Systematic Risk Management Blog

5 Requirements of a Systems Approach to Risk Management

Posted by Vernon Grose on Tue, Mar 5, 2013 @ 06:03 AM

Here at Omega Systems Group Incorporated, we use and teach a systems approach to risk management.

What do we mean when we say a "systems approach"?

In risk management, as well as other endeavors, a systems approach is viewing a situa­tion, problem, organization, machine, business, church, team, or any other entity as a system—rather than as just a situation, problem, organization, machine, or business.

This video explains how a systems approach identifies, ranks and manages risk.

When you decide to convert your viewpoint to a systems approach, there are at least five practical changes you must make:

  1. You must clearly and sharply define what the system’s boundaries are—what is inside the system as well as what is outside the system. In terms of managing risk systematically, you must mark off the precise territory within which you are concerned about risk. You must establish clean lines of demar­cation between managed and unmanaged territory.
  2. You must clearly and sharply define both the known inputs and the desired outputs. This is not always easy because the average person does not think in these terms. What is the system converting or transforming while it uses up resources? How are the inputs converted into outputs? Answering these questions will quickly lead to understanding the purpose or reason for the system—and the reason man-made systems exist can often be obscure.
  3. You must begin to think of the system as a composite, or collection, of resources available to change inputs into outputs. Resources include but are not limited to policy, procedures, manpower, dollars, technology, facilities, materials, time, reputation, information, and influence.
  4. You must be sensitive to the crucial interdependence in the system between the three factors that all managers must simultaneously balance: cost, performance, and schedule. One of these three cannot be disturbed, modified, or influenced without impacting the other two. It is as though together they fill a fixed volume.
  5. You must recognize the dynamic nature of a system. Not only does a system constantly change known inputs into desired outputs, it also, during that very transformation process, constantly changes objectives, ways of operating, rates of production, and other facets due to the output-to-input feedback.

Once you have converted your perspective so that you visualize whatever you are managing as a system, you are ready to capitalize on that new viewpoint. One of its blessings is simplicity. Another is its ability to identify, rank and manage a multitude of complex risks.

 Managing Risk Cover Page

This post includes excerpts from Vernon Grose's timeless classic, "Managing Risk."


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Topics: risk management, systems approach, systems