Managing risk means more than protecting value. It is about creating value through viewing risk management as an aid to building credibility and achieving sustainable growth. In parts 1 and 2, we saw risks being managed through Treatment and Transfer. In this article, we will now look at risk Termination and Tolerance as the other approaches to managing risk.
To terminate is to “let go”. Sometimes, “letting go” can be the most effective risk management strategy. If the costs of risk treatment or risk transfer far outweigh the potential benefits, it might be advisable to replace (or remove) a process/procedure and stop that risk from ever materialising.
For example, if you’re a bank and you are lending funds to a risky business segment where the risk of loss is high, you may consider discontinuing lending to that particular segment. This too is risk termination.
In the Consulting world, risks can be managed through termination as well. Imagine you are a tax consultant. You are approached by your tax client asking you to undertake a digital forensics assignment (for which you don’t have expertise). The costs of doing a sub-standard digital forensics assignment (and losing credibility) may outweigh the (short-term) cost of not taking up the assignment and you opt not to take on the assignment. That too is risk termination.
Tolerating risk is simply taking no action to mitigate risk. Imagine this, what would you do if the costs of managing risk are so high and not worth it? You would dare God on this risk! Also, what would you do if the probability (and impact) of a particular risk is so low that it is deemed an acceptable risk for the business? Most definitely, you would dare God once again and tolerate the risk.
However, when risks are tolerated, they should be routinely monitored just in case future changes make them no longer tolerable. Today’s COVID-19 pandemic has left the world in a permanent state of continuous change.
Gone are the days when companies used to operate by simply using forecasts and projections. Today, most organisations have a renewed focus: to manage risk. And many are outsourcing this service! Not taking risk management seriously, is like walking blindfolded and hoping you will arrive at your destination safely. Visit www.summitcl.com for all aspects of risk management. Like many of our happy clients, you could consider outsourcing our risk management services.