Organizational Risk Appetite and Assessment

Risk is often a requirement for an organization to meet its operational goals. Risk may bring innovation, partnerships, and monetary gains to a company. However, an excessive level of risk may have highly negative consequences varying from operational issues to the full bankruptcy of the organization. To properly calculate the required amount of risk, a concept of risk appetite exists, and it allows companies to determine how much they are ready to take to fulfill their future plans.

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On the other hand, the process of achieving risk awareness enables organizations to identify risks associated with various strategic decisions. It is important to consider all the possible risks when choosing the company’s future strategies. A multitude of approaches to risk awareness exist, and each applies best to its own situation. This paper will provide an overview of the term risk appetite, then show an example of its practical use, as well as describe how risk assessment is performed and which approach would work best for the presented software development company.

Risk Appetite and Its Practical Application

Risk appetite suggests a new business opportunity for organizations. There are many definitions of this relatively modern concept, but the majority of them contain the same basic elements. Risk appetite is defined as the level or amount of risk which a company is willing to accept (Hillson & Murray-Webster, 2016). Along with the more common notion of risk assessment, risk appetite is used to evaluate the organizations’ ability to survive under certain circumstances. By defining risk appetite, any company will be able to avoid financial losses and improve its productivity.

An example of practical application of risk appetite is the analysis of a company’s ability to provide its users with full protection of their intellectual property. In order to do so, the manager needs to evaluate current techniques used to resist malicious activity and analyze how long these methods can last and when they should be replaced by a modernized version. It is necessary to develop a risk appetite statement in which the data on the possibilities of current security measures will be thoroughly analyzed. The manager should assess how dangerous it is to continue using the present approach and how much a company will lose if it does not modernize its methods. The outcomes of such an investigation will indicate risk appetite of the organization.

Key Methods for Determining the Risk Appetite of the Company

In order to establish the organization’s risk appetite, Gifford (2013) suggests applying the following techniques:

  1. Select the risk appetite statement. In order to come up with a unique statement, a manager has to investigate the principles and peculiarities of the company’s risk management activity. That way, the risk appetite will be discussed, and the most beneficial strategies for risk management will be employed.
  2. Pick the quantitative and qualitative measures. Such an approach will promote a more comprehensive perception of risk appetite.
  3. Set both short-term and risk-term goals. They will enable the appropriate measurement of risk appetite at different levels.
  4. Include risk appetite into the existing tasks. It is necessary to realize that risk appetite is not an activity to accomplish but rather a facilitator of the decision-making process. Incorporating risk appetite into the organization’s plans helps to enhance projects and infrastructure. It is useful to educate the employees on risks and increase their knowledge of risk appetite.
  5. Cultivate the major signs that will indicate the need to reconsider the company’s risk appetite. The establishment and implementation of risk appetite are not enough to provide the best outcomes for the organization. It is necessary to arrange constant control and supervision of the process so as no notice whether it is effective or whether it needs some changes.

The Process of Risk Assessment and Preferred Approach to Risk Assessment

Risk assessment is the main component of the system of risk management (Popov, Lyon, & Hollcroft, 2016). The process of risk assessment involves several stages. First of all, it is necessary to identify the potential risks. Then, a risk manager should identify who may be harmed and in what ways it may happen. Further, the severity of outcomes should be analyzed. The next step is assessing the risks and defining the control methods.

The final phases are documenting the findings and monitoring whether all the necessary measures have been taken (Popov et al., 2016). When talking about risk appetite, similar steps should be made. Edgerton (2013) emphasizes that it is necessary to measure the decision-makers’ level of acceptance and tolerance of risks prior to planning any activity. Knowing one’s risk appetite promotes the establishment of the most successful risk mitigating and prioritizing strategies (Edgerton, 2013). Managers who do not understand their risk appetite are not able to express their tolerance to risk.

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Out of a wide variety of risk evaluation methods and approaches, I would prefer to employ SWOT analysis. This assessment tool incorporates four constituents: strengths, weaknesses, opportunities, and threats(Kourdi, 2015). Because of providing so much information for risk evaluation, SWOT is considered as one of the most successful assessment techniques. When analyzing strengths, it is possible to see what advantages the company has over its competitors, what resources it has, and what unique opportunities it can offer to its customers. Studying the weaknesses shows the drawbacks in the organization, points out the things the company should avoid, and shows what aspects may be enhanced (Kourdi, 2015).

Opportunities are the things that a company can employ to make its results better. These may be some changes in the production process or new distribution possibilities. Finally, threats represent the obstacles in the organization’s work. They allow a manager to see what should be avoided in order not to get into trouble (Kourdi, 2015). In my opinion, SWOT analysis in the most convenient and productive type of risk assessment since it gives a possibility to analyze the situation from different angles. As a result, a manager can create a strategy that will incorporate the most beneficial solutions and avoid the most dangerous ones.

Conclusion

Risk appetite and risk assessment are some of the most useful tools for organizations in need of innovation. It is easy to imagine how hard it would be to stay in business if your organization makes complex and risky decisions without proper consideration of all available information on the issue. The balance that risk appetite provides to the decision-making process and the risk assessment that determines the largest areas of risk in any given situation allow organizations to pursue their goals. Competitive environments often force organizations to consider new approaches to business and products, so to improve the chances of creating a successful project, tools like risk assessment and risk appetite are used.

References

Edgerton, M. (2013). A practitioner’s guide to effective maritime and port security. Hoboken, NJ: Wiley.

Gifford, A. (2013). Risk appetite: Cut through the hype. In J. Reuvid (Ed.), Managing business risk: A practical guide to protecting your business (pp. 11-24) (9th ed.). London, UK: Kogan Page.

Hillson, D., & Murray-Webster, R. (2016). A short guide to risk appetite. New York, NY: Routledge.

Kourdi, J. (2015). The 100 business tools you need to succeed. London, UK: John Murray Learning.

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Popov, G., Lyon, B. K., & Hollcroft, B. (2016). Risk assessment: A practical guide to assessing operational risks. Hoboken, NJ: Wiley.

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