Risk is a probability or threat of liability, damage, injury, loss or some other unwanted occurrence that takes place due to either internal or external vulnerabilities (Stonebumer et al., 2002)Background
The risk is inherent in all the projects whether is it related to construction, information technology, pharmaceutical, automobile, power or any other sector. For all the project activities it is considered to be normal situation of reality. In all the cases, a risk is associated with a negative occurrence of an event which may or may not happen. There are two main characteristics for defining risk for any possible negative potential happening, these are; a probability of occurrence, that is, whether some event will take place in future or not and repercussions of occurrence, that is, the Intensity of the event’s impact (Emblemsvag and Kjolstad, 2006). If the management is unaware of the probability of such activities occurring, the situation is associated with uncertainty and the risk undefined. There is a general misconception in the minds of the people that risk is a problem, but it is not so. The risk is not a problem, rather it can be said that risk is a level of threat that surfaces because of future difficulties and the potential problem arises due to the events which have already occurred (Khatta, 2008).
It is essential for the management or an individual to have adequate knowledge on the existing and anticipated risks so as to gain an opportunity to mitigate the uncertainties. Regardless of the fact that management has tried to manage the risk or not, it will occur. Further, whether the project managers acknowledge or not, the risk will crop up. There are nil chances that risk will not transpire because management thinks so or because they are divergent to the regulations, procedures and policies of an organization (Brent and Labuschange, 2007). One can’t categorize risk as good or bad because if dealt properly, one can convert it into an opportunity and if neglected or not handled properly, it may result in disaster. Thus, it can be said that two elements which always accompany risk are progress and opportunity. If an organization wants to achieve consistent progress, it is essential for it to understand, handle and mitigate it to acceptable levels (Rahman et al., 2013). Thus, it can also be said that risk is a probability or threat of liability, damage, injury, loss or some other unwanted occurrence that takes place due to either internal or external vulnerabilities and if treated proper, will provide a company or a project an edge over other, and if neglected it may result in complete failure of the project.
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Continuous innovations in various fields of business have significantly helped organizations in smooth operations, but these developmental activities came hand in hand with various kinds of risks. Thus, in the present business environment, risk management has gained tremendous popularity within organizations and firms. Like other management activities, risk management supports a firm in attaining its goals and objectives (Raz et al., 2002). It assists organizations in the optimal allocation of resources and in a decision-making process. In other words, it can be said that risk management helps organizations to undertake to plan in order to effectively carry out its productive activities. For every firm, the future is uncertain; No one can accurately predict it. Risk management is a unique tool developed by companies to focus on uncertainties that companies may have to face. Uncertainty can be regarding the probability of occurrence of an event, uncertainty in the value of the company due to repercussion of that event. Uncertainty can also arise due to large variations in the normally accepted range (PMI (Project Management Institute), 2004). The figure below shows a general risk management framework which starts with planning and identification of risk, involves risk assessment and risk response, handling and terminates with monitoring and control.
Risk management system is defined as a group of certain elements of company’s management system that basically focuses on managing risk. Risk management system is the one of the main components of a firm’s management and is linked to its structure. The main elements of a risk management system are policies, decision makers, resources, strategic planning and unique corporate environment (Chapman and Ward, 2003). Here are some of the main functions of risk management system:
The risk management is adopted by the management for various projects so as to recognize and measure different kinds of risks and then selecting, developing and implementing measure to eliminate or mitigate the risk and its consequences. In other words, it can be said that risk management is a process and not a sequence of various events. The effectiveness of risk management depends on the planning, timely identification and assessment of the risk, incessant monitoring and reassessment, timely adopting of remedial measures, communication, recording and synchronization of all the activities (Darnalland Preston, 2010). There are many ways in which risk management can be structured, but the most common elements of all the structure are planning, evaluation, handling and monitoring. All these elements are interlinked with each other, that is, once the planning takes place, remaining elements are designed accordingly (Davis and Jarvis, 2007).