Risk Management Software Can Help Manage Risks

Risk management software helps you manage risks not only by providing facilities to do by different kinds of computations but also by directing your attention to risk factors. Let us start with a careful look at what "risk" means in the context of business.

Many business decisions are made on the basis of uncertain assumptions. For example, you decide to invest in a new plant on the assumption that selling prices of the plant's products will not fall below current levels. However, prices can indeed fall if new technologies make it possible to make the product at lower costs.

Future is uncertain and business decisions made on the basis of what will happen in the future are thus risky. That is the essence or risk in a business context. Let us now see how this risk is "managed".

How Do We Manage Risks?

The starting point is to spell out the assumptions about future events that we make. In the case of the new plant we mentioned above, the major assumption related to the future price of the plant's products. Managers are aware of such assumptions and can indeed list all future-related assumptions if they focus their attention on it.

Risk management software forces them to list the risks and assess the probabilities of those risks materializing. This probability can be expressed qualitatively as Low, Medium, High, etc or quantitatively as 10 percent, 50 percent or 80 percent.

The focus now turns to identifying the impact of the risks and the costs of each. It is likely that each risk has different kinds of impact and all these impacts are identified and listed. Their costs are also carefully worked out. Thus, the impact on business profitability is estimated under the assumptions that the product prices might fall by different percentages.

You select the most likely scenario based on your managerial experience in the field, and start thinking of counter actions to eliminate or minimize the risks. If the risk of a price fall is significant enough, you might decide to go for leasing a new plant instead of buying it. Or you might enter into some hedging transactions to benefit from a price fall to counter the business losses you will suffer from it.

Now, counter actions also have costs. For example, leasing can mean paying a higher amount for the use of the asset than buying it. So you estimate the costs of the counter actions and compare these with the costs of the risk. If the counter action costs are less, you decide to go ahead.

To illustrate:

• You estimate that a certain risk can cost you $10000 if it materializes
• You determine that by taking a certain action, this cost can be reduced to $3000, i.e., a saving of $7000. You also estimate that taking that counter action will cost you $2500.
• You thus save $7000 by spending $2500, i.e., generate a return of 7000/2500, or 2.8.

Risk Management Software Facilities

Risk management software will typically offer facilities that make it easier to:

• List the risks associated with a business decision
• Work out "risk factor" weights based on the probability and cost of the different kinds of impact arising from the risks
• Work out the costs of different counter measures to counter the risk impact
• Compare the costs associated with each risk and the costs of different counter actions; and select the best actions
• Check the actual results of the actions and find how things actually turned out

The feedback resulting from the kind of monitoring mentioned as the last step above is extremely important. In many cases, it will be possible to modify actions for better results if you get timely reports on the results of actions. Additionally, your risk management skill can improve from the experience.

After all, risk management software is only a tool. It is the human inputs from experienced managers that provide real value. You have to identify the risks, estimate their impacts and costs, brainstorm counter actions, compare their costs against the risk-related costs and make decisions.

The function of the risk management software can be seen as directing your attention to relevant issues and offering different kinds of timesaving facilities.