Thursday, January 2, 2014

What’s your ‘Risk Appetite’

 It is transcendent to shape a positive, opportunistic view from 'negative' risks. 

Risk appetite implies certain business ability to actually measure risk level. Although there are relatively few opportunities to really measure quantifiable risk in a consistent and meaningful way.

Strategic Planning is a process of enacting on opportunistic risk. Without good threat and opportunity identification and analysis, then the strategic planning process is all about defending your business position. The age-proven SWOT analysis (Strengths Weaknesses, Opportunities, Treats) is a very common process to help determine where value can be created in the organization rather than just protecting value.

There is possibly different scenario in which the identification of 'negative' risks unearths an opportunity. But this requires the stakeholder to change their perspective or framing on what they are observing. This is all a matter of perspective, and when you are dealing with safety experts they tend to only look at the downside of risk. Nonetheless, if you are talking to market risk analysts or investors, they hunt for risk, risk valuable to them because within risk is yield. From an operational standpoint, businesses often focus on threats to the business plan to protect the value and achieve the objectives. But from a strategic perspective, not only must you put in place strategies to protect the value in the business, but value must be created and the company must grow, and good opportunity assessment is vital in that regard. Once the strategy is in place, then there is a focus on managing the threats that may hinder business achieving the new objective.

Look only into a negative prospective of risk is simple, but not optimal:
1). First of all, it’s more comfortable. To concentrate the attention on the negative side of the coin means that you need just to think to something which should prevent a possible problem or mitigate some impacts. There is no proactive action and there is less chance to be wrong.
2). Second, it doesn’t need so much imagination. To concentrate on the negative side often means just to remember something already happened in the past and try to avoid it.
Looking into an optimistic prospective needs more effort,
3). The optimal risk management is multi-dimensions of planning that asks: "What can go wrong? And, what can I do about it?" thinking about what can go wrong absolutely can lead to new opportunities. And just because they may have come form the "dark side", they are opportunities all the same.

There is nothing wrong with re-framing, if you can re-frame the thinking and try to recover positively from that uncertainty. More often, business is still fundamentally looking at risk in a negative context but adapting that context at point of analysis to identify the upside from a specific uncertainty one is threatened with. Business have objective which may potentially benefits, but whether that business strategy is successful or not in the future is uncertain and achieve that objective might have negative outcomes which need to be controlled. Even better business can turn negative outcomes into potential future opportunities. 

Risks are the matter with probability to be occurred and impact level in specific areas. As long as risks have been identified and agreed with stakeholder as per business need, then you can take place a risk models which effectively  predict, optimize and consider a continual and sustainable approach with multi-faceted perspectives, and specific threshold for justifying opportunities and business outcome.

As part of implementing an ERM-Enterprise Risk Management system, companies should put in place a risk appetite system that goes beyond high level statements. You can then use the more granular risk appetite statements to monitor risk taking in the business, and business risk management executives shall point out situations where the business is taking either too much or too little risk with respect to the risk appetite.

Therefore, the healthy level of your 'Risk Appetite' depends on how you can 'digiest' the risks, and identify the upside via re-framing the positive view from that uncertainty. 


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