The Two Headed Coin

APPENDIX IRisk Transformation and the Need for an Integrated Risk Approach

We have stated that risks cannot be eliminated, are interconnected, and that management must determine which risks to keep and manage. This results in the need to manage risks from an integrated point of view.

The oft-stated, standard risk management techniques include acceptance, mitigation, avoidance, and transference. The first two techniques recognize that risks can be central to a business's strategy and operations. The key in acceptance is to fully understand, monitor, manage, and get paid appropriately for the risks. Mitigation focuses on reducing the risks to manageable levels that do not threaten the business sustainability in the normal course or foreseeable stresses and still requires the abilities noted for acceptance. For both, it is important to follow the risk process.

The final two techniques, avoidance and transference, imply that risks can be eliminated or dramatically reduced. On the surface, this may appear to be true, but a deeper examination shows that the risks to the business are transformed, not eliminated.

Avoidance seems to be the most likely to eliminate risk. A firm can avoid the risks associated by entering a new market, developing new capabilities, or adapting a new technology or process, but in doing so, the company also eliminates the upside of each of these. The cost of loss avoidance is the loss of revenue opportunities and risk avoidance transforms the risks of these ...