Forecasting and Risk Assessment

Risk management is a process of identifying risks, evaluating the consequences as well as defining effectual methods of controlling risks and responding to them (Miller 2003). Risk management is a major task for the managers in any organization. So as to manage risks appropriately, the risks associated with each service delivery or policy option needs to be effectively analyzed, identified, monitored and controlled. Evaluating on the consequences of actions and policies in an organization is quite important. Failure to pay immense attention to the consequences as well as the likelihood of a risk can cause grave problems. However, what risk managers ought to be keener on, are the consequences of an event and not necessarily the likelihood as the consequences always tend to determine the failure or success of a business. Failure to focus on the consequences of an event can lead to bad publicity, financial loss, service disruption, claims for compensation among other threats.

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Risk analysis is often used by the management as well as decision makers to direct actions that have vast consequences as well as uncertainties. Risk analysis determines what events might occur. It analyzes on the likelihood that the risk might occur hence assessing the potential consequences and finally communicating the magnitude as well as the elements of the identified risks. Evaluating on the consequences of a risk event is more effective than forecasting on its likelihood due to various reasons that the paper will be discussing. Focus ought to be aimed on forming a more robust treatment to the consequences of an event. Decision makers and managers should be more concerned with the risk consequence associated with the specific issue under consideration and not the likelihood of the adverse outcomes that might result from diverse risk situations.

Evaluating the consequences of an event rather than its likelihood will deliver both concrete and elusive benefits to the organization. For instance evaluating on the consequences of an event will enhance strategic management (Ritchie, 2007). This means that there will be better strategic objectives as well as targets due to risk identification, control, analysis and monitoring process. Therefore, there will be immense aptitude to deliver achievable and realistic targets and objectives. However, if the managers are to just focus on the likelihood of an event it is very possible that they will dismiss any solution to the problem as evaluating likelihood is more imaginary than factual hence they ought to focus more on the consequences.

A risk usually consists of an event, uncertainty and finally consequence. Uncertainty or likelihood is usually embodied more on the information that the managers have gathered rather than the real evaluation. The likelihood usually concerns whether a threat shall be developed and whether your firm is completely protected against this threat or not. The problem with just focusing on likelihood as Hopkin (2012) and Bobson (2011) explains is that there is usually lack of objective data for certain risks, hence making it complex to use the forecasting approach that is based on likelihood or probability. So as to handle the likelihood inherent in any risk, there is a need to come up with an analysis technique that is based on the consequence of the probable threat.

Additionally, there will be enhanced operation management (Bowden, Lne and Martin, 2001). This is because there will be a reduction in interruptions when delivering services, reduction in the managerial time that is usually used to deal with the consequences of a risk when it occurs and there will also be enhanced systematic approach when addressing regulatory, legislative as well as competitive demands. Moreover, focusing on the consequences will enhance or improve the financial management of the company (Kunreuther , 2002). Consequence usually describes how the organization might be affected basing on certain threat outcomes which usually interferes with the mission as well as the objectives of an organization that are usually profit oriented. Forecasting on the likelihood of an event though crucial is not enough as often there is no evaluation of the event in the grass root hence the event is left to happen thus causing losses.

Effective risk management does require managers to identify as well as manage operational and strategic risks that affect the organization hence, they should aim at focusing more on the consequences of events rather than the likelihood. This way they will be in a better way to achieve their strategic objectives.

Risk managers deal with risks in diverse ways as they avoid, transfer, retain, share or reduce it. There are key considerations that risk managers ought to take into consideration when making the above-mentioned decisions. Every situation has got risks that are usually associated and the major consideration that risk managers should focus on is whether or not the benefits do outweigh the costs or the risks

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Managing risk does not entirely mean elimination of risks. The entire process of risk management and analysis is about identification of the risks that are usually associated with a certain situation, elimination of irrelevant risks and mitigation of other related risks (Rejda, 2011).It involves identification of risks, making of informed decisions to retain, transfer, reduce, or avoid significant risks and ensuring that those decisions are fully implemented (Baker, Ponniah & Smith, 1999). When decision makers are deciding on whether to retain, transfer, reduce or avoid risk, they ought to make a rational decision that will be favorable to the organization.

One of the decisions that risk managers make is that of avoidance. This is when an action that might contain risk is not performed hence avoiding the consequences. For instance, one may choose not to develop a particular product or even built a house since they do not want to risk the fact that the product might not be realized or the house might cause loss in future. However, an important consideration for managers is that though they ought to consider risks and benefits incurred, there are some risks that can never be avoided due to the fact that risks are inherent part of the innovation (Lonsdale, 1999). They should focus on positive consequences and evaluate both costs and benefits.

