Risk Management 101

Risk Management is the process through which companies and organizations predict, assess, and reduce the possibility of a negative event occurring when a major decision is made. Risk managers aim to minimize any negative impact on a company’s assets, profits, or data that could occur in the event of an unexpected threat to any of these aspects. Threats and unexpected challenges can range from financial uncertainty to legal liabilities to natural disasters. To a significant extent, every business faces the risk of harmful events occurring, whether these are events are fully preventable or not.

In developing a comprehensive risk management plan, a risk manager considers what, specifically could go wrong (such as the loss of a client relationship due to an administrative error), the potential impact the harmful event could have on the company (such as the loss of assets), and what steps could be taken, proactively, to reduce potential risks. This process begins with the establishment of context and the determination of criteria used to evaluate potential risks, and concludes with continuous risk monitoring and communication with stakeholders that would be affected by the risk. This also often involves the purchasing of insurance.

One of the most common quantitative methods through which risk managers measure risk level is standard deviation. In statistics, standard deviation is the degree to which, for example, the value of a specific home in a neighborhood, differs from the average cost of a home in that neighborhood. Thus, standard deviation, within risk management, is used to predict the likelihood that a decision, such as hiring 25 new employees or investing in a new product, will yield the desired results, based on the results of previous, similar decisions.

Types of risk and the unpredictability of certain factors vary significantly depending on industry. For example, when developing a new product, or a new version of an existing product, there is always the risk that the product will not yield profits as expected, which in turn could lower the company’s stock value. It would be the responsibility of the company’s financial risk manager to develop a plan to minimize the long-term effects this could have on the company’s overall value and potential for growth.

A second example would be the decision to have a celebrity represent a company’s brand or serve as a spokesperson. Since a celebrity’s popularity over time is never fully predictable and often fluctuates significantly, depending on the popularity of movies, tv shows, and other forms of entertainment in which they appear, the extent to which having that individual represent the company increases the likelihood that consumers will buy its products, is never fully predictable.

In both of these examples, the expertise of a risk manager lies in thinking critically about independent variables that affect a company or organization’s success and competitive advantage. Regardless of your major, pursuing an internship in risk management is a great way to gauge your interest in serving in that capacity professionally. Take a risk on a risk management internship!

By Eli Heller
Eli Heller Career Coach Eli Heller