Risk Management

Risk Management
Risk management is the process of identifying, assessing and controlling threats to an
organization's capital and earnings. These threats, or risks, could stem from a wide variety of
sources, including financial uncertainty, legal liabilities, strategic management errors, accidents
and natural disasters. IT security threats and data-related risks, and the risk management
strategies to alleviate them, have become a top priority for digitized companies. As a result, a
risk management plan increasingly includes companies' processes for identifying and controlling
threats to its digital assets, including proprietary corporate data, a customer's personally
identifiable information (PII) and intellectual property.
Every business and organization faces the risk of unexpected, harmful events that can cost the
company money or cause it to permanently close. Risk management allows organizations to
attempt to prepare for the unexpected by minimizing risks and extra costs before they happen.

Importance
By implementing a risk management plan and considering the various potential risks or events
before they occur, an organization can save money and protect their future. This is because a
robust risk management plan will help a company establish procedures to avoid potential threats,
minimize their impact should they occur and cope with the results. This ability to understand and
control risk enables organizations to be more confident in their business decisions. Furthermore,
strong corporate governance principles that focus specifically on risk management can help a
company reach their goals.
Other important benefits of risk management include:

 Creates a safe and secure work environment for all staff and customers.
 Increases the stability of business operations while also decreasing legal liability.
 Provides protection from events that are detrimental to both the company and the
environment.
 Protects all involved people and assets from potential harm.
 Helps establish the organization's insurance needs in order to save on unnecessary
premiums.

The importance of combining risk management with patient safety has also been revealed. In
most hospitals and organizations, the risk management and patient safety departments are
separated; they incorporate different leadership, goals and scope. However, some hospitals are
recognizing that the ability to provide safe, high-quality patient care is necessary to the
protection of financial assets and, as a result, should be incorporated with risk management.
In 2006, the Virginia Mason Medical Center in Seattle, Washington integrated their risk
management functions into their patient safety department, ultimately creating the Virginia
Mason Production System (VMPS) management methods. VMPS focuses on continuously
improving the patient safety system by increasing transparency in risk mitigation, disclosure and
reporting. Since implementing this new system, Virginia Mason has experienced a significant
reduction in hospital professional premiums and a large increase in the reporting culture.

The key elements of a risk management 

1. Process
2. Integration
3. Culture
4. Infrastructure. 

Risk management strategies and processes

All risk management plans follow the same steps that combine to make up the overall risk
management process:

 Establish context. Understand the circumstances in which the rest of the process will
take place. The criteria that will be used to evaluate risk should also be established
and the structure of the analysis should be defined.
 Risk identification. The company identifies and defines potential risks that may
negatively influence a specific company process or project.
 Risk analysis. Once specific types of risk are identified, the company then
determines the odds of them occurring, as well as their consequences. The goal
of risk analysis (Links to an external site.) is to further understand each specific
instance of risk, and how it could influence the company's projects and objectives.
 Risk assessment and evaluation. The risk is then further evaluated after determining
the risk's overall likelihood of occurrence combined with its overall consequence.
The company can then make decisions on whether the risk is acceptable and whether
the company is willing to take it on based on its risk appetite (Links to an external
site.).
 Risk mitigation. During this step, companies assess their highest-ranked risks and
develop a plan to alleviate them using specific risk controls. These plans include risk
mitigation processes, risk prevention tactics and contingency plans in the event the
risk comes to fruition.
 Risk monitoring. Part of the mitigation plan includes following up on both the risks
and the overall plan to continuously monitor and track new and existing risks. The
overall risk management process should also be reviewed and updated accordingly.
 Communicate and consult. Internal and external shareholders should be included in
communication and consultation at each appropriate step of the risk management
process and in regards to the process as a whole.
  
**Risk Management Framework Components

Risk management strategies should also attempt to answer the following questions:

1. What can go wrong? Consider both the workplace as a whole and individual work.
2. How will it affect the organization? Consider the probability of the event and whether
it will have a large or small impact.
3. What can be done? What steps can be taken to prevent the loss? What can be done
recover if a loss does occur?
4. If something happens, how will the organization pay for it?

Risk management approaches

After the company's specific risks are identified and the risk management process has been
implemented, there are several different strategies companies can take in regard to different types
of risk:

 Risk avoidance (Links to an external site.). While the complete elimination of all

risk is rarely possible, a risk avoidance strategy is designed to deflect as many threats
as possible in order to avoid the costly and disruptive consequences of a damaging
event.
  Risk reduction. Companies are sometimes able to reduce the amount of damage
certain risks can have on company processes. This is achieved by adjusting certain
aspects of an overall project plan or company process, or by reducing its scope.
 Risk sharing. Sometimes, the consequences of a risk are shared, or distributed
among several of the project's participants or business departments. The risk could
also be shared with a third party, such as a vendor or business partner.
 Risk retaining. Sometimes, companies decide a risk is worth it from a business
standpoint, and decide to keep the risk and deal with any potential fallout. Companies
will often retain a certain level of risk if a project's anticipated profit is greater than
the costs of its potential risk.

Limitations
While risk management can be an extremely beneficial practice for organizations, its limitations
should also be considered. Many risk analysis techniques -- such as creating a model or
simulation -- require gathering large amounts of data. This extensive data collection can be
expensive and is not guaranteed to be reliable.
Furthermore, the use of data in decision making processes may have poor outcomes if simple
indicators are used to reflect the much more complex realities of the situation. Similarly,
adopting a decision throughout the whole project that was intended for one small aspect can lead
to unexpected results.
Another limitation is the lack of analysis expertise and time. Computer software programs have
been developed to simulate events that might have a negative impact on the company. While cost
effective, these complex programs require trained personnel with comprehensive skills and
knowledge in order to accurately understand the generated results. Analyzing historical data to
identify risks also requires highly trained personnel. These individuals may not always be
assigned to the project. Even if they are, there frequently is not enough time to gather all their
findings, thus resulting in conflicts.
Other limitations include:

 A false sense of stability. Value-at-risk measures focus on the past instead of the

future. Therefore, the longer things go smoothly, the better the situation looks.
Unfortunately, this makes a downturn more likely.
 The illusion of control. Risk models can give organizations the false belief that they
can quantify and regulate every potential risk. This may cause an organization to
neglect the possibility of novel or unexpected risks. Furthermore, there is no
historical data for new products, so there's no experience to base models on.
 Failure to see the big picture. It's difficult to see and understand the complete
picture of cumulative risk.
 Risk management is immature. An organization's risk management policies are
underdeveloped and lack the history to make accurate evaluations.