Mr. Mateta Elie (M.

A, Phd in Mgt)
[email protected]
[email protected]

Risk management

Risk Management is the identification, assessment, and prioritization of risks

followed by coordinated and economical application of resources to minimize,
monitor, and control the probability and/or impact of unfortunate events. [1] Risks can
come from uncertainty in financial markets, project failures, legal liabilities, credit
risk, accidents, natural causes and disasters as well as deliberate attacks from an
adversary. Several risk management standards have been developed including the
Project Management Institute, the National Institute of Science and Technology,
actuarial societies, and ISO standards.[2][3] Methods, definitions and goals vary widely
according to whether the risk management method is in the context of project
management, security, engineering, industrial processes, financial portfolios,
actuarial assessments, or public health and safety.

For the most part, these methodologies consist of the following elements, performed,
more or less, in the following order.

1. identify, characterize, and assess threats

2. assess the vulnerability of critical assets to specific threats
3. determine the risk (i.e. the expected consequences of specific types of attacks
on specific assets)
4. identify ways to reduce those risks
5. prioritize risk reduction measures based on a strategy

The strategies to manage risk include transferring the risk to another party, avoiding
the risk, reducing the negative effect of the risk, and accepting some or all of the
consequences of a particular risk.

Certain aspects of many of the risk management standards have come under
criticism for having no measurable improvement on risk even though the confidence
in estimates and decisions increase.[1]
Contents

 1 Introduction
 2 Principles of risk management
 3 Process
o 3.1 Establishing the context
o 3.2 Identification
o 3.3 Assessment
o 3.4 Potential risk treatments
 3.4.1 Risk avoidance
 3.4.1.1 Hazard Prevention
 3.4.2 Risk reduction
 3.4.3 Risk retention
 3.4.4 Risk transfer
o 3.5 Create a risk-management plan
o 3.6 Implementation
o 3.7 Review and evaluation of the plan
 4 Limitations
 5 Areas of risk management
o 5.1 Enterprise risk management
o 5.2 Risk-management activities as applied to project management
 6 Risk management and business continuity
 7 Risk Communication
 8 Benefits and Barriers of Risk Communication
 9 Seven cardinal rules for the practice of risk communication
 10 See also
 11 References
 12 Further reading
 13 External links

Introduction
This section provides an introduction to the principles of risk management. The
vocabulary of risk management is defined in ISO Guide 73, "Risk management.
Vocabulary".

In ideal risk management, a prioritization process is followed whereby the risks with
the greatest loss and the greatest probability of occurring are handled first, and risks
with lower probability of occurrence and lower loss are handled in descending order.
In practice the process can be very difficult, and balancing between risks with a high
probability of occurrence but lower loss versus a risk with high loss but lower
probability of occurrence can often be mishandled.

Intangible risk management identifies a new type of a risk that has a 100%
probability of occurring but is ignored by the organization due to a lack of
identification ability. For example, when deficient knowledge is applied to a situation,
a knowledge risk materializes. Relationship risk appears when ineffective
collaboration occurs. Process-engagement risk may be an issue when ineffective
operational procedures are applied. These risks directly reduce the productivity of
knowledge workers, decrease cost effectiveness, profitability, service, quality,
reputation, brand value, and earnings quality. Intangible risk management allows
risk management to create immediate value from the identification and reduction of
risks that reduce productivity.

Risk management also faces difficulties allocating resources. This is the idea of
opportunity cost (Opportunity cost or economic opportunity loss is the value of the next best
alternative forgone as the result of making a decision. Opportunity cost analysis is an important
part of a company's decision-making processes but is not treated as an actual cost in any
financial statement. The next best thing that a person can engage in is referred to as the
opportunity cost of doing the best thing and ignoring the next best thing to be done. Opportunity
cost is a key concept in economics because it implies the choice between desirable, yet mutually
exclusive results. It is a calculating factor used in mixed markets which favor social change in
favour of purely individualistic economics. It has been described as expressing "the basic
relationship between scarcity and choice...) Resources spent on risk management could
have been spent on more profitable activities. Again, ideal risk management
minimizes spending while maximizing the reduction of the negative effects of risks.

