RMQS Risk Management Query System
Acronym Definition
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RMQS Risk Management Query System
Risk management is the human activity which integrates recognition of risk,
risk assessment, developing strategies to manage it, and mitigation of risk
using managerial resources.
The strategies 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.
Some traditional risk managements are focused on risks stemming from physical or
legal causes (e.g. natural disasters or fires, accidents, death and lawsuits).
Financial risk management, on the other hand, focuses on risks that can be
managed using traded financial instruments.
Objective of risk management is to reduce different risks related to a
preselected domain to the level accepted by society. It may refer to numerous
types of threats caused by environment, technology, humans, organizations and
politics. On the other hand it involves all means available for humans, or in
particular, for a risk management entity (person, staff, organization).
Some Explanations
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 risk - 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 materialises. 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. 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.
Steps in the risk management process
Establish the context
Establishing the context involves
0. Identification of risk in a selected domain of interest
1. Planning the remainder of the process.
2. Mapping out the following: the social scope of risk management, the identity
and objectives of stakeholders, and the basis upon which risks will be
evaluated, constraints.
3. Defining a framework for the activity and an agenda for identification.
4. Developing an analysis of risks involved in the process.
5. 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 identified 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. Objective-based risk identification is at the
basis of COSO's Enterprise Risk Management - Integrated Framework
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 This method combines the above approaches by listing Resources at
risk, Threats to those resources Modifying Factors which may increase or reduce
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:
Rate of occurrence multiplied by the impact of the event equals risk
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 (annualised 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: (Dorfman, 1997)
Avoidance (aka elimination)
Reduction (aka mitigation)
Retention
Transfer (aka buying insurance)
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 ACAT, for Avoid, Control, Accept, or
Transfer. The ACAT acronym is reminiscent of the term ACAT (for Acquisition
Category) used in US Defense industry procurements.
Risk avoidance
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.
Risk reduction
Involves methods that reduce the severity of the loss. Examples include
sprinklers 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.
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.
Risk retention
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
Means causing another party to accept the risk, typically by contract or by
hedging. Insurance is one type of risk transfer that uses contracts. Other times
it may involve contract language that transfers a risk to another party without
the payment of an insurance premium. Liability among construction or other
contractors is very often transferred this way. On the other hand, taking
offsetting positions in derivatives is typically how firms use hedging to
financially manage risk.
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.
Outsourcing is another example of risk transfer.[1] 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.
Create a risk mitigation 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:
to evaluate whether the previously selected security controls are still
applicable and effective, and
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.
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
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 preformulated 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):
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.
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)
sorting on this value puts the highest risks to the budget first.
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 management will be held 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 minimising 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 realised 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.
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