Introduction

I shared with you my thoughts in a previous article titled “Is ISO 31000 a good choice for risk management?”  

In this article I want to share with you some brief (and I really do mean brief) details on what is risk and the risk equation. 

Check out My VLOG for this Article 

For many of my articles, I produce a short video (or VLOG) giving a quick overview.

Subscribe to my You Tube Channel and get notified or just join the newsletter (for free) and I can update you as soon as I post anything.

(Ref: ISO 31000 Vlog)

Definition of Risk

With reference to ISO 31000, Risk is defined as:

  • A combination of the consequences (I.e., outcome) of an event (including changes in circumstances) and the associated chance of something happening (I.e., likelihood or probability).

In fact, as a noun or verb, risk can be described as:

  • A situation involving exposure to danger (noun); or
  • Exposing (someone or something of value) to danger, harm, or loss (verb).

Risk “Etymology” Example

When I trawled on the internet, I found a good interpretation for the etymology of risk (by Rolf Skjong). 
 

It’s based on the story of Odysseus sailing through the Strait of Messina and is as follows:When Odysseus had to sail through the Strait of Messina between Italy and Sicily, he was in a predicament and had 2 options:

 

  1.  Avoid the monster Scylla living on the rocky cliffs of Italy – the consequence is that he and the men on his ship would be further endangered in becoming swallowed whole by Charybdis, the whirlpool off the coast of Sicily.
  2. Avoid the whirlpool Charybdis – the consequence is that he would inadvertently be pushing himself and the men on his ship closer towards Scylla, making it easier for the monster to swallow all the men on the ship.

This story might be the origin of the phrase, “between a rock and a hard place“.

The Faces of Risk

Risks can be either Internal or External facing.

Internal Facing Risks

Internal risks are those that you can predict, plan for and control (within moderation) as shown with examples in the table below.

Human
Factors can include employees, vendors and customers.
Technological
Factors include computers, information technology and business processes that rely on technology to remain cost-effective and efficient
Physical factors
Include equipment malfunctions, downtime and eventual obsolescence

External Facing Risks

Not always business-specific, external risks are those over which you have little or no control as shown with examples in the table below.

Country risk
A country will not be able to honour its financial commitments.
Political risk
The risk of political instability or changes in a country
Market risk
The risk that an investment will lose financial value due to market forces.

What Determines Risk?

Let’s cast our mind back to that risk definition:

  • A combination of the consequences (I.e., outcome) of an event (including changes in circumstances) and the associated chance of something happening (I.e., likelihood or probability).

Hence, in its simplest form, we can consider risk in the following equation format:

Risk = [Consequence] * [Likelihood]

I say “simplest” because there are variations and complex versions of the above equation, including weighting etc. 

However, let’s not do that in this article and keep things simple, for now!

In conclusion

I am sorry…there is no big fan fare, magical revelations, long paragraphs, complex pictures etc. 

It’s really as simple as that, which is:

Risk is: 

A combination of the consequences (I.e., outcome) of an event (including changes in circumstances) and the associated chance of something happening (I.e., likelihood or probability).

Risk Equation is:

Risk = [Consequence] * [Likelihood]

This is what “Risk Management Simplified” is all about i.e., removing the smoke and mirrors.

What Next?

Likelihood…a potential challenge and it’s important to choose data wisely.

But what about quantifying Consequence? That’s for another article (subscribe for updates).

References

To produce this article I used content from my book “Risk Management Simplified: A definitive Guide for Workplace and Process Risk Management“. 

You can buy the book from various international distributors. Amazon seems to be the biggest and this is the link directly to the book page [Click Here].

You can also find our eCourse offers lots of free preview sections [Check it out here]