Every organization is full of risk and no business can completely avoid all risk. In fact, some degree of risk taking is essential to achieve success in a business. If taking risks is expected and required, then how do we balance the taking of risk with the need to protect against risks that can otherwise destroy an organization?
Risk management is all about the implementation of critical tools (often referred to as controls) designed to lower our risk without eliminating it all together. The best risk managers allow for great risk in high risk environments but establish the right controls into the right places not to altogether eliminate risk (which we know is inherent in any business and is even necessary to achieve success in business), but to merely reduce or control risk at an acceptable level given the business environment, business model and key performance requirements for the organization.
Let’s take a closer look at risk.
Risk is defined in the business context as a probability or threat of damage, injury, liability, loss or any other negative occurrence that is caused by external or internal vulnerabilities. External risks are those which arise due to events occurring outside of the organization (economic factors, natural factors, environmental factors, political factors) and which are typically outside of the control of the business (although they may be able to be anticipated by the business). Internal risks are those arising from events taking place in the ordinary course of the business (human factors, technological factors and physical factors) and typically can be reduced and/or controlled by a business owner. Risks can further be broken down into where they arise within an organization (strategic risks, operational risks, reporting risks and compliance risks).
The payoffs for effective risk management and controls include both intermediate and ultimate results. Intermediate results include improvements in areas such as compliance, business process continuity, working environment, resource allocation, internal reporting, external reporting, reputation and brand image, and earnings volatility. Ultimate outcomes for risk reduction programs include: reduce short term and long-term costs, increase revenue, improve program effectiveness, achieve greater organizational success and improve overall shareholder value.
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