Types of Risks 5
Sources of Risks 5
Limitations of Risks 6
Methods of Minimising Risks 6
Ranking Risks 9
Risk Management in Telecom Industry 10
Over the past few decades, the definitions of risks have evolved taking it to an altogether new level. In this paper, we will try to critically analyze risk as well as take a look at how risk management has emerged in this era. Since the issue of risk management has become an increasingly important factor in every company's business operations. Such perceptions remain prevalent in the labor market whose share of GDP has registered steady growth within the global economy and at the global level. Transparency and other specific aspects of services compared to physical products require a different career path in the field of risk management, especially when it comes to financial-strengthening services such as telecommunications. This type of service is provided mainly to large companies that need to pay attention to the risk management process, from discovery, risk assessment to selection and implementation of the appropriate risk management method. Risk management strategies include a group of risk management strategies and a group of risk-recovery strategies through risk management or insurance. All of these methods can be applied to the broader set of personal, property, and credit risk encountered by companies and employees in the communications sector. This paper will try to take a critical insight into the risk management techniques, how the risk is evaluated via various methods and how a company in the telecom sector can minimize the level of risk by using such techniques.
The simple definition of risk is- ‘it is the chance or the probability of negative damage, threat, loss, injury and any other bad happening or occurrence which can take place but which can be taken care of with certain precautionary measures and steps if undertaken’ (Business Dictionary, n.d.). In other words, it can also be defined as the uncertainty that an investor is agreeing and willing to undertake to get a profit from the investment that he or she has undertaken (Economic Times, n.d.). It may also be a future uncertainty regarding deflection from the expected profits or gains or the aspired results. In addition to this in different market situations, different risks arise as a result of various forces of the market that may be endogenous or exogenous. Also, risk can be minimized with various methods such as probability distribution, risk management system, etc. The risk management system is an important tool by which risk-taker can minimize the level of risk undertaken by the risk taker which is widely incorporated in the telecom sector as well.
The risk might also be considered as a possibility that the result which a person is anticipating might not come as expected if in the concept of finance we can regard it as return on investment (ROI) (The Street, n.d.).
There are different types of risk namely:
Business risk: it is the risk which a firm has to handle due to its exposure to the outside world of the market like competition, consumer tastes, and preferences, etc.
Political Risk: it is the risk that a nation can experience due to change in the political scenario of the country. (Money Control, 2012).
Project Risk: it may be that risk that can happen due to an uncertain event that may occur while doing or undertaking a project. (Press Books, n.d.).
Operations Risk: it is the risk involved in the failure of a procedure or operating a mechanical system or process. (Search Compliance, n.d.).
Technical Risk: it is the probable influence that can happen on infrastructure, system, or a project when the procedure and the implementation do not happen as expected by the person. (Cast, n.d.).
Insurable risks: these include those kinds of risks which if happened or occurred the insurance companies will have to bear the losses or outcomes of that particular risk. These include a broad and wide range of risks in them such as loss by fire, theft, etc. In other words, it includes those risks in it which follow and conform to the rules and definite norms set and laid down by the insurance company in the insurance policy documents. (Economic Times, n.d.)
Since there are several sources of risk as well they might have or occur due to endogenous or exogenous forces in the company. Now endogenous means having an internal cause. This means that the organization is facing a risk due to the economic activities and operations undertaken by it and no external factor is the cause for such risk. Exogenous means something that is caused outside. They arise due to factors that are external to the business organization and are much more dangerous in comparison with endogenous risks.
There are certain problems and difficulties also which a firm or a person can face while estimating the level of risk like:
It can sometimes be a problem to predict or anticipate the level of risk a person or an organization is undertaking in a project or business.
Lack of adequate information or time may be difficult for a person to understand the expected risk as risk can be quantified.
The organizations or an individual has to bear huge looses even more than the estimated risk level.
To minimize the risk, people take due care of it using various techniques and measures like risk management, via probability distribution, via standard deviation, coefficient of variation, etc. They apply these tools and measures so that as much as possible they can neutralize and minimize the bad impacts and influence of risk on the business or a specific project which is undertaken by the risk-taker or entrepreneur.
However, if we talk about a probability distribution, in this the possible or anticipated results in an enterprise are taken into consideration and they are arranged in a proper format of a frequency distribution which is called a probability distribution. The degree and how much uncertainty can happen can be defined and estimated by taking into consideration of the person’s or business forecasting probability distribution. Now, the probability distribution comprises various anticipated results which can be either positive or negative. The formula for calculating via this method is:
Expected Value= ∑(Ai,Pj) ; where i, j= 1,2,3...n
Where Ai= return to every result or outcome
Pj= probability related to every possible outcome
Now we can have an overview of the limitations in the evaluation and calculation of risk via probability approach. These limitations can be listed as:
Human error: Now, human error can have severe effects on the equipment and reliability of the processing systems. However, it is extremely difficult to compute human errors as a result of human attitudes in comparison to the failure of hardware or software.
