Identifying and Managing Risks

Risk management is a process of evaluating the possible risks attached to the planned activities, which is necessary for any business organization. This paper presents a discussion on the techniques devised by Dr. James Kallman and Professor Georges Dionne.

Kallman (2005) considers risk management a part of the business decision-making process, which entails a wide number of business operations, in particular planning, organizing, controlling, and monitoring the allocated resources. The process demands the foresight of the risk manager on the target path in operation. Risk managers are expected to make a decision relating to the available resources and relevant to the organization's goal. The decision-making process requires through in-depth analysis, evaluation of alternatives, and sufficient capacity of the organization.

A well-planned risk management system provides the guidelines for realistic actions to take during the ongoing process of the plan. Risk managers actively participate in overseeing the possible outcome required for flexibility and dynamic environment. Furthermore, they are expected to refrain from taking any haphazard action and handle the situation proactively to protect the organization from unfavorable results (Kallman, 2005).

George Dionee’s financial risk management strategy suggests taking radical and realistic actions in approaching the target goals, which requires re-aligning the objectives according to the target actions to reflect the changing conditions (Dionee, 2009).

This technique ensures that the actions taken by the changed situation will not endanger the achievable target. The goals are set at the planning stage, but in case any changes of the situation happen, some actions may go against the plan to protect the larger interest of the organization. According to Dionee (2009), a pure risk is the combination of the probability of the incident and consequences, which is normally negative.

He added that uncertainty is less precise because the probability of an uncertain event as well as the consequences are often unknown. Kallman suggests that if one of the parameters such as variance is not within the desired then, it is wise to spend the resources to align the parameter with the desired range.

The risk affects the creditors and shareholders of the financial institutions, which justifies the need for regulations in financial institutions. The agents are paid for the risk they take and have access to monitoring instruments giving useful information. Kallman and Dionee both recommend using various hedging and derivatives tools for speculative risk management. However, Dionee has emphasized more on the safe projects when the situation is risky or uncertain, whereas Kallman deems it wise to add profitable options to a product which may enhance the desired revenue, while in case of pure risk, the probability of loss is too high, and therefore, the risk manager should spend resources on loss prevention project.

Dr. James Kallman identified some costs of risk to be financed such as administration of risk management, loss financing, and risk control. All overheads for running risk management departments such as rent, salaries, consultation fees, and supplies are included in administration cost. The core target of risk management is to reduce the chances of loss and protect the valuable resources (Kallman, 2005).

George Dionee (2009) holds a different risk cost tenet. In his work, the author mentioned various risk costs such as financial distress cost, risk premium to partners, expected income taxes etc. Though both authors of risk management differ in various aspects, the main purpose of the risk management is to serve the organization to reduce the wastage of the resource and ensure the optimality of the business operations.

The optimal state of the assets not only improves the productivity, but also lowers the chance of loss. Therefore, the scholars of risk management suggest that prevention is the most powerful solution to controlling risk. The risk manager must decide whether to spend scarce resources when the risk level is accepted. Preventing the chances of losses is an important step for value creation and achieving goals. Dionee (2009) mentioned the relevance of moral hazard while controlling the risk through hedging and insurance when controlling the risk is less beneficial than bearing it.

Other significant factors to be considered in risk management include country and business risks. Importantly, the financial and interest rate risks include the portion of the country hazards, and unsystematic risk partially includes business perils.

It can be inferred that though there are some differences in a notion of preventing the resources from damage or protecting the assets, the basic principles of managing risk are quite similar. Both authors recommend accepting the risk when it is assumed that the organization can bear it. Though there are differences in positions on the issue of costs needed for managing risk to protect the resources, Kallman and Dionee mentioned quite similar techniques of preventing losses. Both authors consider operation management one of the most powerful tools used for the risk manager. Many experiences prove that proper maintenance has a higher correlation with fewer losses, and therefore, it can be deemed rational to agree with the author’s recommendations.

References

Kallman, J. (2005). Managing risk. Risk Management, 52(12), 7-18.

Dionee, G. (2009). Structured finance, risk management and the recent financial crisis. The Journal of RiskInsurance, 31(4), 463-492.