Lesson 06: Costs and Risks
Do you know the exact meaning of risk? Let’s have a quick review.
Based on AXELOS ITIL® material. Reproduced under licence from AXELOS. All rights reserved.
- 00:06 – Okay. So, in this lesson, we’re going to look fairly quickly and simply at Costs and Risks and how that affects us in a Service Management environment.
- 00:16 – Costs and Risks, let’s do them in that order. Let’s talk about understanding costs.
- 00:22 – At its simplest, the amount of money spent on a specific activity or resource.
- 00:28 – Two types of costs. They’re the costs imposed on the consumer.
- 00:34 – What we pay for our cup of coffee. What we pay to ride on the train.
- 00:40 – So, we understand that. What we pay to get our financial service or our HR service, or what we pay to get our new computer at work.
- 00:48 – Costs imposed on the consumer.
- 00:51 – Typically, charges from the service provider but there’ll be other charges as well; overall licenses costs and convenience costs and compliance costs, and, yeah, at its simplest, if you go to stay in a hotel in many towns, you will pay money to the service provider.
- 01:09 – You’ll also be imposing, paying costs on things like local tourist tax.
- 01:14 – So, it isn’t just to the service provider, but that’s the key thing.
- 01:18 – So, costs imposed, but also costs removed from the consumer by the service.
- 01:23 – Mentioned earlier, talking about money we save by computerizing things.
- 01:29 – Things we don’t have to spend because we’ve got the service.
- 01:34 – So, money in, money that doesn’t go out, and we need to understand those costs and we’ll look at methods later on in the course about how we establish that, but we understand the money we spend.
- 01:49 – That’s a nice simple thing. Again, we do that at home.
- 01:53 – We know how much money we spend, we know the benefits we get from it.
- 01:58 – We understand the costs we save.
- 02:00 – Insulating your house removes costs in terms of less payment for electricity bills, for example.
- 02:08 – The other element of this little lesson is about Risks. Understanding risk.
- 02:14 – Now, we think that risks are a complicated thing that we do at work, and let’s look at the professional definition of it, and it’s a nice long definition just to make us believe that it’s a difficult and comprehensive thing.
- 02:28 – It’s a possible event that could cause harm or loss or make it more difficult to achieve objectives.
- 02:37 – Risk can also be defined as uncertainty of outcome, and we can use it in the context of measuring the probability of positive outcomes as well as negative.
- 02:47 – So, that is saying that we can use the term risks to mean there is a risk that things are going to be better than we thought.
- 02:54 – What’s the risk of winning the lottery tomorrow night? Pretty low.
- 03:00 – Let’s think about risk. It sounds like a complicated thing, but actually you already understand it perfectly.
- 03:09 – If you can look out of your house in the morning, peep out the window, check on the weather forecast, look at the sky and decide whether or not you need to take a raincoat or an umbrella with you.
- 03:23 – If you can understand that, if you can get out of the door with or without the umbrella, you understand risk management.
- 03:32 – You don’t want to get wet, but you also don’t want to leave even more umbrellas on the train or poke them into people walking through crowded streets.
- 03:42 – So, you don’t want to take an umbrella if you don’t need to. You don’t want to get wet.
- 03:46 – You make a risk-based decision, and it’s not about never getting wet or never losing an umbrella.
- 03:54 – At the end of the year, you might think, “Pretty good year this year.” “I got wet twice and I left one umbrella on a train. I’ll live with that. That is an acceptable risk profile.” If you never ever got wet, you’ve certainly got the risk balance wrong, and if you lost hundreds of umbrellas, you probably got the risk balance wrong.
- 04:14 – We understand the idea that risk is not about totally avoiding the consequences, it’s making a balanced choice and taking the right level of risk on purpose.
- 04:26 – Depending on the kind of organization you work for, it may be very risk averse.
- 04:31 – If you are maintaining aero engines and flying an aircraft, I hope you’re very risk averse.
- 04:37 – I have to fly somewhere in a few days' time. I’m counting on people being risk averse.
- 04:43 – If you’re totally driven by new marketing ideas and innovations, you’re probably happy to take risks.
- 04:50 – You’re probably happy to float, as an organization, ideas that may work or may not work.
- 04:55 – If you’re at the cutting edge of research and development, then you’re probably encouraged to take risks and innovate.
- 05:02 – So, risk varies in terms of context and is not about removing risk, it’s about understanding the environment, the chain, the service values you’re in, the benefits that can be delivered, and understanding what the right level of risk that the business as a whole wishes to take.
- 05:22 – This is not risk driven by a service provider.
- 05:25 – This is a service provider supporting the overall business and supporting their level of risk.
- 05:31 – So, it depends on the relationship between the service provider and service consumer to get risks right.
- 05:38 – So, it is at the same time a bit more complicated than you think because you can’t just decide it yourself, and it’s also a bit simpler than you think because it’s a basic concept that you already understand.
- 05:50 – Right. What we’re going to look at in the next lesson is the Service Value System, the mechanism at the heart of ITIL.
- 06:01 – We’re going to be taking these words and concepts and the building blocks that we’ve talked about and seeing how ITIL suggests we fit them together and how we can build that principle structure to help us get better at Service Management and deliver better services for our customers' benefit and ourselves because remember, we’re co-creating value. Thank you.
Do you remember what risk means in this context and how it’s different from the day to day meaning of the word?
Sometimes it seems that we take the undesirable risks more seriously than desirable ones; are you familiar with the “loss aversion” fallacy? It may explain a lot. Can you think of some desirable risks in your work and life?
Again, can you explain the difference between outcomes and outputs? Can you explain why this is important to pay more attention to outcomes?
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