An organization’s approach to risk is usually to either avoid it at all costs or embrace it and let it take the lead in decision making. An accurate understanding of risk management is essential for companies and tech departments to learn to harness the power and opportunities made available to them. Knowing the difference between risk appetite, risk tolerance, and risk threshold is vital for successful decision-making, efficient use of resources, and moving forward confidently.
Risk appetite refers to the approach an organization has when it comes to taking a risk to achieve business goals. In other words, how ready is a business prepared to take a chance to gain a 5 percent increase in profits? Will they be willing to take a risk to attract 10 percent more customers?
It is important to understand a company’s risk appetite for two main reasons.
- Regulators want to know what type of risk management is being used at the company as well as the process of assessing risk at the organization.
- Understanding the risk appetite helps decision-makers within the company know how much risk they should take when faced with an opportunity to do so.
For CIOs, knowing their organization’s risk appetite can help them understand how to use limited resources well, what type of new technology would be welcome at the company and how to strategize well to build a strong tech department.
There are different levels of risk that companies can withstand. This is called the risk tolerance of the organization. It refers to the maximum amount of risk that the company could take out without serious consequences. Unlike risk appetite, which is an attitude towards taking risks, risk tolerance looks at specific risks and how much is acceptable by the organization. For example, the amount of disruption a company will tolerate in the case of a cyber-attack or malware.
CIOs need to be aware of the risk tolerance in different areas of the business. While an organization may have a moderate risk appetite when it comes to risks that could put them ahead of competitors, the organization’s risk tolerance may be relatively low when it comes to reputation. The reason for this difference is that the company may see their reputation as essential to their business.
Understanding where the risk tolerance is low helps CIOs know where to tread cautiously when it comes to risks and new technological developments. It may also be helpful for CIOs who want to take some risk to develop plans to mitigate it in areas of low-risk tolerance. Doing so can help get more of the leadership on board with the change.
The point at which risk becomes unacceptable is the risk threshold. When risk passes the tolerance level, there are two options left:
- Use technology to bring the risk exposure down to a more acceptable level
- Take and manage the risk through the organization’s risk process
It is essential for CIOs and members of the tech department to understand the organization’s risk threshold. Equipped with this knowledge, they can make the best decisions that fit the company’s willingness to take and manage risk. Moving a company forward with the right technology initiatives is a balancing act, and CIOs need the correct understanding to guide the process.
Benefits of Effective Risk Management
With a good grasp of risk appetite, risk tolerance and risk threshold, CIOs will be well-positioned to make the best choices when it comes to using company resources and finances appropriately. It can also help members of the tech department focus their time and energy on projects that are within the scope of an organization’s risk tolerance and appetite.
Risk management is an excellent strategy and approach for CIOs to use when assessing problems with the department. There are times when the issues do not fall outside of the risk threshold and therefore pose little threat to the organization. This risk framework can also help CIOs communicate with other business leaders about potential projects or concerns using language that other managers will clearly understand. Having productive conversations is a direct result of understanding risk management.