Also, when it comes to reducing risks, risk managers should bear in mind that when reducing risks, it is possible to increase other risks (Nocco and Stuiz, 2006). Therefore, they need to balance risks and make rational decisions so that they can get maximum level of acceptance in relation to the likely benefits that might be achieved in the process. For example, in reducing risks, risk managers can perform an analysis before entirely coming up with the new product which will ensure that the danger of infringing other related patents in the making process is curbed or reduced. Moreover, they should ensure that they come up with a management process as well as risk analysis so as to identify unsuccessful and unnecessary risks hence act promptly to avoid them.

Risk retention can be either unaware or aware. As far as conscious or unaware retention of risks is concerned, risks are usually perceived and they are not reduced or transferred (Lynch, 2008). Managers ought to know that when risks are not recognized, they are hence unconsciously retained. This means that the organization or person involved ends up retaining the financial consequences of the loss without having knowledge that they do. Those risks that are neither transferred nor avoided are usually retained. For instance, when developing a product, one tends to take time, staff and financial related risks.

Risks can also be transferred from one person to another who is willing to tolerate the risk incurred. For example, insurance is one way of transferring risks. In this scenario, risk managers should shift their risks to an expert in return of a financial cost. Therefore, before making such a decision the risk managers should weigh both benefits and costs in the entire process.

After estimating and identifying the risks, risk managers should come up with a management plan (Amihud, 2011 & Daccarini, 2001). This will detail the decisions as well as the risks and the best way to control them. This will also help to ensure that all mitigation strategies are fully implemented and other probable risks are dealt with promptly.

Transfer is generally when an individual or a company decides to shift a forecast risk to other stakeholders (Longenecker et al, 2005). In the case of risks that are related to developing a new product for example developing new software or building a home, they can be transferred to an insurance company as they have the required expertise to deal with the financial obligations as well as bear the consequences incase of a risk.

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Risks are usually caused by uncertainty in the market, failure of projects, credit risks, accidents, legal liabilities, natural disasters among others. The strategies to ensure full management of the risks do include transferring of the risks to other parties, reducing the adverse effects of the likely risks, avoiding these risks or accepting the actual as well as potential consequences of the risks (Reovid, 2011 & Lynch, 2008).

When an individual decides to purchase product or home insurance, they essentially pay the insurance company so that it can take risks that are involved. In the event that anything might happen to either the software product or house, for example damage that is caused by natural disasters or fire, then the company will deal with the consequences fully.

Risk managers make their decisions basing on the costs of managing the entire risk, severity and finally the implied benefits (Lynch, 2008). There is hence need to consider a crucial point here that managing risks effectively does not entirely mean elimination or shifting of the risks. Actually, risk management choice and decision ought to be evaluated in a cost-benefit framework through focusing on the costs incurred by the company in eliminating or reducing the risks against the benefits it gets from such decision. Conversely, it can consider on the costs of retaining the risks versus the benefits incurred.

There are clear merits of using cost versus benefit framework in a scenario that involves transfer. Generally, there are risks that are less severe and infrequent hence retention can be used in such scenario as they are improbable to damage the organization financially. Those that are of high frequency and very severe ought to be fully eliminated as they lead to financial ruin. On the other hand there are those risks that do occur frequently but have a low financial impact as well as those that are rare such as fire accidents but do have an immense financial impact which is difficult to handle. In such a case, an organization ought to analyze the costs as well as the benefits of applying retention, loss control or risk transfer.

A cost versus benefit framework is important when transferring risks to an insurance company as it helps in comparing the opportunity costs of an intervention with all the benefits that are achieved incase it is implemented (Latemi & Lutt, 2002). It is also beneficial as it offers an exceptional opportunity to consistently organize disparate information hence enhance the process as well as the outcome. For instance, by evaluating the costs as well as the benefits when transferring risks to an insurance company, the risk managers will be in a better position to know whether their decision is going to affect the organization’s profit. Additionally, it forces the risk managers to be explicit when it comes to their assumptions as well as hypothesis as far as risks are concerned (Grossman & Hart, 1999).

Risk managers have a crucial role to play in organizations. They train companies on risks that might damage their existence or profits. Also, they assess as well as identify any form of threat ensuring that everything is in place and incase things go wrong, they decide on ways to reduce, avoid or even transfer the risks (Renn, 1998 & Lynch, 2008).

