Measuring Costs and Benefits of Risk Management Procedures - Essay Example

Running Header: Measuring Costs and Benefits of Risk Management Procedures Student’s Name: Instructor’s Name: Course Name & Code: Date of Submission: Measuring Costs and Benefits of Risk Management Procedures Risk management procedures involve handling the high-level risks first with the ones having lower probability of occurrence being handled thereafter. Risk management is a central part of organization’s strategic management. It involves organizations evaluating the risks attaching to their activities with the objective of attaining sustainable benefit within every activity and across all activities’ portfolio1. The managers of risk in various institutions have put efforts in identifying the risks inherent in the global strategy. They have also developed policies and procedures that will assist in addressing those risks. They have also integrated risk management into each of the global practice areas and enterprise functions. Risk management is a process, which assures organizations that their objectives are easily attained or achieved. It also assures that damaging things will not occur or they will occur less frequently. It also assures an organization that beneficial things will be achieved in time. Risk measurement involves the quantification of risk exposures that takes a variety of forms including value at risk, earnings at risk, stress scenario analyses, and duration gaps. However, this depends on type of risk being measured and the extent of sophistication of the estimates. Risk management on the other hand refers to the entire process that a financial institution follows in order to define a business strategy, identify the risk, and quantifies the risk as well as controlling and understanding the type of risk facing it. Cost of risk is in a wider perspective about uncertainty in the achievement of corporate objectives. This is an issue of an enterprise involving deviations from expected gains or losses in a given time. It involves issues related to risk communication, risk appetite, and cost of strategic risk management. Cost of managing risk involves efficient utilization of capital (equity, off-balance sheet, and debt). Models measuring market risk is used to measure the risk occurrence in financial markets like exchange markets. Such models include the Capital Asset Pricing Model (CAPM)2. The aim of risk management is not to eliminate risk but to manage risk by reducing the costs that they may bring. It also maximizes the opportunities while minimizing the adverse effects of the risk. The cost of risk management procedures can be measured in short run through effective analysis of risk occurrence and achievement of strategies within an organization. The risk management process starts with setting organization strategic objectives. It then follows risk assessment that includes risk analysis and risk evaluation. Risk analysis involves risk identification, description, and risk estimation. The other step is risk reporting of threats and opportunities. This leads to decision making, risk treatment, residual risk reporting and finally monitoring. The cost of risk management can be measured through the identification of unexpected events or costs within an organization. The cost can be measured through the identification of threats occurring within the operations of organization activities including financial aspects. The financial cost can be measured with the failure to meet short-term expectations of the firm. If a firm produces products much high than the customer demands in terms of taking risk, then the surplus can be measured as the cost of risk in the short run. The cost can also be determined by the rate in which the competitors introduce their products into the markets at a lower price3. This definitely can be measured in terms of risk in the short run. The change of currency value can be a great risk for an organization invested in foreign currencies and that is willing to get some profits. However, the value currency may change in a negative way leading to an organization making loss due to change of currency value in the exchange rate market. This is usually referred to as market risk and the loss occurred is the risk in the short run. The organization had decided to take the risk of investing in exchange market that in turn fails to favor it leading to losses. Risk management procedures cost in most instances is the cost or loss that an organization gets in the short-term investments. It is because of short run investment towards trying to make profits in a short period. Cost due to short-run risk management procedures can be measured with the extent to which the malpractice issues arise due to negligence. The higher number of shocks and unwelcome surprises is a measure of how high the costs of risk management procedures are. They are a good measure that clearly shows that an organization is undergoing a lot of cost due to risk management procedures hence the need to revise them to reduce further costs in terms of shocks and unwelcome surprises. These are clear indications that an organization is not prepared fully to any risk that may come on its way costing it a lot. Improper coordination of activities and other operations is way of measuring the costs as well. When there is inefficient coordination of activities, it shows the costs that an organization is getting because of risk management procedures. In situations where they are no organized coordination of activities, then it indicates that they are no benefits attained from risk management procedures. There are long run costs of risk management procedures that require to be measured. This are determined or measured by the extent to which an organization fail to meet long-term objectives or strategies. Failure by an organization to meet certain set aims or outcomes within a given set of time can be used to measure long-term costs of risk management. Achievement of aims within the required timeframe is a way of measuring the costs of risk management procedures. When an organization does not attain and fulfill the laid out plans within the set time clearly measures and indicates how unprepared an organization is, hence the costs of risk management procedures. The threats that an organization faces in the long run as it tries to establish other operations in order to fit in the market better than competitors are as well costs. However, failure to meet the expected results or strategies is in a major determinant or measure of risk cost. In most instances, organizations set out strategies and objectives that they wish to meet within a certain period, however, it becomes difficult for it to meet those objectives or strategies due to varying forces of economy like competition or politics. Initially, it sets out a varying amount of capital and other resources to be used in the establishment. However, due to various forces, it fails to meet those set objectives. Therefore, this is a cost that it occurs due to unpredicted forces on planned capital use. This fails to bring around the expected outcomes in terms of production. The net loss in terms of expected outcome is usually the determinant of cost incurred in terms of managing risk procedures. The long run cost of risk management can be measured through the extent to which the stakeholders are not been satisfied. The stakeholders usually set out expectations that they expect the organization to meet, they invest their resources in terms of liquid capital, or other forms of resources4. They then set up aims or target that the organization will meet in return. They take the risk of investing their resources in the organization. The extent to which the organization fails to meet those aims or expectations determines the cost of risk management in the end. The organization’s stakeholders may become unsatisfied with the