The five “T”s of risk management

Few years ago I read a brief article issued by an oil company about risk management[1].

I found it so illuminating that I decided to develop my own version of a tool which over the years has proven very effective when dealing with risks, no matter in which context.

Here is my take:

We live in an uncertain universe and it would be foolish to waste time to think how to eliminate “risks”. The most important thing you can do is to manage risks so that the impact could be mitigated in case the “risk” event occurs. It is important to structure your course of action in connection with your appetite for the risk.

How can you do so?

Think of 5 “T”s. in regard to a certain unfortunate event you can decide to

1.     Take the risk

2.     Treat the risk

3.     Transfer the risk

4.     Terminate whatever you are doing

5.     Take a tea (or Take it easy)

Let us use a concrete example to explain the concept. If you happen to live in Naples who is a large city in southern Italy build very, very close to the Volcano Vesuvius, and want to buy a house you know that you are exposing yourself to a certain risk. Vesuvius is a dormant volcano that has been quiet for a while, but some day, as it did in the past, will erupt again causing destruction.

The risk certainly exists and cannot be eliminated. However you can decide to:

1.     Take the risk. You will buy your house and won’t care much about any eruptions.

2.     Treat the risk. Yes you can buy the house but it will be an anti seismic building close to a motorway, allowing you to leave quickly if anything bad happens.

3.     Transfer the risk. You may decide to transfer the effect of an eruption by taking the appropriate insurance (assuming you find one) and indicate as a beneficiary someone living far away, whom you like very much.

4.     Terminate. If your appetite for the risk is low, you may decide to buy your house somewhere else (which will deprive you from the pleasure of living in the second most fascinating and beautiful place on earth[2]).

5.     Take a tea (or Take it easy). When looking at the risks around you, if you are willing to do an intellectually honest job you should consider leaving politics and emotions out of your risk management structuring. Once you make your considerations, the itchier is your issue, the better is to let someone independent, external to revise your ideas.

I used my extensive tool in contract negotiations and when addressing Boards for difficult decisions many times and I was surprised to see how successful, calming and rewarding a structured approach can be.

As a final input: in Chinese the word for "crisis" (危機) is “frequently invoked in Western motivational speaking as being composed of two Chinese characters respectively signifying "danger" and "opportunity"”. (Wikipedia)

Even if this is etymologically incorrect, I still like the idea.  

Should you need advice or support in these matters, please do contact me.

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[1] I think it was Shell but unfortunately I can’t find anything on this topic attributable to the reputed oil company.

[2] The most fascinating and beautiful place on earth is obviously Salento, the area I come from......