The role of the risk managers in any organization cannot be underestimated as they are the main backbone to any successful company hence a company cannot do without them. They are fully responsible of managing risks to the employees, the firm, consumers, assets, reputation and interests of other members such as the stakeholders. These are very influential people in a company and their roles ought to be quite outstanding within the wider management. This is because they work in diverse sectors specializing in a number of fields including; corporate governance, enterprise risk, operational and regulatory risk, security and information, technology risk, market and credit, product development, marketing, finance among others (Lynch 2008 & Sitkin,1995).

Moreover, risk managers design, plan as well as implement overall risk management for the entire firm. They also report on any risks that might hamper the growth of the company in a professional manner to diverse audiences such as the board of directors. Additionally, they identify risks that are associated with various activities so as to ensure continuous existence of the firm such as market risks, financial risks, strategic and operational risks.

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Furthermore, the risk managers usually assist the senior managers in evaluating those risks that are usually associated with prospects as well as guiding the decisions in order to minimize on the negative impacts. They also plan and execute activities in the organization.

Generally, the role of the risk manager goes beyond just being a bearer of negative news as they are the voice of reason in the organization compared to the rest of the management which only focuses on the positive outcomes.

Risk is defined as anything that can cause negative impact on a business. It is usually managed by various approaches namely risk avoidance, risk transfer, risk acceptance and risk reduction (Lynch, 2008). Every organization deals with its shares of risks. Risks are usually made up of likelihood of an event and consequences. Risk analysis helps a lot in understanding risks so that the organization can be in a better position to manage it and reduce losses. It helps to control risks in a cost effective manner. Learning about risk analysis is quite important as it helps in identifying as well as managing potential problems that can end up depressing the business. Risk analysis is used in identifying threats, estimating risks, and managing these risks. It is usually carried out after identifying threats and estimating the probability that such threats might end materializing.

The major goals of risk management are usually to assess and measure risks with the major aim of managing the risk. It helps persons concerned to manage risks by transferring it, avoiding or reducing the effect. Risk managers should thoroughly understand the concepts and components of risk management which include evaluation of risk management, implementation of the decision that is risk management oriented and finally monitoring as well as reviewing the risk.

References

Amihud, Y. (2011). Risk reduction as a managerial motive for conglomerate mergers. The bell journal of economics, 12(2): 605-617.

Baker, S., Ponniah, D., Smith, S. (1999). Risk response techniques employed currently for major projects. Construction management and economics, 17(2): 205-213..

Bobson, I. (2011). Risk management. The open group guide. New York: John Wiley and sons.

Bowden, A., Lane, M & Martin, J. (2001). Triple bottom line risk management, enhancing profit, environmental performance, and community benefits. New York: John Wiley and sons.

Daccarini, D. (2001). The risk ranking of projects: a methodology. International journal of project management, 18(3): 138-145.

Grossman, S., Hart, O. (1999). The costs and benefits of ownership: a theory of vertical and lateral integration. Journal of political economy, 94(4):691-719.

Hopkin, P. (2012). Fundamentals of risk management. Understanding, evaluating and implementing effective risk management. CA: Kogan page publishers.

Kunreuther, H. (2002). Risk analysis and risk management in an uncertain world. Risk analysis, 22(4): 655-664.

Latemi, A., Lutt, G. (2002). Corporate risk management: costs and benefits. Global finance journal, 43(1):28-3.

Longenecker, J., Moore, C & Leslie, L. (2005). Small business management: an entrepreneurial emphasis. New York: Cengage learning.

Lonsdale, C. (1999). Effectively managing vertical supply relationships: a risk management model for outsourcing. Supply chain management, an international journal, 4(4): 176-183.

Lynch, G. (2008). At your own risk: How the risk conscious culture meets the challenge of business change. New York: J. Wiley& Sons.

Miller, K. (2003). Scenarios , real options and integrated risk management. Long range planning, 36(1):83-107.

Nocco, B., Stuiz, R. (2006). Enterprise risk management: theory and practice. Journal of applied corporate finance, 18(4): 11-20.

Renn, O. (1998). The role of risk communication and public dialogue for improving risk management. Risk decision and policy, 3(1): 5-30

Reovid, J.(2011). Managing business risk: a practical guide to protecting your business. Washington: Kogan page publishers.

Ritchie, D. (2007). Supply chain risk management and performance: a guiding framework for future development. International journal of operations and production management, 27(3): 303-322.

Rejda, G. (2011). Principles of risk management and insurance, 8th Edition. New York: pearson education , limited.

Sitkin, S. (1995). Determinants of risky decision making behavior: a test of the mediating role of risk perceptions and propensity. The academy of management journal, 30(6):1573-1592.

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