Measuring Risk
Risk is an essential factor in business. In organizations that accept its significance, their investors and managers allow it to impact how they make decisions. Several factors influence risk measurement and include, cultures, processes, structures, and the impact of evolving risk measures. Further, when measuring risk, one may use qualitative or quantitative methods. The main purpose of the paper is to discuss the evolution of risk measures in the context of upcoming developments and organizational cultures, structures, and processes.
The way organizations measure risk continues to evolve with time. The development, especially, particularly from the earlier fatalistic acceptance characteristic of bad outcomes, to probabilistic measures in which managers and business owners can now get a handle on risk. Risk measures has also evolved from the logical extension of risk measures into insurance. The evolution is estimated to have gone through about twenty milestone. Starting with None or gut feeling (pre-1494), other milestones include, computed probabilities (1654), sample-based probabilities (1711), expected loss (1800s), price variance (1900), bond and stock rating (1909-1915), variance added portfolio and market beta (1964), and proxies (1992). Although new risk measures continue to evolve, the old ones are still existing. Therefore, while increasing academic research seems to have jumped to the portfolio theory bandwagon together with its successive refinements, there are still several investors who believe in subsequent judgements regarding risk or overall risk categories (NYU Stern. n.d.).
Qualitative and Quantitative Measures of Risk
Qualitative measurement of risk involves the use of a pre-defined scale to determine prior identified risks in a project. Scores are assigned to each risk considering the probability of occurring and the impact they are likely to have on the project in case they occur. Every organization has its defined impact scale, for example, some have a scale of a one to ten, with ten indicating the highest impact on the objectives of the project, such as budget, quality, and schedule.
Quantitative measures of risk is conducted after qualitative risk measurement, and concerns analyzing the highest priority risks. It is accompanied with assigning a numerical rating to the risks during the development of a probabilistic project analysis. There are three ways that quantitative measurement of risk can help project managers. First, it helps them to quantify the potential outcomes for the project, and subsequently assess the probability for the achievement of specific project objectives. Secondly, it is a quantitative approach of making decisions whenever there is uncertainty. Third, it creates achievable and realistic cost, scope targets, and schedule (Goodrich, 2019).
The Impact of Cultures, Structures, and Process on the Risk Management Process
An organization’s three main dimensions include culture, structure, and process. Of these three, culture proves to be the easiest to neglect and probably the most challenging to observe and change. The advent and growth of financial assets and markets is one of the factors that have contributed to the continued evolution of risk measures. An organization with an appropriate risk culture is capable of transitioning from mere compliance to ripping benefits of the value the risk culture creates for the organization. Instances involving employee-created reputational damage is evident of a misaligned risk culture, in which adequate frameworks may be in place but are not clearly embedded in business operations. Paying attention to an organization’s culture drives decision making towards achievement major goals such as attaining the target sales and minimizing loses.
Regarding structures, although all organizations in the same industry, such as banking, have resembling organizational structures, there main focus varies. Using banks as an example, one bank may focus on individual responsibilities, while another will focus on either regional or central levels to identify and measure risks (Wallgren & Lindé, 2012). Also, measuring risk requires the utilization of four components of the risk management process. Each of these components are crucial in ensuring that managers are able to manage risks through an integrated process. An effective process should involve the entire organization (Culp, 2002).
References
Culp, C. L. (2002). The risk management process: Business strategy and tactics (Vol. 103). John Wiley & Sons.
Goodrich, B. (2019, November 19). Qualitative Risk Analysis vs Quantitative Risk Analysis. Retrieved from https://www.pmlearningsolutions.com/blog/qualitative-risk-analysis-vs-quantitative-risk-analysis-pmp-concept-1
NYU Stern. (n.d.). CHAPTER 4 HOW DO WE MEASURE RISK? Retrieved from http://people.stern.nyu.edu/adamodar/pdfiles/valrisk/ch4.pdf
Teller, J. (2013). Portfolio risk management and its contribution to project portfolio success: An investigation of organization, process, and culture. Project Management Journal, 44(2), 36-51.
Wallgren, E., & Lindé, A. (2012). The effects of organizational structure and rules on banks risk management: A comparative case study of three major banks in Sweden.