Generalized probabilities do not serve the purpose: these probabilities do not do well for a particular or specific place or location. For example: in airports, it will not give a justifiable result of how many aircraft accidents take place as a result of birds crashing into the airplanes.
Sample size: Now the sample size is an important consideration while estimating the probabilities in a risk assessment. It is generally seen that estimations are done a sample size which is small may have a low level of confidence and vice versa for large sample size. Now the probabilities calculated in estimating risk are generally of the small sample size which therefore results in a low confidence level. (Klim, Balazinski and Dragan, 2011)
Standard deviation helps the forecaster to find out in advance how much dispersion or deviation can occur from the desired outcome or output in a project undertaken by an individual or an organization. In addition to this, the standard deviation can be estimated taking the square root of the variance. Variance is the sum of the squared deviation of the data set which is calculated by subtracting the data set from the mean value and squaring the value to make it positive. Now, the standard deviation is represented by a Greek symbol known as ‘sigma’ which looks like σ.
Standard deviation σ= √∑(xi-µ)2/N
Where Xi is the particular values,
µ is the arithmetic mean of the values
N is the total number of observations
Moreover, we take a closer look at this measure as well we tend to tend certain flaws which make this method not adequate for estimating the risk. We can explain it as- now the standard deviation method only defines the person estimating risk the annual returns of the investment diversity of spreading out but on the contrary, does not mean that the result which can come in the coming future will be consistent. The investment done is affected by several nonrelated causes like for instance market competition, changes in the interest rate, etc. Now, this makes standard deviation, not an adequate tool for estimating risk. On the contrary, it should only be utilized alongside other measures and functions of risk. (Corporate Finance Institute, n.d.)
In addition to this, another flaw that is there while calculating risk from standard deviation is such that it is based on the assumption of the normal distribution for the given set of the data values. This means that it lacks uniformity in probability for getting the values below or higher the arithmetic mean.
Another method of evaluating risk is the coefficient of variation. It is the ratio of the standard to the arithmetic mean. Now, this method can help the forecaster to estimate the risk in terms of the variability in the outcome or returns. This is most commonly expressed in terms of percentage. The more the coefficient of variation the more will be the variability in the outcome (Your Article Library, n.d.). The formula for the coefficient of variation can be given as:
Coefficient of Variation= σ/µ
Where σ is the standard deviation of the data set which is forecasted,
µ is the arithmetic mean.
Nothing in this world is perfect so is the coefficient of variation. The coefficient of variation also has some serious shortcomings which are:
The most significant problem associated with the coefficient of variation is that when we are using it as a measure of estimating the risk then it may hamper the real and honest influence of the demographic constitution on the organizational results.
Another problem with using the coefficient of variation as an estimate to calculate risk will be the consideration of the model constituents and its specification.
Another defect in applying this measure to use is it not entirely clear and definite that whether the coefficient of variation will give a clear picture of the idea of demographic variation as it is utilized in other organizational demographic concepts. (Sorensen, 2002)
To conclude, another problem that arises in using this measure will be if having both positive as well as negative values in the sample population which will then lead to problems in estimating the coefficient of variation. This may happen as a result when the mean of the sample population taken into consideration is equal to zero. (Corporate Finance Institute, 2020)
Risk management in simple layman’s language is the practice of recognizing the potential and capable risks beforehand and carefully analyzing and reviewing them and taking some cautious steps to decrease the risk (Corporate Finance Institute, n.d.).
There are certain limitations to the risk management technique. They can be listed as (Dikmen and Birgonul, 2004)
Facile risk management tools and techniques: not even a bit of the measure used in this are independently capable in defining the risks in terms of the quantity of the impact and influence of risks on the success and prosperity of a project or field of work undertaken by the risk-taker. Also, there is a need that arises to evaluate risk at each point and every hierarchical domain and structure.
Risk is poorly explained and defined: Now when we study and take a look at the definitions given by scholars, big scientists, researchers, individuals, entrepreneurs, etc we see all these definitions lack in them a sense of inconsistency. In most of the cases of risk evaluation, we see that it is quite a difficult task to obtain and get a generic risk evaluation checklist which can be applicable in most of the projects.
Absence of integration: Jaafari (2001) in his journal article said that the most significant problem in the risk management tools done by researchers is that of lack of integration. It might be the integration of- tasks of the management of risk following project management, unstructured facts, and information with the structured information and data, etc.
Obscurity of the expectations and aspirations from risk management: Some risk models build-up by the researchers are based on the static approach which does not give justice to numerous other projects which require in them a dynamic approach. Now the main purpose of the risk management should be more focused on the management of the prospective opportunities but it does not lay any stress on that which is a negative factor.
Furthermore, ranking the risks is an important process which the businessmen or an individual do to ascertain the degree and level of risks to which he/she or the business has been exposed too. Now the time in the risk management process when the forecaster of risk, identifies all the potential risks and then evaluates those risks with qualitative and quantitative tools. At that time the forecaster tries to understand the degree of the topmost occurrences and which risks will have the greatest impact after occurrence then he/she ranks those risks in overall order of preference and importance. This arrangement of potential risks and giving those risks a rank by the forecaster is known as risk ranking (IGI Global, n.d.).