Principles of risk management

The International Organization for Standardization identifies the following principles
of risk management:

 Risk management should create value.

 Risk management should be an integral part of organizational processes.
 Risk management should be part of decision making.
 Risk management should explicitly address uncertainty.
 Risk management should be systematic and structured.
 Risk management should be based on the best available information.
 Risk management should be tailored.
 Risk management should take into account human factors.
  Risk management should be transparent and inclusive.
 Risk management should be dynamic, iterative and responsive to change.
 Risk management should be capable of continual improvement and
enhancement.

Process
According to the standard ISO 31000 "Risk management -- Principles and guidelines
on implementation", the process of risk management consists of several steps as
follows:

Establishing the context

Establishing the context involves

1. Identification of risk in a selected domain of interest

2. Planning the remainder of the process.
3. Mapping out the following:
o the social scope of risk management
o the identity and objectives of stakeholders
o the basis upon which risks will be evaluated, constraints.
4. Defining a framework for the activity and an agenda for identification.
5. Developing an analysis of risks involved in the process.
6. Mitigation of risks using available technological, human and organizational
resources.

Identification

After establishing the context, the next step in the process of managing risk is to
identify potential risks. Risks are about events that, when triggered, cause problems.
Hence, risk identification can start with the source of problems, or with the problem
itself.
  Source analysis: Risk sources may be internal or external to the system that is
the target of risk management.

Examples of risk sources are: stakeholders of a project, employees of a company or

the weather over an airport.

 Problem analysis: Risks are related to identify threats. For example: the
threat of losing money, the threat of abuse of privacy information or the
threat of accidents and casualties. The threats may exist with various entities,
most important with shareholders, customers and legislative bodies such as
the government.

When either source or problem is known, the events that a source may trigger or the
events that can lead to a problem can be investigated. For example: stakeholders
withdrawing during a project may endanger funding of the project; privacy
information may be stolen by employees even within a closed network; lightning
striking a Boeing 747 during takeoff may make all people onboard immediate
casualties.

The chosen method of identifying risks may depend on culture, industry practice and
compliance. The identification methods are formed by templates or the development
of templates for identifying source, problem or event. Common risk identification
methods are:

 Objectives-based risk identification: Organizations and project teams have

objectives. Any event that may endanger achieving an objective partly or
completely is identified as risk.
 Scenario-based risk identification: In scenario analysis different scenarios are
created. The scenarios may be the alternative ways to achieve an objective, or
an analysis of the interaction of forces in, for example, a market or battle. Any
event that triggers an undesired scenario alternative is identified as risk - see
Futures Studies for methodology used by Futurists.
 Taxonomy-based risk identification: The taxonomy in taxonomy-based risk
identification is a breakdown of possible risk sources. Based on the taxonomy
and knowledge of best practices, a questionnaire is compiled. The answers to
the questions reveal risks. Taxonomy-based risk identification in software
industry can be found in CMU/SEI-93-TR-6.
 Common-risk checking In several industries lists with known risks are
available. Each risk in the list can be checked for application to a particular
situation. An example of known risks in the software industry is the Common
Vulnerability and Exposures list found at http://cve.mitre.org.
 Risk charting (risk mapping)[citation needed] This method combines the above
approaches by listing Resources at risk, Threats to those resources Modifying
Factors which may increase or decrease the risk and Consequences it is
 wished to avoid. Creating a matrix under these headings enables a variety of
approaches. One can begin with resources and consider the threats they are
exposed to and the consequences of each. Alternatively one can start with the
threats and examine which resources they would affect, or one can begin with
the consequences and determine which combination of threats and resources
would be involved to bring them about.

Assessment

Once risks have been identified, they must then be assessed as to their potential
severity of loss and to the probability of occurrence. These quantities can be either
simple to measure, in the case of the value of a lost building, or impossible to know
for sure in the case of the probability of an unlikely event occurring. Therefore, in the
assessment process it is critical to make the best educated guesses possible in order
to properly prioritize the implementation of the risk management plan.

