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.
This post will outline the five steps of risk management, which you can use to protect your company against the uncertainties of doing business.
What Is Risk Management?
Risk Management is a multi-step process that identifies and evaluates any emerging threats or risks, whether internal or external, to a business’ information systems and data. It is essential to maintain a risk management process because it reveals all potential threats within the business, whether they already exist or before they generate a negative impact.
It also generates a series of benefits, such as avoiding data breaches and driving the need for a cybersecurity program. It also includes cost/benefit analysis activities related to security risks, operational risks, business risks, and other metrics.
What Are the Five Steps in a Risk Management Process?
Risk management can be defined as a process that helps you:
- Project risks, 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 have a risk response and 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. There are many types of risk assessments, but generally, this process is performed routinely. To start a risk assessment, examine the factors in your organization and environment — regulatory, legal, environmental, market risks, and so on — that are potentially dangerous.
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. This will help you and your team manage current risks. It can also serve as a reference for past projects and guide you on future ones.
Step 2: Analyze All Risks
After risk identification, you perform risk analysis. Some risks can bring your business to a standstill, while some will only be minor inconveniences. To analyze each threat and 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. For example, 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: your risk appetite and risk tolerance. Some organizations are comfortable running many risks; others want their risk exposure to zero.
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 threat (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 an adverse event occurring.
- Share the risk: take out insurance to cover the risk or contractually agree with other parties to share the potential recovery costs.
- 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 is crucial here without derailing your daily operations. Luckily, once you start building a risk register of past projects, you can anticipate risks rather than take a reactive approach.
Step 5: Monitor Your Risks
Regularly monitor, track, and review your risk mitigation results to determine whether your initiatives are adequate or if 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 practical.
Avoid impulsive reactions and getting into “firefighting mode” to rectify problems. Instead, a clear, calm perspective will make you better equipped to minimize the harm of project threats and capture opportunities.
What Are the Methods and Processes of Risk Management?
The risk management process is a series of steps 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 of 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 the 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. So you have to take things one day at a time.
However, that doesn’t mean that you cannot accelerate the process. For example, 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 ensure you have the necessary controls to monitor your company’s compliance with its regulatory obligations. Create a risk management plan to watch 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. However, you can manage this risk by entering into early and long-term contracts with different suppliers to secure your company’s future, regardless of the market conditions. You can also do the same with customers to stabilize the price of your products or services.
What Are Risk Management Standards?
Risk management standards set out a strategic set of processes that begin with the overall aspirations and objectives of an organization. They are intended to identify risks and encourage mitigation through best practices.
The standards are commonly designed and created by several agencies that collaborate to promote mutual objectives and help further assure that organizations conduct high-quality risk management processes.
Risk management standards are guidelines to help guarantee that risk management is carried out in a structured manner. The standards typically include checkpoints and examples to facilitate compliance by companies.
There are various types of Risk Management Standards.
ISO 31000 was published in 2009 and revised in 2018. It includes a list of enterprise risk management (ERM) fundamentals and a framework to guide organizations in applying risk management mechanisms to their operations. It also defines processes and tools for identifying, assessing, prioritizing, and mitigating risks.
The ISO 31000 risk management standards framework includes:
- ISO 31000:2009 – Principles and Guidelines on Implementation
- ISO/IEC 31010:2009 – Risk Management – Risk Assessment Techniques
- ISO Guide 73:2009 – Risk Management – Vocabulary
A more strategic focus on ERM is included in the newer 2018 standard. It also further emphasizes the significant role of senior management in risk management and embedding risk management throughout the organization.
British Standard (BS) 31100
This code of practice for risk management was issued in 2011 and offered a process for applying the principles outlined in ISO 31000, including identifying, assessing, responding, reporting, and reviewing.
The Risk and Insurance Management Company’s Risk Maturity Model (RMM)
The RMM framework is being updated, although it is readily available in the initial 2006 version. The RMM lists out seven core attributes of a risk management program and assists organizations in assessing each on a scale ranging from nonexistent to leading.
An RMM risk management assessment, designed as an integrative framework of worldwide, cross-industry standards, enables businesses to determine how well their risk management activities match these best practices. Companies receive a maturity score and practical suggestions to help them enhance their programs and reap the numerous advantages of maturity.
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, consider the 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 some risks will come to fruition despite your best efforts. Still, your chances of success will be higher after identifying, evaluating, and treating risks, facilitating more confident decision-making.
Managing risk also has profound 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 with Reciprocity ZenRisk
Your organization’s risk management process should become part of your organization’s culture. While you can pursue a manual risk management process, a manual process is prone to errors and other bottlenecks that can result in expensive and damaging consequences.
Reciprocity ZenRisk simplifies risk management with comprehensive views of control environments, easy access to the information needed for risk assessment, and continuous compliance monitoring to address critical tasks at any time.
ZenRisk’s tools and templates enable you to evaluate risks and see the far-reaching effects of each risk faster by providing risk heatmaps, dashboards, and reports to give you greater visibility across your organization.
Schedule a demo to see how easy it is to know what risks to mitigate, how to mitigate them, track workflows, collect and store documents, and much more!