Why Measure Risk?
There are many reasons to measure risk. Measurements allow companies to grasp the importance of the risks they face. By measuring risk, companies can more easily compare risks on many different levels and note declines or improvements in either their overall situations or specific problem spots. After all, the goal of measurement is to understand the nature of risk and pinpoint problems.
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In your risk planning, always try to remember the key reasons for measuring risk. They include understanding how large or small specific risks might be, the possibility of contagion or concentrations of risk, monitoring, supporting mitigation methods, pinpointing causes, and evaluating future investment in efforts to reduce risk.
Measuring risk even allows companies to gain perspective on how much they want to invest in future risk management technologies, people, and processes. Since risk management can call for either a simple solution (always the goal!) or something complicated enough to twist a math professor into a pretzel, it’s best to measure and size up the issues first. Measurement also allows you to determine materiality, a key concept that helps to focus on risks and groups of risks that are most important and significant.
How Much Mitigation Do You Need?
The other key reason for measuring risk is to decide how much mitigation and management is required. This is the big money question, quite literally. Measurements will be a waste of time and money if mitigation plans and proper management are not assigned to their results. Likewise, overly mitigating a not-so-serious risk can shrink profits and productivity. The balancing act between measuring and mitigating is perhaps the most vital task for a company’s risk manager, whether it be the company owner or an executive, director, department, or outside consultant.
def•i•ni•tion
Immaterial risks are smaller risks that are not likely to present any problems now or in the near future.
In this review, look at both immaterial and material risks. With immaterial risks, mitigation and management may not be needed; after all, they’re barely a blip on the radar. Material risks, however, may suggest that serious management and mitigation is in order. It is important to spot risk concentrations and evaluate how material or immaterial they may be.
Within those risk concentrations are the so-called small risks, those radar blips that can become screen-consuming blobs as they reach problem levels.
With material risk, the focus becomes different: How does the company mitigate it? At what cost? Most of the pitfalls described here and in earlier chapters can be avoided with good measurement and assessment techniques.
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