Sunday, 22 November 2009

Responding to risks: Tolerating risks

Your assessment of probability and/or impact may lead you to the conclusion that is is acceptable to tolerate a risk.  Such a decision is likely to be based on one (or both) of these two perceptions:
  • the probability of the downside is so low that it can be ignored
  • the impact of the downside would be so insignificant that it can be ignored.

If you are satisfied that one or both of these is true, a decision to tolerate the risk may well be the right one.

By making the choice to tolerate a risk, you are basically saying that you will do whatever is necessary to recover from a downside when it occurs, but nothing to prepare for it in advance.  However, this decision clearly rests on your understanding of probability and impact.  If you cannot be certain of probability, you may not be on safe ground tolerating the risk of a downside.

We have seen how impacts can often be quantified in financial terms, so that they can be compared to each other.  If you tolerate a risk, the business needs to be financially prepared to sustain the impact of its occurrence.

For example, if there is a risk that one in every hundred units made in a factory will be defective, but changing the manufacturing process is prohibitively expensive, the risk may be tolerated.  But the business needs to be sure that the waste resulting  from this decision to tolerate a risk will not damage its profits.  A decision might be taken to increase the selling price of the item, or sacrifice some profit margin, to offset the cost of the risk occurring.

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