Just Do the Math!
Risk is a matter of mathematics. Simply stated, a risk represents the probability that an event will occur. A big risk identifies the size of the loss (or success), relative to the value at risk. In poker, both the probability and the size of the value at risk are represented by the “pot” of money being gambled by all players.
Management and Mitigation
In business, risk management seeks to eliminate the possibility of an adverse event. If the adverse event does occur, risk management applies techniques to mitigate the loss.
Risk Management in Outsourcing
In outsourcing, special commercial, legal and geopolitical risks add to stakes. The amount at risk can include future revenues from the goodwill of customers. As a variation on business process management, outsourcing transactions require extensive risk analysis, measurement and planning. Service providers will fail if they do not understand the enterprise customer’s need for risk management.
“Solutions” for Risk Management
Contractually, risks can be allocated between the parties. The art of contracting requires anticipation of the typical major risks and an appreciation for confronting potentially unknown material risks. In short, the art of sourcing requires an appreciation for both known and unknown possibilities. Successful practice of this art begets prudent use of several strategies and processes for risk management, mitigation and allocation.