changes in the operations undergoing in the firm. They may feel that their resources may not result to the expected level of satisfaction. This is an effective way of determining the extent of risk cost. Failure by an organization to meet the expected customer satisfaction in terms of quality value may lead to organization failure to get the expected results. The extent to which workers are compensated due to failure by an organization gives a good measure of the cost that an organization undergoes. The amount of resources and finances an organization uses is the cost of risk it undergoes. Good risk management can be used to reduce the costs associated with compensation of workers and liabilities arising due to purchasing plans and managed care planning5. A risk manager may for example show five guests to a healthcare firm obtained $4500 each claiming they sustained injuries from falls due to damaged portions of pavement. After working with engineers to repair pavements, the risk manager estimated the risk management procedures saved the firm more than $200,000 by preventing more injuries. The cost of risk management procedure in long run is the amount of money paid to five guests due to failure by risk management to undertake necessary risk measures. The amount of cost that an organization spends or incurs due to failure of taking appropriate risk management procedures leading to long term effects. The benefits of risk management procedures can be measured in the long-run are the achievement of set out strategic plans. Risk management procedures ensure all the processes are well managed towards reducing the risks. At one moment, the organization sets out strategic plans to be achieved after some set period. The organization works out in ensuring those strategies will be achieved within the set timeframe6. After the time set lapses, the organization evaluates whether the objectives have been achieved. If the strategic plans are achieved, then the benefit costs are said to have been measured. The achievements of set strategic plans are the benefits of risk management procedures. The benefits of risk management are measured on how efficiently the strategies are attained or achieved by the organization. The risk management procedures benefits in the short run can be measured by the amount of money or resources that have been saved. This is through the adoption of effective risk management procedures. The organization sets out certain amount of money to ensure they are reduced risks that may occur. After fully implementation of the set strategy or practice, the organization then calculates the amount of money it saves because of better control. In the short run, the organization controls the cost that it would have incurred because of better management of risk. The benefits in the short run are also calculated in terms of reduced or minimized disruptions in the operations of an organization7. Effective risk management usually results to minimized disruption due to failure of operations. The more the disruptions because of poor risk management procedures, the higher the cost it impact into the organization. The benefits are as well measured in the way effective resources are utilized. Maximum utilization of resources in an efficient way is a good measuring way of how the resources are utilized in the short run. Failure by an organization to utilize resources effectively results to ineffective operations hence disrupting the arranged plans making an organization incur some losses. Therefore, when an organization is able to achieve better utilization of resources, it is a clear measurement of benefits incurred. Fewer shocks and unwelcome surprises in an organization is another way of measuring the benefits of risk management procedures. This is assuring way of determining the extent of benefits that risk management procedures is providing to an organization. The fewer the unwelcome surprises and shocks are, the higher the benefits in the organization. The benefits in the long-run is measured in terms of how the confidence of stakeholders is maintained. The better the achievement of risk management procedures benefits, the higher the confidence of stakeholders. The enhancement of shareholder’s values through minimized losses and maximized opportunities measures the benefits of risk management procedures. Minimized opportunities and increased losses is a clear measurement of the costs incurred by the risk management procedures. Therefore, the benefits of risk management procedures can be measured by the level of stakeholders’ confidence. Reassurance of stakeholders is a good measure of benefits achievement by the organization8. Benefits in the long-run can also be measured by how an organization is able to grasp the new opportunities arising. The extent to which an organization is capable of utilizing various business opportunities arising is one way of measuring the benefits of risk management procedures. It clearly indicates that an organization’s risk management procedures are beneficial. Failure by an organization to utilize arising chances is an indication that its risk management procedures are not beneficial at any moment. Capability of an organization to attain long term set strategies and objectives is an assuring way of measuring the benefits of risk management procedures9. The achievement of the set strategies is a clear measure of how benefits are attained. Failure by an organization to achieve the strategies is an indication that risk management procedures are costing it. The achievement of beneficial things within an organization is a way of measuring the benefits of risk management procedures. The higher the number of valuable achievements by an organizations with time, the higher the benefits. Evaluating continuous improvements by an organization is another way of measuring the benefits of risk management procedures. When an organization is able to have continued improvements in its operations, then this is an indication that its risk management procedures are beneficial. When they are no continuous improvements in the organizations’ operations, this measure how costly the risk management procedures are. Increased knowledge and understanding of risk exposure is way of measuring the benefits of risk management procedure. Increased knowledge and risk exposure understanding is a clear way of indicating how the benefits are attained within the organization10. However, these benefits are measureable in the long-run or after a long period of time. They have to take time in order for an organization to realize that they are benefits that are being achieved from risk management procedures. Risk management procedures are the steps that an organization has laid out in ensuring high-level risks are dealt with first. The ones with lower probability of occurring and with less impact follow11. Organizations require risk management plan that details procedures used as solutions. Risk management procedure has the main purpose of defining a method for risk management that is applicable to efforts of formal risk management. Good risk management provides a positive assurance from business activities and administrative functions to senior management team and eventually to the governing body. Risk management procedure involves various steps that include identification of risk, assessment of risk, and risk mitigation through risk reduction, risk mitigation through impact reduction, contingency planning, and practical actions by business managers. The procedures include strategies and policies, internal compliance and internal control that have been approved by management and boards of various organizations. When an organization faces high cost because of inefficient risk management procedures, it should improve and monitor closely the effectiveness of risk management procedures. 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