Risk management: Difference between revisions

Revision as of 22:51, 29 March 2006

Revision as of 10:27, 3 April 2006

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:''For non-business risks, see [[Risk]] or the disambiguation page [[risk analysis]].''

Generally, '''Risk Management''' is the process of [[measurement|measuring]], or [[Risk assessment|assessing]] [[risk]] and then developing [[strategy|strategies]] to manage the risk. In general, the strategies employed include transferring the risk to another party, avoiding the risk, reducing the negative effect of the risk, and accepting some or all of the consequences of a particular risk. Traditional risk management, which is discussed here, focuses on risks stemming from physical or legal causes (e.g. natural disasters or fires, accidents, death, and lawsuits). [[Financial risk management]], on the other hand, focuses on risks that can be managed using traded financial instruments. [[Intangible risk management]] focuses on the risks associated with human capital, such as knowledge risk, relationship risk, and engagement-process risk. Regardless of the type of risk management, all large corporations have risk management teams and small groups and corporations practice informal, if not formal, risk management.

In ideal risk management, a prioritization process is followed whereby the risks with the greatest [[loss]] and the greatest [[probability]] of occurring are handled first, and risks with lower probability of occurrence and lower loss are handled later. In practice the process can be very difficult, and balancing between risks with a high probability of occurrence but lower loss vs. a risk with high loss but lower probability of occurrence can often be mishandled.

Intangible risk management identifies a new type of risk - a risk that has a 100% probability of occurring but is ignored by the organization due to a lack of identification ability. For example, knowledge risk occurs when deficient knowledge is applied. Relationship risk occurs when collaboration ineffectiveness occurs. Process-engagement risk occurs when operational ineffectiveness occurs. These risks directly reduce the productivity of knowledge workers, decrease cost effectiveness, profitability, service, quality, reputation, brand value, and earnings quality. Intangible risk management allows risk management to create immediate value from the identification and reduction of risks that reduce productivity.

Risk management also faces a difficulty in allocating resources properly. This is the idea of [[opportunity cost]]. Resources spent on risk management could be instead spent on more profitable activities. Again, ideal risk management spends the least amount of resources in the process while reducing the negative effects of risks as much as possible.