Management

RISK MANAGEMENT: APPROACHES AND LIMITATIONS

This article shares the risk approaches and the limitations in the process of implementing risk management.

Risk management approaches

Risk Avoidance 

One of the approaches is to avoid risk. Risk avoidance means not participating in activities that could harm you or could impact the organization’s objectives. Doing away with smoking is one of the common good examples of Health Risk Avoidance.  However, complete elimination of all risk is rarely possible, and thus the necessity to consider the risk reduction approach.  

 

Risk reduction

Risk reduction is about reducing the amount of damage that certain risks can cause to organizational processes. Risk reduction is an approach that assists in minimizing or reducing the amount of loss that might happen but not a complete elimination. Another excellent example of health risk reduction is getting vaccinated for the corona virus. An individual vaccinated for coronavirus is not entirely free from contacting the viruses, but vaccination significantly minimized the possibility.

Implementation of the Risk reduction approach is not on a stand-alone basis; instead, it involves adjusting certain aspects of the overall project plan or organization process. In some cases, it may go to the extent of reducing the scope of a project or task.

Risk Sharing

 Sometimes, the consequences of risk are shared or distributed among several of the project’s participants, business departments, or a third party, such as a vendor or business partner. Remaining at the health risk example, sharing risk can be applied to how employer-based benefits are often more affordable than getting individual health insurance.  

Risk Retention

The risk retention approach acknowledges the inevitability of specific risks in an organization. Thus, organizations decide that risk is worth it from a business standpoint and keep the risk and deal with any potential fallout. From a business standpoint, organizations will often retain a certain level of risk if a project’s anticipated profit is greater than the costs of its potential danger.

Risk Transfer

 Transferring risk is easily explained using insurance companies. A financial institution may transfer the risk of loan default by insuring all the loans issued and be ready to pay a premium for them as security. With the health care issue, organizations share the risk of high medical costs by registering all the employees with the health insurance company. 

Limitations

Despite the benefits of risk management practices for organizations, it is also worth considering the limitations. The following are some of the limitations of practicing risk management.

Costly Data Collection

 Many risk analysis techniques such as creating a model or simulation require gathering large amounts of data. This extensive data collection can be expensive and is not guaranteed to be reliable.

Limited Expertise and Time

Lack of analysis expertise and time is another limitation that most organizations face while implementing risk management policies. For accuracy, computer software programs have been developed to simulate events that might harm the company. These complex programs require trained personnel with comprehensive skills and knowledge to accurately understand the generated results.

 

A false sense of stability 

Measures used to value risk focus on the past events instead of the future, implying that the longer things go smoothly, the better the situation looks. Unfortunately, sometimes, it is not the case.

The illusion of control 

It is possible for Risk models to give organizations the false belief that they can quantify and regulate every potential risk, which may cause an organization to neglect the possibility of novel or unexpected risks. Furthermore, there is no historical data for new products, so there’s no experience to base on.

Failure to see the big picture 

It’s difficult to see and understand the complete picture of cumulative risk.

Risk management is immature

 The concept of risk management is new, and hence the risk management policies are underdeveloped and lack the history to make accurate evaluations.