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Risk management

The challenge is interesting, but can be met with an assured confidence

By Prof. Dr. Khawaja AmJad Saeed.
Mar 26 - Apri 01, 2001

In today's world the pronounced role of a decision maker is to keep the risk level as low as is possible. There are no decisions without risk. However, in real life, right type of risk should be undertaken in a catious manner, so that losses are minimised and returns are maximised.

This paper briefly reviews the concept of risk, various charateristics, categories and types of risk. It also presents some guidelines in respect of process for management risk and urges the decision makers to develop and later adopt Risk Mitigation, Monitoring and Management Plan (RMMM Plan).

Risk can be defined as:

- Lower yield on an investment than expected.

- Loss of part or all of the actual.

There is a strong relationship between risk and yield. There are inter-related areas of financial risk, market (price) risk and production risk.

There is a need to concentrate on understanding and integrating these three sources of risk into effective management decision making.

Peter Drucker on Risk is quoted below:

"While it is futile to try to eliminate risk and questionable to try to misuse it; it is essential that the risk taken be the right risks".

Characteristics of risk

Essentially there are two characteristics of risk. These include uncertainty and loss. These aspects are briefly described as under:

Uncertainty: The event that characterises the risk may or may not happen; i.e. there are no 100% probable risks.

Loss: If the risk becomes a reality, unwanted consequences or losses will occur.

When risks are analyzed, it is important to quantify the level of uncertainty and the degree of loss associated with each risk.

Categories of risk

There are two categories of risk namely, General and Specific. General categories of risk consist of three aspects namely, Known, Predictable and Unpredictable. Table-1 presents these categories alongwith operational details.

Categories of Risk

Operational Details


Can be uncovered after;

a) Careful evaluation of the project plan.

b) Reliable information sources

- Unrealistic delivery date

- Lack of documented requirements

Predictable Extrapolated from past project experience;

- Staff turnover

- Poor communication with the customer

- Dilution of staff effort as ongoing maintenance requests are serviced


These can and do occur but are

difficult to identify in advance.

Specific categories of risk include three types, namely, Project Risks, Technical Risks and Business Risks. These are tabulated below:

Specific categories of risk



Project Risks

Threaten Project Plan:

- Budget

- Schedule

- Personnel

- Resource

- Customer

Technical Risks

Quality and Timeliness:

- Design

- Implementation

- Verification

- Maintenance

Business Risks

Threaten Viability:

- Market Risk

- Strategic Risk

- Sales force does not know how to sell

- Management Risk (Lack of support)

- Budget Risk

Types of risk

It is difficult to develop an all encompassing and fully comprehensive chart identifying all types of risks. However, Table 3 is a suggestive approach to identifying significant types of risk :

Types of risk




Prospects of loss - Plant: fire


Investment in marketable securities


Sales or services


Material, labor, overheads.


Financial transactions - Bonds

rates.....Interest rates


Destruction of productive assets:

force, floods, riots.


Fraud, or embezzlement


Pollution -- Clean up cost


Health Care providers

Suggestive Risk Item Checklist is given below:

Product Size - "overall size"

Business Impact - "constraints imposed"

Customer Characteristics - "Ability to communicate"

Process Definition - "Process"

Development Environment - "Tools"

Technology to be built - "newness"

Staff size and experience - "Technical or project experience".

Process of managing risks

There are three stages which are involved in the process of managing risks. These include: risk identification, visualizing and quantifying the impact of risk and finally the art and craft of handling risk. Table 4 presents an approach to the process of Managing Risks.

Process of managing risks




Potential risks


Impact of risk

a) Immaterial

b) Potential impact


a) Insurance

b) Third party - shipping

c) Derivative Contracts

- Hedge

- Financial derivatives ---- interest rates and exchange rates

d) Reduce probability of occurrence

- Preventive approach

e) Reduce magnitude

- Reinsurance

f) Total avoidance

- Discontinue a product/service


Risk Mitigation, Monitoring and Management Plan is generally referred to as RMMM Plan. This plan deals with the following strategic issues:

- Risk avoidance
- Risk monitoring
- Risk management and contingency planning.


All decision makers should undertake extensive reading, gain field experience and sell the idea of Risk Management as their business territory of work. The challenge is interesting, but can be met with an assured confidence.

The author is Former President, ICMAP (1997-99).

Former Pro Vice-Chancellor & Founder Director, IBA, University of the Punjab, Lahore.

Dean Executive Programs, Punjab College of Business Administration, Lahore.