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What is your personal appetite for risk? And could this impact your job?

I am pleased to be able to bring you this article by Ian McGregor, a well-known leader, professional, and consultant in the Risk Management field. Dr. McGregor is a true expert in the field. This is really two great articles in one; here he covers some important risk management fundamentals and if you click on the link within the post, it will take you to another article by Ian on how to determine YOUR risk profile. For more information, Dr. McGregor can be contacted at mcgregor@sportrisk.com. We are pleased that we will be able to occasionally post more risk management articles from SportRisk, his risk management newsletter. Doyice

By Ian McGregor, Ph.D.
President, SportRisk

0982-RiderKOsKing9148.jpg: U.S. Army World Class Athlete Program martial artist Sgt. William Rider delivers a knockout kick to the ribs of Californian Cory King with 1 minute, 3 seconds remaining in the second round of their featherweight semifinal match at the 2009 U.S. National Taekwondo Championships July 5 at the Austin Convention Center in Texas. "In my 25 years of Taekwondo, I think that’s the second time I’ve ever seen a body shot knockout, and the first from a roundhouse kick,” WCAP Taekwondo coach David Bartlett said. “I have to give thanks to the strength and conditioning program of Master Sgt. Mike Mielke.” Photo by Tim Hipps, FMWRC Public Affairs

Personal and professional risk-taking

On a daily basis we all take personal risks – crossing the street, investing in the stock market, playing ice hockey, driving a car to work. Some risks may be greater than others (e.g. buying a house), and some can have very serious consequences (e.g. falling during a rock climbing trip).

We all fit somewhere along a broad spectrum of risk taking – from the high risk takers (big appetite for risk) to the low risk takers (more risk averse). And in general, if you display a certain risk tolerance in one sphere, that appetite/aversion behavior will likely be demonstrated elsewhere. It’s who you are.

So what has this got to do with your job? Essentially, your personal appetite for risk will impact your professional life by shaping your decision making. So for example, if you are a Sport Clubs coordinator and have a relatively low appetite for risk, this will likely impact how you manage the Sport Clubs program, and which types of Sport Clubs you are more comfortable with (either keeping or adding them). Alternatively, having a higher risk appetite means that you’ll likely embrace higher risk Clubs, and take more risks when deciding whether to add new Clubs.

Which is better? The answer comes later in article…

The need to assess risks

Irrespective of your personal appetite for risk, from a department perspective all professional staff need to objectively assess the risks inherent in the programs and facilities they are responsible for.   And to be able to do this effectively, there needs to be a way to factor in the concept of ‘risk appetite’.

Ways to assess risk

So how do you measure and assess risk i.e. how do you determine the risk profile of an activity? There are two simple ways to look at this: Qualitatively (Risk Matrix) or Quantitatively (Risk Rating).

In the Qualitative approach, you adopt a more ‘intuitive’ or ‘gut-reaction’ approach to measuring risk. The Quantitative approach attempts to ‘put a number’ on the level of risk by calculating a risk rating. (For a more detailed description of how to determine ‘Risk Profile’ go to page 2 of: http://ow.ly/70tu30335cC )

The Risk Matrix (or Probability vs. Severity Grid) is a simple tool that can help you determine high and low risk. You determine in which quadrant an activity belongs (e.g. rugby, climbing wall, basketball etc.) based on your perception of how risky the activity is.

While this risk classification system can be quite subjective, it is the simplest approach and you often end up with an assessment of risk level that is quite sufficient for your needs.

In the more quantitative Risk Rating approach, you assign actual numbers to Probability (P) and Severity (S). Hence a probability of 1 means an injury is unlikely to occur while 5 means there is a high probability it will occur. A severity of 1 would signify minor injury or damage, while a 5 means that major injury or damage is likely.

Irrespective of which of these tools you use to assess risk, their weakness is that neither tool factors in the risk appetite of the person conducting the assessment. Hence using the Risk Rating approach, a person with a higher risk appetite is more likely to end up with a lower risk score than someone with a more risk averse disposition.

Factoring in Risk Appetite

How do we do this? Simply stated – you make sure that a single person (e.g. the Sport Clubs coordinator) does not make the final call on how risky a program or facility is. And this might be where the Risk Management Committee comes in by providing a broader perspective on the issues. (If you don’t have this committee, then a small group of staff or the senior management team would work).

So what would this look like?

Let’s stick with the Sport Clubs example. If the assigned task is to do a risk assessment of all Sport Clubs (from a ‘high-risk/ low-risk’ perspective), then a small staff group should tackle the issue. Since the ‘Risk Rating’ tool measures risk more quantitatively, it is recommended for this task.

Each person in the group would rate a Sport Club (or the individual components of a Club e.g. travel, physical contact) and come up with a risk rating number. These rating numbers would then be shared with the group, and a discussion initiated on how each person arrived at their number. This is when you’ll see how people’s different risk appetites impact the scores. And through the interactions of healthy group discussions, it should be possible for the group to achieve consensus regarding what the actual risk rating should be.

While recreation departments need both risk takers and risk avoiders, the real value of a group approach to assessing risk is that it helps to balance out the two extremes in the risk appetite equation.

At the end of the exercise, the group will likely agree on a final risk rating (often referred to as the ‘residual risk’). The next question for discussion is: can we manage this residual risk or is the risk rating still too high? Once again, it is critical that a balanced approach be taken to answering this question, to ensure that opinions of staff members with a higher risk appetite are balanced out by staff adopting a more conservative risk management approach.

On a final note, a risk assessment exercise like the one described above is only the first step in the overall risk management process. By first obtaining a more detailed (and therefore clearer) picture of the department’s higher risk programs and facilities, you are then able to focus your attention on these high-risk areas and ‘not sweat the small stuff’.

The real heavy lifting starts when you tackle the next step, which is to perform a more in-depth look (essentially a risk audit) on what you are actually doing to manage the risks in those programs and/or facilities for which you have responsibility.   While there are a number of options on how to do this (including an in-house audit process), it is much better to seek professional help with this. That way, things don’t get missed!

As a starting point, check out the ‘Best Practices Risk Assessment Tool’ reported in this Newsletter or check out the link www.sportrisk.com/best-practices.

Understanding that we all have different risk appetites goes a long way in achieving department consensus around its overall philosophy and approach to Risk Management. While inclusion of higher risk programs may be important in attracting or retaining clients who enjoy these activities, it is important to ensure that the amount of risk being assumed by the department is reasonable and manageable – and does not create undue liability exposure. Of course, the danger at the other end of the scale is that the department plays it too safe and alienates the risk seekers.

Either way, a balanced approach to assessing and managing risk is the way to go.

Photo Credit: Thanks to Tim Hipps and the U.S. Army via Flickr.

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