At its core, risk management is about identifying risks and guarding against them. It gives organizations a plan of action to determine which risks are worth taking and which aren’t, to assure better outcomes for their bottom lines.
In this post we’ll outline the five steps of risk management, which you can use to protect your company against the uncertainties of doing business.
What Are the Five Steps in a Risk Management Process?
Risk management can be defined as a process that helps you:
- Forecast and evaluate risks to your organization
- Analyze and determine their effect on your business operations (finances, customers and employees, brand, stakeholders)
- Identify an action plan to eliminate or reduce those effects
Risk mitigation and risk management make it easier to understand where a business should spend its time and resources. You don’t have to cross your fingers and hope your business remains protected from bad luck.
Step 1: Identify Your Risks
First, identify all the risks your organization might encounter in its operating environment; this is risk assessment. To do a risk assessment, examine the factors in your organization and environment — market risks, regulatory risks, legal risks, environmental risks, and so on — that are potentially dangerous.
Aim to identify as many of these risk factors as possible. Anything that can harm your organization should be on your radar, including natural disasters, technological risks, and single point of failure (SPOF) risks.
Consider creating a risk log or risk register that serves as an ongoing database of each project‘s potential risks. Not only will this help you and your team to manage current risks; it can also serve as reference for past projects and guide you on future ones.
Step 2: Analyze All Risks
After risk identification comes risk analysis.
Some risks can bring your business to a standstill, while some will only be minor inconveniences. So analyze each risk to determine its scope and potential disruption. Ask: How likely are these risks to occur? And if they do, what will the consequences be?
You can then establish a link between the risks and different factors within your organization. Specifically, this will help you understand how many business functions the risk affects. The greater the number of functions, the more severe the risk.
Step 3: Evaluate and Prioritize Every Risk
Next, rank and prioritize each risk depending on its severity.
This allows the risk management team to see and understand your organization’s total risk exposure. Risks that will lead to minor inconvenience should be a lower priority, while risks that can cause catastrophic losses should be at the top.
Additionally, you should figure out your risk profile — that is, your risk appetite and risk tolerance. Some organizations are comfortable running a lot of risks; others want their risk exposure as close to zero as possible.
Step 4: Treat Your Risks
Develop a risk treatment plan to eliminate or contain each risk as much as possible.
Starting with the highest-priority risk, you and your team should work to solve the risk (or at least mitigate it) so the risk no longer threatens your organization. A good starting point is to connect with the respective experts of each field to which the risk belongs.
Your risk mitigation strategy should include the following:
- Avoid the risk: stop activities that cause the risk.
- Reduce the risk: take action to reduce the likelihood of a negative event occurring.
- Share the risk: take out insurance to cover the risk, or contractually agree with other parties to share the potential costs of recovery.
- Accept the risk: acknowledge that if the threat occurs, the organization will have to bear the consequences and be prepared with a contingency plan.
Using your available resources efficiently, without derailing your daily operations, is crucial here. Luckily, once you start building a risk register of past projects, you can anticipate risks rather than taking a reactive approach.
Step 5: Monitor Your Risks
Regularly monitor, track, and review your risk mitigation results to determine whether your initiatives are effective or you need to make any changes. Your team will have to start over with a new process if the implemented risk management strategy isn’t effective.
Avoid impulsive reactions and getting into “firefighting mode” to rectify problems. A clear, calm perspective will make you better equipped to minimize the harm of project threats and to capture opportunities.
What Are the Methods and Processes of Risk Management?
The risk management process is a series of steps you can take to identify, analyze, and respond to possible risks that may arise over your organization’s life cycle, assuring your business remains on track and meets its objectives.
To help you manage your risk more effectively, here’s an overview of the different methods of effective risk management:
Risk Management Strategy
- Develop a risk management plan
- Implement comprehensive risk management documentation
- Assign risk management responsibilities
- Create a risk-aware culture
- Use risk training and communication
- Understand the importance of an assessment to risk
- Identify short-, medium-, and long-term new risks
- Analyze risk likelihood and impact
- Implement loss control
- Know the importance of risk appetite: risk capacity and risk exposure
- Practice the four Ts of hazard response: tolerate, treat, transfer, and terminate
- Apply risk control techniques: preventative, corrective, directive, and detective
Risk Assurance and Reporting
- Evaluate control environment
- Carry out internal audit function
- Apply risk assurance techniques, such as audit committees
- Report on risk management (risk documentation)
- Understand and reinforce the importance of corporate reputation
Common Risk Management Process Examples
Predicting what might happen is never easy. You have to take things one day at a time.
That doesn’t mean, however, that you cannot accelerate the process. You can get an idea about what actions to take and which tactics to use to mitigate risks by understanding the different types of risks at play.
Regulatory compliance is critical for every organization. You must assure you have the necessary controls in place to monitor your company’s compliance with its regulatory obligations. Create a risk management plan to monitor all your existing processes, procedures, and technologies to stay compliant.
There’s no guarantee that the product or service you purchase will be priced at the same value in the future. You can manage this risk by entering into early and long-term contracts with different suppliers to secure your company’s future to an extent, regardless of the market conditions. (You can also do the same with customers, to stabilize the price of products or services you offer.)
When you don’t understand all aspects of your risk profile, it’s better to transfer the risk in to mitigate it. For instance, if a retail brand isn’t prepared to manage all cybersecurity risks the company faces, the retailer can outsource its IT capabilities to a third party. This will make the third party accountable and therefore transfer some (but not all) of the risk to that provider.
Why Is Risk Management So Important for Your Business?
If you still aren’t sold on the importance of having a sound risk management process for your company’s bottom line, let’s consider the potential consequences of sitting back and waiting to see how it all turns out. They are not good.
Failed or Restricted Growth
Having a risk management process can sustain and help grow your company. Sure, there’s still a chance you may fail, but your chances of success will be higher after identifying, evaluating, and treating risks, facilitating more confident decision-making.
Managing risk also has serious financial implications. You have much to gain by protecting your company — and potentially everything to lose by not.
You could lose market share simply because you failed to predict changes in market conditions. You could lose money if you fail to anticipate the risks of expanding your company. Moreover, failing to prepare to manage difficulties can further cause irreparable damage to your company’s reputation.
Non-compliance with laws and regulations increases the odds of your company facing litigation from regulators, employees, customers, competitors, or other parties. Those lawsuits will cost your company money, either in legal fees, settlement costs, or both.
Simplify Your Risk Management Process
Your organization’s risk management process should become part of your organization’s culture. While you can pursue a manual risk management process (it’s not illegal to do so), a manual process is prone to errors and other bottlenecks that can result in expensive and damaging consequences.
Reciprocity’s ZenGRC helps simplify and improve the accuracy of risk management processes. It allows you to evaluate risks and know the far-reaching effects of each risk faster by providing risk heatmaps, dashboards, and reports to give you greater visibility across your organization.