What are the underlying concepts of Risk Management?


Risk management is an ever-evolving process. The traditional approaches of risk analysis consider only the potential magnitude and frequency of an adverse outcome. So in a broad sense, it usually considers the potential loss associated with an initiative or a certain workflow. The classification of risk has traditionally been from a qualitative point of view also. However, with innovation and sophistication of traditional industrial and financial system, the approach toward the risk management has transformed to a quantitative outlook and it will be in continual evolution for times to come. Businesses now consider risk not only as a loss scenario associated with a project but also as a potential opportunity for growth in a project. Thus risk management involves not only safeguarding of assets involved in a strategic approach but also leveraging the potential risk information to maximise growth opportunity.

We will touch upon the basic idea of risk and its classification. From there on we will further delve into the concepts behind the risk management models.

What is risk?

Risk is basically a consequence of a potential loss event over a period of time. It is a function of – probability of occurrence of an event and the potential magnitude of the event. OHSAS (Occupational Health & Safety Advisory Services) defines risk as the combination of the probability of a hazard resulting in an adverse event, and the severity of the event.

Classification of risk

Risk can be classified in various ways according to the effect it carries in various industry. It can be classified in the following way

  1. Assigning a level according to the chance of occurrence and the severity,
  2. Segregating source of the potential event and then assigning risk level,
  3. Segregating according to the operational category and then assigning a level.

While devising strategy and project planning, the risk scenario can also be studied in terms of prior historical knowledge and statistical models of disruptive events or the lack of those.

Concept behind Models for Risk Management

Every industry and businesses build up the risk management model according to the unique operating scenario and the vertical under consideration. So while there are several models which one can refer to like CalTOX, DREAD and others, but they are developed with particular scenarios and challenges faced by those businesses. So it makes sense to study the underlying concepts behind the established models and then internalise according to your business needs.

Identify the risks and pain points

Source : PWC Sharpening strategic risk management
Source : PWC Sharpening strategic risk management

When you are starting building your own model the first step is to identify the risk. This step is critical in setting up the correct framework in place and ensuring that the risk management strategy, delivers. This step requires sound business and domain knowledge since the assumptions that will be made needs to be well thought out. Historical facts and well-defined data points provide solid premise to the assumption. Please also consider the inherent risks in your system and the risks which are likely to appear in the later stage of the project.

Fortify your model with active insights

Now that we know the risks associated with an initiative, in the next step, you can rope in the active stakeholders in the process and get valuable insights from the feedbacks. This step is essentially building up a contingency plan in case of any aberrations. The feedback loop provides with causal input and at the same time validation mechanism. The contingency plan should consider effective fallback options so that the strategic initiative or the project plan moves as efficiently as possible.

Build, Measure and Analyse

Risk Management Concepts

In the third step, we will put in the risk framework in action. You will test the theoretical model with statistical tools and reliability studies. Measurability of the effect of potential risk event occurrence is of paramount importance. The step will essentially test the risk events in the strategy model and analyse the effects with statistical data points.


The steps discussed above leverages the output from the previous step in a closed feedback loop. Each of the steps is a prerequisite to moving on to the next one. Your business can build on the concepts discussed here to create the best-suited framework serving your unique business needs.

V-Comply has built an effective and a powerful cloud-based too. It enables you to  classify risks and prioritize your task according to the risk classification. With a simple assign and remind function , V-comply ensures that your business is never behind the curve. The tool has been developed to address the major pain points in risk management. Moreover, it helps in the area of business strategy , changing compliance and project management.

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