Risk:

Companies face a number of internal and external factors, which make it uncertain, whether the company will meet its objectives.

These uncertain events, or conditions, are called the risks.

So far in this article, we thought that the risks always have a negative impact.

Let’s be clear here, that the result of a risk, is not always negative.

  • Opportunity:

Risks are uncertain events. These unsure activities could lead to tremendous or negative results.

Positive risks are acknowledged as opportunities.

Organizations try to avoid or limit the affects of negative risks.

However, when it comes to positive risks, organizations would like to take maximum advantage of these opportunities.

  • The difference between a Risk  and an Issue:

While risk is a future uncertain event, an issue is an event that has already occurred.

  • Risk Appetite and Risk Tolerances:

The concepts of both of these risk appetite and risk tolerance are related to the extent to which an organization is comfortable taking a risk.

Taking big risks could be lead to big losses, or big rewards.

Risk Appetite is about the willingness to take a risk.

That amount and kind of risk that an enterprise is organized to seek, accept or tolerate.

Risk tolerance is all about what the organization can bear.

Organizations or businesses ‘ readiness to bear the risk after risk treatments in order to achieve their objectives.

Why take a risk?

Risk is related with reward.

Generally, more risk lead to rewards. But that is not true always.

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“Risk management identification, evaluation and prioritisation of risks (positive or negative) observed through coordinated and cost-efficient utility of resources.

To minimize, monitor and manage the profitability and/or impact of unfortunate events or to maximize the cognizance of opportunities.”

In Risk Management, 

You pick out the potential risks, then you examine them so that you understand which of the identified risks are more indispensable and which are less.

Based on that assessment you provide more priority to some risks and less to others.

You can not cover all risks since you have limited resources.

With this priority, you put your resources on excessive precedence risks.

As we discussed earlier a risk can be a negative or positive risk.

You strive to minimize the influence of negative risks, monitor then and maintain them under control.

However, if it is a high-quality risk or an opportunity, you put your sources to maximize the opportunity.

Risk Management technique to be effective.

For that some of the key principles of risk management, that should be considered are in the following manner:

  • Create value
  • Be an integral part of organizational processes
  • Be part of the decision-making process
  • Be systematic and structured
  • Be transparent
  • Be responsive to a charge
  • Be capable of continual improvement and enhancement
  • Be continually or periodically re-assessed

Since the organization is spending resources, to manage risks, it should create value.

Risk management should be performed systematically, and be an integral part of the organization’s work processes.

As the business enterprise matures, the types of risks or challenges change.

The organization should undertake to these changes, and enhance the risk management process.

  • Application of Risk Management:

Risk management is applied in a variety of fields such as:

  • Project management, 
  • Military, 
  • Space, 
  • Medical, 
  • Engineering, 
  • Plant operation, 
  • Safety and
  • In financial portfolio management.

Potential Benefits of Risk Management:

Key benefits of implementing risk management :

  Fewer shocks and unwelcome surprises,

  • Effective use of resources and 
  • Reassuring stakeholders.

Instead of being unprepared for the threats and opportunities, that happen at some stage in the course of a challenge or business, risk management can help plan and prepare for them.

This preparedness helps organizations in saving costs and time.

Risk Management Steps:

Risk management process can be divided into these five key steps:

  • Plan Risk Management,
  • Identify Risks,
  • Analyze Risks,
  • Plan Risks Responders,
  • Monitor and Control Risks.

It starts with having a risk management plan.

The next step is to identify the potential risks and prepare a list of all risks.

This list of risks is then analyzed, using qualitative, and quantitative techniques, to identify high priority, medium priority, and low priority risks.

The response is deliberate for these risks, depending upon the priority.

Risks are then monitored and controlled.

  • Plan Risk Management:

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The risk management plan specifies the management intent, systems, and procedures required for managing risks.

A risk management plan will provide the definitions of various risk-related terms.

The response is deliberate for these risks, depending upon the priority.

In a way risk management plan specifies how the next four steps listed i.e. executed in the organization are in the following manner:

That is, 

  • How the organization will identify risks?
  • How these risks will be analyzed?

Identify Risks:

Once the plan is in place, identify risks is the first key step in the actual management of risks.

This is the process of identifying the potential risks, their root cause, and the risk consequences.

To identify risk is a systematic process.

It is a group effort, the place challenge remember experts from a various groups participate.

A wide number of people participate in this process including-

Management, Employees, Customer, Other stakeholders.

Tools used:

The most common tool used in the risk identification process is brainstorming.

In this, the situation be counted experts from more than a few groups meet collectively and listing down all the potential risks.

During brainstorming, no identified risk is evaluated, or criticized.

The intent here is to listing down as many possibles risks, in limited time.

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Other tools such as:

Flow diagram, and

SWOT analysis may also be used.

Here the term SWOT stands for Strengths, weaknesses, opportunities, and threats.

  • Risk Register:

 The outcome of risk identification is a list of risks or risk register. What is done with the list of risks depends on the nature of the risk?

A few low priority risks may additionally be kept certainly as a listing of crimson flag items, and periodically monitored.

Some high priority risks may go through the rigorous process of assessment, analysis, mitigation, and planning.

The next risk management process, that analyzes risks, helps in deciding that.

  • Analyze Risks:

Organizations do not have the resources to address all risks.

After having the listing of all potential risks, the next logical step is to analyze and prioritize risks.

Some risks may need a detailed action plan, and some may just need periodic monitoring.

An organization may accept some of the risks without any action.

In this step, which analyzes risks, we will look at how the risks are analyzed and prioritized.