The fundamental difficulty in risk assessment is determining the rate of occurrence

since statistical information is not available on all kinds of past incidents.
Furthermore, evaluating the severity of the consequences (impact) is often quite
difficult for immaterial assets. Asset valuation is another question that needs to be
addressed. Thus, best educated opinions and available statistics are the primary
sources of information. Nevertheless, risk assessment should produce such
information for the management of the organization that the primary risks are easy
to understand and that the risk management decisions may be prioritized. Thus,
there have been several theories and attempts to quantify risks. Numerous different
risk formulae exist, but perhaps the most widely accepted formula for risk
quantification is:

RISK = Rate of occurrence multiplied by the impact of event

Later research has shown that the financial benefits of risk management are less
dependent on the formula used but are more dependent on the frequency and how
risk assessment is performed.

In business it is imperative to be able to present the findings of risk assessments in

financial terms. Robert Courtney Jr. (IBM, 1970) proposed a formula for presenting
risks in financial terms. The Courtney formula was accepted as the official risk
analysis method for the US governmental agencies. The formula proposes calculation
of ALE (annualized loss expectancy) and compares the expected loss value to the
security control implementation costs (cost-benefit analysis).
Potential risk treatments

Once risks have been identified and assessed, all techniques to manage the risk fall
into one or more of these four major categories:

 Avoidance (eliminate)
 Reduction (mitigate)
 Transfer (outsource or insure)
 Retention (accept and budget)

Ideal use of these strategies may not be possible. Some of them may involve trade-
offs that are not acceptable to the organization or person making the risk
management decisions. Another source, from the US Department of Defense,
Defense Acquisition University, calls these categories ACAT, for Avoid, Control,
Accept, or Transfer. This use of the ACAT acronym is reminiscent of another ACAT (for
Acquisition Category) used in US Defense industry procurements, in which Risk
Management figures prominently in decision making and planning.

Risk avoidance

It includes not performing an activity that could carry risk. An example would be not
buying a property or business in order to not take on the liability that comes with it.
Another would be not flying in order to not take the risk that the airplane were to be
hijacked. Avoidance may seem the answer to all risks, but avoiding risks also means
losing out on the potential gain that accepting (retaining) the risk may have allowed.
Not entering a business to avoid the risk of loss also avoids the possibility of earning
profits.

Hazard Prevention

Main article: Hazard prevention

Hazard prevention refers to the prevention of risks in an emergency. The first and
most effective stage of hazard prevention is the elimination of hazards. If this is too
timely or impractical, the second stage is mitigation.
Risk reduction

It involves methods that reduce the severity of the loss or the likelihood of the loss
from occurring. For example, sprinklers are designed to put out a fire to reduce the
risk of loss by fire. This method may cause a greater loss by water damage and
therefore may not be suitable. Halon fire suppression systems may mitigate that risk,
but the cost may be prohibitive as a strategy. Risk management may also take the
form of a set policy, such as only allow the use of secured IM platforms (like Brosix)
and not allowing personal IM platforms (like AIM) to be used in order to reduce the
risk of data leaks.

Modern software development methodologies reduce risk by developing and

delivering software incrementally. Early methodologies suffered from the fact that
they only delivered software in the final phase of development; any problems
encountered in earlier phases meant costly rework and often jeopardized the whole
project. By developing in iterations, software projects can limit effort wasted to a
single iteration.

Outsourcing could be an example of risk reduction if the outsourcer can demonstrate

higher capability at managing or reducing risks. In this case companies outsource
only some of their departmental needs. For example, a company may outsource only
its software development, the manufacturing of hard goods, or customer support
needs to another company, while handling the business management itself. This
way, the company can concentrate more on business development without having to
worry as much about the manufacturing process, managing the development team,
or finding a physical location for a call center.

