Risk Management Software - Can Risks be Managed?

What are “risks” and how can risk management software help with these? Let us look at the total picture.

The future is uncertain. Yet you have to make decisions that will decide your course in the future. These decisions can be excellent decisions if things remain as they are now. But then, the future is uncertain and things could be very different tomorrow. In that tomorrow, the decisions you made today can prove disastrous.

That is the essence of risk. Let us now see how the impact of such risks could be managed.

Risk Management

When managers make decisions, they are usually aware of the assumptions on which they base the decisions. For example, they might decide to invest in a new plant on the assumption that prices of the plant’s products will continue to remain at current levels. If new technology makes it possible to make the product at a lower cost, prices can fall to non-remunerative levels.

The first step in risk management is to list all risks. Against each risk, a probability assessment is made. How likely is that risk to materialize - low, medium, high, or 10%, 50% or 80%?

Next, the impact of that risk on the business will be estimated. What kinds of impact will result? And what would be the costs of each? For example, the impact of a price fall of 20% on the profits of the business can be estimated.

Once you have an idea of the kinds of impact, and their effect on costs/profits, you can start thinking of counter measures. For example, you might opt for leasing a new plant (with an option to terminate the lease by giving notice) instead of buying it outright.

The key issue is that once you start looking at your assumptions, and the likely risks, you will gain a sound perspective. You can estimate probabilities, kinds of impact and the costs associated with each. You then try to manage the risks by developing courses of action that minimizes the impact and costs of the risk.

To illustrate:

• You estimate that a certain risk can cost you $10000
• You determine that by taking a certain action, the cost can be reduced to $3000, i.e., you can save $7000. You also estimate that taking that counter action will cost you $3000.
• You thus save $7000 by spending $3000, i.e., generate a return of 7000/3000, or 2.33.

Risk Management Software

Risk management software would have facilities to:

• List all risks associated with a project or decision
• Look at the probability and impact of each risk, and arrive at the weight to be attached to each
• Analyze the costs of different counter measures to reduce the impact of each risk
• Compare the costs of the risk with the costs of each suggested action and select the best course of action
• Monitor the results of selected actions and measure Return on Investment, as illustrated earlier

Risk management software is only a tool. Human managers have to call on their experience and skill to use that tool. They have to identify the risks, estimate their probability, work out the costs, and so on.

Most importantly, feedback should be available. One example is calculation of Return on Investment we mentioned above. Another is more subjective. How did things actually turn out compared to your assessments and estimates? The uncertainties of the future are not static. Things are constantly happening, and all your prior assumptions and estimates can be off the mark. It is feedback that enhances your risk management skill.

And once you have developed a high degree of skill, the risk management software would prove an invaluable timesaving and accuracy-enhancing tool.