In addition to this, the ranking risks are generally done by the business or individual based on their utmost cruciality and by taking into due consideration their criticalness. This helps to give an outlook to the risk-taker in the project management on were essential and adequate changes can be done to reduce the level of risk in the project undertaken by the company or individual (Mitre, n.d.). This also helps and enables the risk to organize and manage the risks which are of the highest probabilities to occur or happen and to take steps and measures accordingly.
Moreover, with the above discussion on the measures and ranking of the telecom industry, we will try to construct a proper risk management strategy in the telecommunications industry with stakeholders from various parts of the world like the United States, Europe, etc. Furthermore taking into consideration the telecom industry it will try to first identify the various risks, following that it will access and evaluate the degree of risks and thereafter manage those risks involved which can arise as a result of the strategic environment and business direction (Daniel Vizcayon’s Insights, 2012).
In today’s modern world the project risk management process in the telecom industry is undertaken through several operations and activities in the business. These activities include- operations management, analysis of the investments done into the business, business planning, and last but not least by the management of the project. In a nutshell, these should include these measures and effective steps in proper order and structure as:
Recognizing and identifying the risks which can have an impact and affect the business working and operations and also which can deflect the business in achieving the targets and goals set.
After recognizing is done then it should be followed by accessing those risks and figuring out whether these risks are valid and acceptable under the present circumstances of existing controls or whether any other measure or step is needed to curb them.
Take proper steps and efforts to curb those risks based on the earlier assessment made by the risk managers.
Proper and efficient monitoring and immediate reporting should be done on the present situation of those risks and the reliability and effectiveness of the measures undertaken.
This kind of analytical and organized structure is been used by the telecoms for managing and controlling the risks is being adopted by the telecommunications sector. Furthermore, the management should regularly report to the board of directors or senior members of the company on the effectiveness of the risk management measures and efforts. If we talk about the telecom sector, all the risk management is done and implemented through a proper framework of delegatory authority and there are in addition to this other policies and measures that provide a well-defined structure for managing as well as handling particular pan telecom risks that emerge as a result of a change in the business environment or the activities undertaken.
However, the risks present in the telecom industry need to be reviewed and analyzed concerning the measures taken to decrease the impact and influence of these services on biodiversity and natural habitat and environment. This has been identified as green supply chain management. Now the problems and risks in this sector are mostly with the physical, economic, and social root causes. So the risk management should take due care of these entire problems (William, Smith and Young, 1998).
Furthermore in this sector, one of the most significant ways is to not initiate those projects which are highly risky. In this domain, the best measure of risk management is the reduction or prevention of loss likelihood. In this, the company follows set norms and rules which act in the way of capable sources of problems to avoid and prevent the happening of a mishap. In addition to this, the technical measures like safety gear, shields; equipment, etc also help in minimizing the risks of accidents in the workplace or office premises. Educating the staff and employees of proper handling the machinery, the plant will also help in risk minimizing.
Another risk that can arise in this industry is of environmental conditions. If there are bad weather conditions for example of a snowstorm, cyclone, floods which are common in Europe and the USA the investors will have to bear heavy risks as it will disrupt the operations. For instance, suppose a telecom tower has to be established and a natural calamity has struck then there are high levels of risks involved in the business. This can be minimized by taking into consideration weather forecasting and doing the operations in a nice climate.
In the case of protecting the telecom company in monetary terms, the investors will use risk retention which will be highly valuable and helpful. Also, the risk retention technique will enable the company to bear the losses which arise out of relatively small risks. The risk retention measure is one of the fastest and simplest steps that can be us. For larger risks in terms of money, the company can enter into contracts, insurance schemes, etc which will help the company to face risks in monetary issues.
Insurance is one of the most suitable measures guarding and protecting the telecom industry as well as other industries against risks with the low probability and rising capacity of losses. In the telecom sector, insurance helps in changing the potential and capable losses into a specific well-defined cost which is called the insurance premium. It helps the company to cope with any sort of sudden or unplanned losses by giving monetary support to the company (Kozarevic, 2015).
With the above discussion, it is clear that risk is nothing but an exposition to danger in the business which is of various types depending upon the scenarios. Risk but also can be limited to a large extent by various methods of which risk management is the most prominent one. Thus with the help of a risk management system in a project, it helps an individual or a big company to insure themselves against big losses due to the risks undertaken in a project or domain. It enables the risk-taker to be monetary sound even after bearing looses as it guards the business against unforeseen and sudden events. Risk management systems and techniques play a significant role in the minimization of risk in the telecom sector in the present era as it also safeguards the interests of the entrepreneurs and business companies by protecting and insuring them against huge losses. This makes them undertake new ventures by taking risk which helps them to even expand their growth and business. It is also important to take into consideration the best usage of risk minimization techniques to reduce the most level of risk which a company has to bear. They can ensure their respective companies and organizations against big and unforeseeable risks which will protect them against a high level of losses.
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