The research firm Gartner defines integrated risk management (IRM) as “a set of practices and processes, supported by a risk-aware culture and enabling technologies, that improve decision-making and performance through an integrated view of how well an organization manages its unique set of risks.”
It’s essential to understand that IRM is not the same as enterprise risk management (ERM). Enterprise risk management is more strategic in nature; it focuses on planning, organizing, directing, and controlling your risk activities. ERM allows you to review your strategic business objectives and the information technology risks associated with those objectives.
Some risks may reflect exposures that, while damaging, will not threaten the overall health of an organization or its ability to meet its business objectives.
Risk management has always been vital for success in every organization or industry, but it has never been more critical than it is today. Risk assessments bring threats to light and save money, time, and essential resources. They help decision-makers and management teams to see opportunities and take the necessary measures.
What Is a Strategic Risk?
Strategic risk is the danger of making a poor business decision that will limit your opportunities in the future. Considered another way, strategic risk is an estimate of the future success of your chosen strategy. Since strategy is a set of clear choices – “We will pursue these objectives, for this benefit; but not those other objectives” – strategic risk reflects the risks within those decisions.
Strategic risks arise when an organization fails to meet market needs. To achieve business objectives, companies face dangers and pitfalls. Every internal choice carries the possibility of making the wrong decision.
How Does Strategic Risk Differ From Operational Risk?
The difference between strategic risk and operational risk lies in its primary focus. To better understand this, let’s define operational risk.
Operational risk refers to losses that may result from disruptions to day-to-day business operations. They arise from inadequate or failed internal procedures, employee errors, cybersecurity events, or external events.
Strategic risks arise when a business strategy fails to achieve the expected results, affecting the company’s development and growth. These risks may occur due to technological change, an evolving competitive landscape, or changes in customer demands.
Operational risk management (ORM) is critical for removing obstacles to executing strategic plans. Therefore, risk assessments are often performed as part of ORM to understand better how the ORM program is performing.
What Are Examples of Risk Management Strategy?
Risk management strategy helps to establish and activate a risk-aware culture, and executive sponsorship of the risk management program. There are many different risk management strategies available, each with advantages and uses that respond to specific needs. Some examples are:
This strategy uses “what if” scenarios to measure different outcomes of potential threats. Many functional groups are versed in running business experiments, from IT to marketing teams. Finance teams also run experiments to measure return on investment or evaluate other financial metrics.
Developing Minimum Viable Products
Developing complex products with many whistles and bells is not always the best route.
Instead, a good risk management strategy is to create software with basic modules and components that will be relevant and useful to the bulk of your customers: the minimum viable product (MVP). It helps to keep projects within scope, minimizes financial burden, and brings them to market more quickly.
Isolate Identified Risks
In this model, IT teams rely on internal or external help to isolate security gaps or flawed processes that may give rise to vulnerabilities. These teams search for security risks before an event occurs, rather than waiting for a malicious and costly breach.
Data collection and analysis are critical elements in assessing and managing various risks. For example, qualitative risk analysis can help identify potential project risks. Conducting a comprehensive qualitative risk analysis helps isolate and prioritize risks and develop strategies to address, monitor, and reassess them.
Risk and Reward Analysis
Conducting a risk-versus-reward analysis is a risk strategy that helps companies and project teams discern the benefits and drawbacks of an initiative before investing resources, time, or money. It is not only about the risks and rewards of investing funds to take advantage of opportunities but also about providing insight into the cost of missed opportunities.
Things rarely go as planned, and while having a plan is excellent, that’s rarely enough. Companies need to develop multiple projects or options based on various scenarios. Contingency planning is about anticipating things going wrong and planning alternative solutions for events that might thwart the original plan.
Leverage Best Practices
Best practices are highlighted in risk management plans for a purpose. They are usually tried-and-true methods of working, and while they may vary by industry and project, best practices assure that firms don’t have to reinvent the wheel for every project. In the end, this reduces the risk.
How to Mitigate Strategic Risk
Define Business Objectives
Many companies do not integrate risk or do not recognize it when defining their business objectives. Hence it’s crucial to outline the types of risks that may threaten your organization at this stage. You can do this with a simple exercise such as using a SWOT analysis.
Identify Strategic Risks
Risks are unknown situations that can affect the variability of your key performance indicators (KPIs). Create a list of such risks to understand what is happening and how to resolve the situation.
Allocate Resources at the Operational Level
Once you’ve decided on your company’s strategy, you’ll need to align all departments and people with it. Allocate your resources accordingly to help your overall strategy to succeed. Be ready for the consequences of this step: it might mean that some departments or regions will need to make do with fewer resources for a while, to feed those contributing most to your strategic objectives.
Align Your Incentive Structure
Focusing on execution takes another form besides resource redeployment. First, you need to visit and align the incentive structure of senior management and middle managers with your strategic objectives. This is crucial in executing your strategy, as it eradicates internal conflicts.
Measure Strategic Risk
Two key metrics can measure strategic risk. The first is the amount of equity needed to cover unexpected losses based on a predetermined solvency standard, known as economic capital.
The second metric is the risk-adjusted return on capital: the expected after-tax return of an initiative divided by economic prosperity. (Your finance department, or an outside financial adviser, will know how to calculate these numbers.) If this exceeds the company’s cost of money, the industry is viable and will add value.
What Is Strategic Enterprise Risk Management?
ERM can address all sorts of risks faced by any organization. Some risks may reflect lesser threats that, while detrimental, will not threaten the overall health of an organization or its ability to meet its business objectives.
Strategic risks and strategic risk management (SRM), on the other hand, have become increasingly important because they are more significant risk exposures. Identifying, assessing, and managing risk in the organization’s business plan and taking timely action when the risk materializes is what SRM entails.
SRM is very much a board-level concern. Boards of directors should focus on the risk inherent in strategy and execution. When senior management reviews a strategy, they need to be deliberate in asking questions and providing feedback. In addition, they need to explore “what ifs” to stress-test against the potential impacts of external conditions such as a recession.
Strategic and enterprise risk management (SERM) is the combination of both strategic risk management (SRM) and enterprise risk management (ERM).
SERM works on developing a strategic vision, framework, and implementation plan for ERM, including assessing safety programs, regulatory compliance, reputational, operational, and financial risks. SERM aims to develop a more strategic, holistic approach to ERM.
Manage Strategic Risk Seamlessly with Reciprocity ZenRisk
Transparency is crucial to the success of an integrated risk management program, and your team must stay current on all of your risk reduction efforts. ZenGRC provides your company with an integrated central location for your risk and compliance management activities, streamlining your workflows and making it easier for everyone to be on the same page.
Reciprocity ZenRisk is a comprehensive cybersecurity risk management solution providing actionable data to help you successfully detect, assess, and mitigate IT and cyber risks in your business processes.
With ZenRisk, you gain the visibility you need to stay ahead of threats and communicate the impact of risk on high-priority business initiatives. This contextual information enables you to prioritize investments and make informed business decisions while optimizing security.
Schedule a demo to learn more about how ZenGRC can simplify your risk mitigation plans.