This is the system of quantifying the risk events, documented in the previous step so that the organisation can focal point on integral risks.

For risk analysis, qualitative and quantitative analysis is conducted.

Qualitative risk analysis is a subjective analysis and is quick and easy to perform.

One tool to conduct qualitative analysis is the probability and impact matrix.

On the other hand, Quantitative risk analysis is a detailed analysis of the risk.

It is not required to conduct quantitative analysis for all risks and is conducted when it is worth the time and effort required to conduct it.

Tools to conduct quantitative risk analysis include, anticipated monitory value analysis, Monte Carlo analysis, and decision tree.

  • The Probability and Impact Matrix:

The Probability and Impact Matrix is a qualitative risk analysis tool.

Instead of assigning a score of 1 to 9, a score of 1 to 3, or a score of 1 to 5 may be used.

We are using a score of 1 to 9.

The score of 1 to 9 assigned to the probability and impact are subjective, the organization managing the risk creates some guidelines to ensure that these are consistent.

This table shows a sample table, for assigning probability numbers.

Sample Probability Table:



Profitability Category

Probability Number

Description

Very high

9

Risk event expected to occur

High

7

Risk event more likely than not to occur

Probable

5

Risk event may or may not occur

Low

3

Risk event less likely than not to occur

Very low

1

Risk event not expected to occur

Sample Impact Table:

This is a sample table, to assign the risk impact number.

The risk may impact cost, schedule, scope, or quality.




Project objectives

Very Low-1

Low-

3

Moderate-5

High-

7

Very high-9

Cost

Insignificant cost impact

<10% cost impact

10-20% cost impact

20-40% cost impact

>40% cost impact

Schedule

Insignificant schedule impact

<5% schedule impact

5-10% schedule impact

10-20% schedule impact

>20% schedule impact

Scope

Barely noticeable

Minor area impacted

Major areas impacted

Changes unacceptable to the client

A product becomes effectively useless

Quality

Barely noticeable

Minor function

impacted

Client must improve

quality reduction

Quality reduction unacceptable to the client

A product becomes effectively useless


Once we have assigned a risk probability number, and an impact number, these are plotted on the probability and impact matrix.

A simple example of that is shown here.

risk management Definition
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Let us look at the boxes shown above.

Risks in the direction of the bottom right corner, are of necessary importance considering the fact that these are high impact and high probability risks.

These are your top priorities risks, that you must pay close attention to.

Risks in the top left corner are low have an impact on and low probability risks.

Risks in the middle of the table, are of moderate importance, since these are low impact, and high probability risks.

If these things happen, you can cope with them, and pass on.

However, you need to try to decrease the likelihood, that they will occur.

When high impact and low probability risks, and these are very unlikely to happen.

For these, you do what you can to reduce the impact, and you have to have contingency plans in place, just in case they occur.

  • Plan Risk Response:

Once we have analyzed risks, the next step in risk management is to plan risk response, for each identified risk.

When planning a risk response:

We strive to minimize the impact and chance, of negative risks, and enhance the impact and chance, of tremendous risks.

There are in the following shows the four risk responses, for negative risks, and the corresponding responses for positive risks.

Negative Risks

Avoid

Mitigate

Transfer

Accept

Responding to Risks:

Exploit

Enhance

Share

Accept

  • Avoid the risk:

In risk avoidance, we completely eliminate the possibility of the risk.

An example might be to use an old and proven process, instead of a new and risky process.

Risk can also be prevented with the aid of accelerated communication, providing information, or acquiring an expert.

  • Mitigate:

If you can no longer avoid risk completely, you try to mitigate it.

The purpose of risk mitigation is to reduce the size of the risk exposure.

This is performed by using either decreasing the probability of the risk or by means of decreasing the impact.

  • Transfer:

The risk transfer strategy aims to pass ownership for a particular risk to a third party.

It is also vital to remember that risk switch nearly constantly involves payment of a risk premium.

A Cost and benefit analysis may be done, to make certain that the value of transferring risk is justified.

  • Acceptance:

Acceptance of risk skill that the probability, and or the severity, of the risk, is low enough, that we will do nothing about the risk except it occurs.

There are two kinds of acceptance:

Active and 

Passive

Acceptance is active when we determine to make a contingency plan, for what to do, when the risk occurs.

Acceptance is passive when nothing at all is carried out to deal with the risk.

The next will deal with the risk responses for positive risks or opportunities.

  • Exploit:

The first response to deal with the positive risk is to exploit it.

This response tries to get rid of any uncertainty so that the opportunity is sure to happen.

  • Enhance:

The enhance response, focuses on the root cause of the opportunity, and goes on to influence those factors,

Which will increase the likelihood of the opportunity occurring?

  • Share:

Sometimes exploiting a positive risk is now not possible, except collaboration.

A partnership with a distinct group, department, or company may be required, to make the most a positive risk.

  • Accept:

Just like dealing with negative risks, we can also actively or passively accept a positive risk.

Acceptance of risk means that the probability, and or the severity, of the risk, is low enough, that we will do nothing about the risk until it occurs.

Once we have identified risks, analyzed then and made a plan to deal with them.

  • Monitor and control the risk:

The next step is to monitor and control the risks.

A risk management program is in no way finished.

Risk monitoring and manage need to be ongoing and continual.

New risks will emerge, and current risks will disappear.

You have to stay on pinnacle of it.

When we monitor and control the risks, unexpected risks will occur.

These unexpected risks are the risks, which you did now not pick out in your risk identification process.

A workaround is created to deal with such risks.





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