Risk retention

It involves accepting the loss when it occurs. True self insurance falls in this category.
Risk retention is a viable strategy for small risks where the cost of insuring against
the risk would be greater over time than the total losses sustained. All risks that are
not avoided or transferred are retained by default. This includes risks that are so
large or catastrophic that they either cannot be insured against or the premiums
would be infeasible. War is an example since most property and risks are not insured
against war, so the loss attributed by war is retained by the insured. Also any
amounts of potential loss (risk) over the amount insured is retained risk. This may
also be acceptable if the chance of a very large loss is small or if the cost to insure for
greater coverage amounts is so great it would hinder the goals of the organization
too much.
Risk transfer

In the terminology of practitioners and scholars alike, the purchase of an insurance

contract is often described as a "transfer of risk." However, technically speaking, the
buyer of the contract generally retains legal responsibility for the losses
"transferred", meaning that insurance may be described more accurately as a post-
event compensatory mechanism. For example, a personal injuries insurance policy
does not transfer the risk of a car accident to the insurance company. The risk still
lies with the policy holder namely the person who has been in the accident. The
insurance policy simply provides that if an accident (the event) occurs involving the
policy holder then some compensation may be payable to the policy holder that is
commensurate to the suffering/damage.

Some ways of managing risk fall into multiple categories. Risk retention pools are
technically retaining the risk for the group, but spreading it over the whole group
involves transfer among individual members of the group. This is different from
traditional insurance, in that no premium is exchanged between members of the
group up front, but instead losses are assessed to all members of the group.

Create a risk-management plan

Select appropriate controls or countermeasures to measure each risk. Risk mitigation

needs to be approved by the appropriate level of management. For example, a risk
concerning the image of the organization should have top management decision
behind it whereas IT management would have the authority to decide on computer
virus risks.

The risk management plan should propose applicable and effective security controls
for managing the risks. For example, an observed high risk of computer viruses could
be mitigated by acquiring and implementing antivirus software. A good risk
management plan should contain a schedule for control implementation and
responsible persons for those actions.

According to ISO/IEC 27001, the stage immediately after completion of the Risk
Assessment phase consists of preparing a Risk Treatment Plan, which should
document the decisions about how each of the identified risks should be handled.
Mitigation of risks often means selection of security controls, which should be
documented in a Statement of Applicability, which identifies which particular control
objectives and controls from the standard have been selected, and why.
Implementation

Follow all of the planned methods for mitigating the effect of the risks. Purchase
insurance policies for the risks that have been decided to be transferred to an insurer,
avoid all risks that can be avoided without sacrificing the entity's goals, reduce
others, and retain the rest.

Review and evaluation of the plan

Initial risk management plans will never be perfect. Practice, experience, and actual
loss results will necessitate changes in the plan and contribute information to allow
possible different decisions to be made in dealing with the risks being faced.

Risk analysis results and management plans should be updated periodically. There
are two primary reasons for this:

1. to evaluate whether the previously selected security controls are still applicable and
effective, and
2. To evaluate the possible risk level changes in the business environment. For example,
information risks are a good example of rapidly changing business environment.

Limitations
If risks are improperly assessed and prioritized, time can be wasted in dealing with
risk of losses that are not likely to occur. Spending too much time assessing and
managing unlikely risks can divert resources that could be used more profitably.
Unlikely events do occur but if the risk is unlikely enough to occur it may be better to
simply retain the risk and deal with the result if the loss does in fact occur.
Qualitative risk assessment is subjective and lack consistency. The primary
justification for a formal risk assessment process is legal and bureaucratic.

Prioritizing too highly the risk management processes could keep an organization
from ever completing a project or even getting started. This is especially true if other
work is suspended until the risk management process is considered complete.

It is also important to keep in mind the distinction between risk and uncertainty. Risk
can be measured by impacts x probability.

Areas of risk management

As applied to corporate finance, risk management is the technique for measuring,
monitoring and controlling the financial or operational risk on a firm's balance sheet.
See value at risk.

The Basel II framework breaks risks into market risk (price risk), credit risk and
operational risk and also specifies methods for calculating capital requirements for
each of these components.

Enterprise risk management

Main article: Enterprise Risk Management

In enterprise risk management, a risk is defined as a possible event or circumstance

that can have negative influences on the enterprise in question. Its impact can be on
the very existence, the resources (human and capital), the products and services, or
the customers of the enterprise, as well as external impacts on society, markets, or
the environment. In a financial institution, enterprise risk management is normally
thought of as the combination of credit risk, interest rate risk or asset liability
management, market risk, and operational risk.

In the more general case, every probable risk can have a pre-formulated plan to deal
with its possible consequences (to ensure contingency if the risk becomes a liability).

