What Risk Management Really Means
posted by John Spacey, December 05, 2012Risk management is one of those business terms that everyone has an opinion about.
Some point out that risk taking is the key to business success. They fear that risk management will inhibit critical risk taking behaviors that drive business results.
Others see risks as a threat to business goals, profits and an organization's very survival. They may believe that risk management is the best investment an organization can make.
As with any controversial business topic, a few back-to-basics definitions can help you to navigate the issues.
Risk
Risk is the chance of a negative event.
Risk is defined differently from one business to another. For example, financial market risk is often defined as unexpected variability or volatility of returns.
Information security professionals define risk as the chance a threat will exploit vulnerabilities.
Is risk always bad?
From a practical perspective, risk management is all about managing the probabilities of negative events.
People rarely talk about the risk of something good happening. Nevertheless, businesses often define risk as potentially positive.
In 2009, the International Standards Organization assembled experts from 30 countries to define risk (amongst other things). They came up with this:
effect of uncertainty on objectivesThis definition leaves the possibility open that risks can produce positive outcomes. This is no doubt based on the philosophy that problems represent opportunities.
~ Definition of Risk, ISO 31000
The definition of market risk also allows for positive results from risk — unexpected variability or volatility of returns.
Risk Management
Risk Management typically has two steps:
1. Identify, assess and prioritize risks.
2. Minimize, monitor and control risk to maximize opportunities.
There is nothing in the definition of risk management that suggests that all risks need to be minimized. In fact, risk management practitioners will point out that risk management needs to be economical and practical.
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