Do You Know All Your Risks?

Posted: July 1, 2007 in Readiness & Strategy

A former student of mine works for a major multinational corporation. Safely ensconced within this large organization, one would think he would feel completely secure in his position, but this is not entirely the case. You see, he has analyzed the work he does and has concluded that it would be fairly easy to send the job off shore.

So far he is safe, but how long will that situation last? He has started taking measures in his personal life to make his position more secure. Without realizing it, he is mitigating the risks from off shoring his job, while improving his potential to seize on future opportunities. Presumably, the benefits of working for this large corporation continue to outweigh the potential for loss should he be laid off because his work is sent to a lower cost country. However, once the balance shifts, he will be in a better position to profit from new opportunities.

I bring up this example because risk is everywhere. Sometimes it lurks in the most innocuous places, and sometimes it hits you right in the face. The reality though is that risks should only be taken on consciously and with the prospect of equivalent reward. Otherwise, risks become dangers without our even being aware of it.

A risk must be a known quantity and should be taken on willingly only for the prospect of gain it offers. The perfect example of this is insurance. Insurance companies take on risk from the insured for a premium. The insurance company tries to make money from the proceeds of the premiums while mitigating the risks through various measures. On the other hand, the insured views the risk as a threat or a danger, and is willing to pay good money for someone else take on the financial downside of the risk.

Ask yourself the following questions to ascertain if you or your organization has taken on risks without the prospect of commensurate reward.

  1. What are the dangers and threats to the viability and survival of your organization? Are these competitive, economic, political, technological, and natural?
  2. What measures can be put in place to mitigate or otherwise eliminate each of these threats? Examples of such measures include insurance, workplace safety practices, security, monitoring, research, etc.
  3. Are there any that can’t be eliminated or mitigated? If so, what is the prospect of reward for taking on these risks? For instance, the airline industry cannot entirely eliminate the dangers and threats of air travel, but the demand for air travel creates a business opportunity which provides a reasonable prospect of reward to the airlines.

The essence of business is the risk-reward ratio. Each type of business or undertaking has its own inherent risks, threats, and opportunities for growth and gain. Have you identified all of the potential risks and threats? Have you taken appropriate measures to eliminate or mitigate these? For those that remain, are they appropriate to the level of potential gain?

Asking and answering these types of questions will go a long way to better understanding the risks, threats and opportunities that you and your organization face, as well as the potential rewards that await through sound risk management.

© 2010 Richard Martin. Reproduction and quotes permitted with proper attribution.

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