From the information above and the average cost per employee over time, or cost
accrual ratio, a project manager can estimate:

 The cost associated with the risk if it arises, estimated by multiplying employee costs per
unit time by the estimated time lost (cost impact, C where C = cost accrual ratio * S).
 the probable increase in time associated with a risk (schedule variance due to risk, Rs
where Rs = P * S):
o Sorting on this value puts the highest risks to the schedule first. This is intended
to cause the greatest risks to the project to be attempted first so that risk is
minimized as quickly as possible.
o This is slightly misleading as schedule variances with a large P and small S and
vice versa are not equivalent. (The risk of the RMS Titanic sinking vs. the
passengers' meals being served at slightly the wrong time).
 the probable increase in cost associated with a risk (cost variance due to risk, Rc where
Rc = P*C = P*CAR*S = P*S*CAR)
o Sorting on this value puts the highest risks to the budget first.
o See concerns about schedule variance as this is a function of it, as illustrated in
the equation above.
Risk in a project or process can be due either to Special Cause Variation or Common
Cause Variation and requires appropriate treatment. That is to re-iterate the concern
about extremal cases not being equivalent in the list immediately above.

Risk-management activities as applied to project

management

In project management, risk management includes the following activities:

 Planning how risk will be managed in the particular project. Plan should include risk
management tasks, responsibilities, activities and budget.
 Assigning a risk officer - a team member other than a project manager who is
responsible for foreseeing potential project problems. Typical characteristic of risk officer
is a healthy skepticism.
 Maintaining live project risk database. Each risk should have the following attributes:
opening date, title, short description, probability and importance. Optionally a risk may
have an assigned person responsible for its resolution and a date by which the risk must
be resolved.
 Creating anonymous risk reporting channel. Each team member should have possibility
to report risk that he foresees in the project.
 Preparing mitigation plans for risks that are chosen to be mitigated. The purpose of the
mitigation plan is to describe how this particular risk will be handled – what, when, by
who and how will it be done to avoid it or minimize consequences if it becomes a liability.
 Summarizing planned and faced risks, effectiveness of mitigation activities, and effort
spent for the risk management.

Risk management and business continuity

Risk management is simply a practice of systematically selecting cost effective
approaches for minimizing the effect of threat realization to the organization. All
risks can never be fully avoided or mitigated simply because of financial and practical
limitations. Therefore all organizations have to accept some level of residual risks.

Whereas risk management tends to be preemptive, business continuity planning

(BCP) was invented to deal with the consequences of realized residual risks. The
necessity to have BCP in place arises because even very unlikely events will occur if
given enough time. Risk management and BCP are often mistakenly seen as rivals or
overlapping practices. In fact these processes are so tightly tied together that such
separation seems artificial. For example, the risk management process creates
important inputs for the BCP (assets, impact assessments, cost estimates etc). Risk
management also proposes applicable controls for the observed risks. Therefore, risk
management covers several areas that are vital for the BCP process. However, the
BCP process goes beyond risk management's preemptive approach and moves on
from the assumption that the disaster will realize at some point.

Risk Communication
Risk communication refers to the idea that people are uncomfortable talking about
risk. People tend to put off admitting that risk is involved, as well as communicating
about risks and crises. Risk Communication can also be linked to Crisis
communication.

Benefits and Barriers of Risk Communication

"Some of the Benefits of risk communication include, improved collective and
individual decision making. Both the purpose of the exchange and the nature of the
information have an impact on the benefits. Depending on the situation, personal
and community anxieties about environmental health risks can be reduced or
increased. For example, a goal might be raising concern about radon and prompting
action."

Seven cardinal rules for the practice of risk

communication
(As first expressed by the U.S. Environmental Protection Agency and several of the
field's founders)

Accept and involve the public as a legitimate partner.

Plan carefully and evaluate your efforts.
Listen to the public's specific concerns.
Be honest, frank, and open.
Coordinate and collaborate with other credible sources.
Meet the needs of the media.
Speak clearly and with compassion.
Source: Seven Cardinal Rules of Risk Communication. Pamphlet drafted by Vincent
T. Covello and Frederick H. Allen. U.S. Environmental Protection Agency, Washington,
DC, April 1988, OPA-87-020.