risk management 1

Introduction to Risk Management

• Risk management is the introduction to the importance of risk management in an organization

What is Risk?

• Risk is a future event that may impact a project.
• It's an uncertain event or condition that might affect the project if it occurs.
• Risk is also the probability of an event occurring and the impact of that event.

Definition of Risk Management

• Risk is the chance of loss or an unfavorable outcome associated with an action.
• Risk, in financial terms, is the chance an outcome or investment's actual gains will differ from expected goals or return.
• It includes the possibility of losing some or all of an original investment.
• Risk is a probability of damage, injury, liability, loss, or other negative occurrences from internal or external vulnerabilities that may be avoided through preemptive action.

Risk Themes

• Risk Tolerance - the degree of risk a person is willing to accept.
• Risk Appetite - the level of risk an organization is prepared for while pursuing goals.
• Risk Threshold - the degree of risk beyond which risk responses are initiated.

Risk Attitudes

• Risk Seeker - Someone looking for risk, likely looking for a thrill.
• Risk Neutral - Someone who neither seeks nor avoids risk.
• Risk Averse - Someone who avoids risk.

Definition of Risk Management (Mañez et al., 2016)

• A systematic approach to identify, assess, and understand risk to guide further appropriate management decisions and actions.
• It helps organizations to identify, evaluate, analyze, monitor, and mitigate risks threatening organizational goals in a disciplined and systematic manner.

Management and Perception

• Risk management is influenced by what is perceived to be risky.
• Risk perception influences opinions on risk and risk management.
• Perception is influenced by past experiences, preparedness, and perceived control.

Approaches to Management

• Proactive: Focusing on actions taken before a disaster or risky event to prevent it or minimize its impact. It's about planning, awareness, and mitigation. Key components include risk assessment, prevention strategies and preparedness.
• Example: A company located in an earthquake-prone area adopting proactive measures to prepare for and prevent damage.
• Reactive: Actions taken after a disaster or risky event to mitigate its effects, recover, and prevent similar events. It's response-focused. Key components include emergency response, rehabilitation, and improvement plans.
• Example: After a flood damages a town, implementing emergency response, rehabilitation, and future plans.

Comparison of Approaches

• Proactive: Before the risk event, prevention and preparedness, Can be expensive upfront but long-run cost savings.
• Reactive: After the risk event, response and recovery, Often more costly due to damages.

Purpose of Risk Management

• To minimize the potential harm of a risk event by implementing strategies and actions to control and reduce risk.
• The main object is to increase the probability and/or impact of positive events and decrease that of negative events.

Risk Management Process

• Risk Identification: Identify project, product, and business risks.
• Risk Analysis: Assess the likelihood and consequences of these risks.
• Risk Planning: Develop plans to avoid or minimize risk effects.
• Risk Monitoring: Monitor the risks throughout the project.

Benefits of Risk Management

• Enhances management: Knowing what could go wrong and how to deal with it.
• Streamlines daily operations: Identifying and addressing risks minimizes disruptions.
• Improves financial management: Losses, lawsuits, and injuries are avoided or minimized.
• Provides consistent and enhanced services: Prevents disruptions to service delivery when losses or damages occur.

How to Manage Risk

• Focus on risks the organization can control.
• A business risk is a future possibility preventing a business goal, which include controllable elements like strategy, and uncontrollable factors like global events.
• A strong relationship exists between risk and reward. Eliminating all risk is generally impossible. Companies aim to optimize the risk-reward ratio.