A few posts back I wrote about how poor we all are at identifying important risks, generally giving more importance to things that are topical and dramatic rather than those that are more likely to happen and have a bigger impact.

The same thing happens in business and one suspects that even those companies that have thorough processes for identifying and mitigating the most important risks it faces may spend valuable resources focusing on insignificant risks.

This happens because managers, collectively and individually, assign unjustified probabilities and possible impacts to certain issues. Typically these will be in their department, which is not an issue until they gain precedence of other risks where the company has considerably more exposure.

Having a proper risk management process will undoubtedly clear out things that are localized operational issues, such as those that emanate from aging and unreliable plant, and place the focus on the real risks, such as the company is failing to adopt new technologies.

However, we should not be surprised that we are collectively poor at identifying risk. Research has shown that even ‘experts’ are only good at identifying risks in stable and repetitive environments which they have encountered many, many times – such as an fire-fighter almost intuitively recognizing the dangers in a fire.

But otherwise experts are hardly any better than the rest of us. For instance in a study* of 101 independent internal auditors found they contradicted themselves 20% of the time when assessing the same audit reports on separate occasions. The same goes for radiologists, clinicians and pathologists.

Dr. Virginia Apgar whose systematic approach to risk assessment has saved countless lives

One way to improve judgement is to adopt standard procedures for prioritizing issues, which has been repeatedly shown to improve judgement. The most well documented case being that of the Apgar Score, a five point scoring algorithm based on a new-born’s heart rate, respiration, reflex, muscle tone and color that once adopted as a standard procedure in delivery rooms in the 1950′,  immediately helped reduce the incidence of brain damage in neonatals.

So although there may be some kick back from managers, who will insist that weighting and scoring risks undermines their ‘expert knowledge’, such procedures, (which are embedded in solutions such as SAP Risk Management), do deliver a consistent approach that will ensure what is on a company’s  top 5, 10, or 15 critical strategic risks really does deserve their place on the list.

Paul R Brown, ‘Independent Auditor Judgement of Internal Audit Functions’, Journal of Accounting Research, 21, (1983), pp. 444-455