The role of software in risk management

Today there is a heightened appetite for risk management due to global economic circumstances. But risk management has always been an intrinsic aspect of business to a higher or lesser degree. However, in the current technology-led business environment, the use of software to effectively manage risk makes logical sense. It provides a level of sophistication that the traditional processes simply cannot offer. Let me explain why.

Risk management essentially involves three stages – identification, quantification, and the on-going management of risks. In reality, these stages are not completely distinct from each other, with each stage influencing and informing the others. For example, an initial quantification of risks may lead to the conclusion that some of the identified risks are in fact not serious enough to warrant further consideration, or that the original description of the risk was not sufficiently precise for meaningful risk management measures to be put in place.

Each of these stages can benefit from the use of supporting risk modeling software. For instance, Microsoft Excel can be used to create a risk register, i.e. a database that records the risks identified, the assessment of the likelihood and impact of each of these risks, the mitigating actions that have been planned, and the assignment of responsibilities for these actions. However, there are many other software tools available, each designed for a specific purpose and focus. To illustrate, enterprise-wide risk management software focuses on the creation of integrated and holistic risk management systems, whereas Monte Carlo simulation and decision tree software place their emphasis on enhancing the quantitative analysis of risks.

The selection of the appropriate risk analysis software should involve very careful thought. The right decision can lead to a very effective implementation, whereas the wrong decision may result in a large amount of wasted investment.

There are some key considerations to bear in mind when selecting the risk modeling software. Choosing software based on how many staff will genuinely be required for the day-to-day risk management process is crucial. It is easy to select software based on the ideal situation that there will be a wide staff involvement in the risk management process. In reality, this may not be possible, potentially resulting in a cumbersome and inflexible solution being chosen over a more stand-alone and flexible application.

Similarly, knowing the level of risk quantification required is important. In fact, best practice risk management now involves the use of quantitative techniques, often using Monte Carlo simulation. When correctly conducted, the process of quantifying risks is rigorous and structured, can expose hidden or biased assumptions, as well as provide a more solid rationale upon which to base the major decisions.

Finally, determining the extent of on-going risk management needed for your business can assist with software selection. 

Needless to say, any software application will be most successful when used by appropriately trained and motivated staff, and when used as a supporting tool within an overall risk management process. Software is not a replacement for process.

Craig Ferri
EMEA Managing Director of Risk & Decision Analysis

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