Identifying and Managing Risk (Essay Sample)

Identifying and Managing Risk
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Identifying and Managing Risk
According to Kallman (2008) risk management is a process that helps create value. To achieve this goal, he opines that some managers purchase insurance to cushion their companies against financial losses. Others come up with safety projects. Every organization has some goals it intends to achieve. In the midst of these are threats hampering achievement of such goals. Kallman brings this into perspective by stating that “…opportunities are causes of speculative gains, threats are perils that may cause pure risk losses” (2008, p.40). The first step in risk management is avoidance or acceptance of potential risk situations. By making the avoidance decision, an organization will not have a chance to gain or lose. However, if the organization feels that its risk appetite is high, then it will have to accept the situation and take risk management initiatives. Upon accepting the risk, the next step is to make a decision on whether to commit funds in risk control measures or simply tackle the situation the way it is. Kallman (2008) suggests the use of a risk map to analyze the characteristics of risk. If an organization feels that there is a low probability for loss, the risk can be accepted just the way it is. On the contrary, where the probability is high, a lot of resources must be committed towards reducing the loss. Thirdly, he advises that risk management must be financed. He gives three risk costs that need financing. These are: loss financing, risk control and risk management administration. An example of loss financing cost is insurance. Rent, salaries and consulting fees are some examples of risk administrative costs. On the other hand, costs of risk control include advertising, promotions and prevention.
Kaplan (2012) feels that risk management has been treated as an “…issue that can be solved by drawing up lots of rules and making sure that all employees follow them” (50). Nonetheless, he reckons that such rules do make a lot of sense and help reduce risks that could potentially result in a loss. As a first step, Kaplan (2012) suggests that one must understand distinctions that exist between different types of risks faced by organizations. In his view, risks can be categorized into three: preventable, strategy and external risks. Preventable risks are those arising internally within an organization. They can be controlled and the organization should eliminate them. Organizations achieve no benefit from taking such risks. Strategy risks are those accepted voluntarily through business strategies and are not undesirable. Companies accept them as they do generate returns. Examples include credit risks taken by banks and research and development initiatives. External risks arise from events happening outside an organization. Political events, natural disasters and economic changes are some examples of external risks that organizations face with no control over them. Organizations must have risk-management processes that are tailored towards these categories. For preventable risks, companies must have a set of guidelines that clarify a company’s mission, values and goals. A mission statement outlines the main purpose an organization exists. Values guide the way employees behave towards customers, fellow employees, shareholders and suppliers. Goals are milestones an organization hopes to achieve. Strategy risks, according to Kaplan (2012), should be managed through hiring of independent experts to manage a company’s strategies. Facilitators come in handy to collect views from managers on risk management and assist in enhancing their awareness. For external risks, organizations should identify them, assess the impact they have on business and come up with ways of mitigating the effects.
In my view, avoidance or acceptance of risk as suggested by Kallman provides an organization with a choice. Risk managers can assess the probability of risk before deciding whether it is w...