Every organization faces the danger of unforeseen events that might disrupt operations, cost unexpected amounts of money, or even ruin your business. To counter that potential harm, businesses must engage in risk management.
This article introduces the concepts of risk management, and how an organization can begin implementing a risk management program to confront the threats that it faces.
What Is Risk Management?
Risk management is the set of steps an organization takes to prevent unwanted events from happening, or at least to reduce the damage of those events when they do happen. Put another way: risk management is a system for dealing with risks before they evolve into immediate and direct harm.
Before creating your risk management plan, it’s essential to understand what “risk” really means.
In the business world, a risk is an event or condition that, if it happens, might affect business objectives positively or negatively. Investing money, for example, incurs the risk of a positive outcome (financial gain) or a negative one (financial loss).
“Risks” are not the same as “threats.” Risk is what might happen in a theoretical sense; when you cross the street, you might get hit by a car, so you look both ways before stepping off the curb. A threat is specific and imminent: a vehicle speeding through the intersection is about to hit you, so you jump out of the way.
A risk that has happened is an event or incident. In cybersecurity, the term “event” refers to some unusual and observable occurrence, such as someone trying to breach the system. If the breach attempt succeeds, that’s an “incident.” In other words, a cybersecurity incident is an event that results in damage or exposure to information security assets and operations.
Once you fully understand the meaning of risk, you can begin managing it. The risk management process involves a series of actions, each step leading to the next one and all of them critical to your risk management program.
Risk Management Steps
Numerous bodies of knowledge describe the five steps of risk management that businesses must take to manage risk. The ISO 31000 standard, Risk Management Guidelines, created by the International Organization for Standardization (ISO), is one well-known example.
Any entity can apply ISO’s five-step risk management approach, which consists of the following steps:
- Risk identification
- Risk analysis
- Risk evaluation/prioritization
- Rick’s treatment/mitigation
- Risk monitoring/review
Let’s explore each of the above steps in more detail.
Risk identification, as the name implies, is the identification of existing and potential risks. For example, businesses might have operational, financial, or cybersecurity risks. For this step, you’ll need to use your imagination and envision worst-case scenarios, from natural disasters to economic ones.
What if a fire broke out in your building? What if someone stole your proprietary secrets? What if the economy crashed? What if ransomware locked your systems? What if a competitor undercuts your prices? And so on. Common risks include the following:
- Financial risk
- Compliance risk
- Reputational risk
- Cybersecurity risk
- Competitive risk
- Legal risk
- Economic risk
- Operational risk
- Physical and environmental risk
- Quality risk
During risk identification, remember that we cannot see into the future. You might miss something, or new risks could emerge for which you haven’t yet formed a plan. Hence it’s important to keep your risk management process and program flexible; plan to review this list regularly and establish contingency plans for new and unforeseen risks.
After you identify relevant risks, you must analyze their potential harm. In this analysis phase, you’ll examine each identified risk and assign it a score based on four factors:
- Likelihood. What’s the chance that the risk will materialize?
- Impact. How much disruption would your project, function, or enterprise suffer if the event occurred?
- Velocity. How quickly would your project, function, or enterprise feel the impact?
- Materialization. What’s the potential severity of the impact? (To arrive at this score, add the impact and velocity scores and divide by 2).
Scores for impact and velocity (and, therefore, materialization) can be reduced with risk mitigation or controls.
Some risks are more potentially damaging than others, and so deserve more of your attention. Others may pose little danger and can be accepted. An effective risk management strategy requires risk prioritization according to levels of risk. Prioritizing risk can help you avoid wasting time and expenses.
Prioritizing risks can be a relatively straightforward exercise. Look at your risk analysis, and the materialization scores assigned to each identified risk. The ones with the higher scores should receive your attention – and your efforts to introduce controls to reduce the potential harm – first.
Mitigation is the set of controls you’ll introduce to reduce the harm of a risk. On a risk register (that is, a catalog of all identified risks), you’ll want to list each risk, its materialization score and rank, and your decision about how to treat that risk. Typically, risk treatment has four options:
- Risk acceptance. The potential harm is so low that you simply live with the possible damage.
- Risk avoidance. The potential harm is high enough that you avoid those actions that might trigger it. For example, if a certain technology vendor’s security is extremely poor, you choose another vendor or don’t outsource that technology process at all.
- Risk transfer. Typically this involves buying an insurance policy to cover the financial costs of the potential harm. You might also strike partnerships with third parties so that they assume the risk rather than you.
- Risk reduction. You implement a set of controls (extra management approvals to award a contract, for example; or using multi-factor authentication to access confidential data) that work to reduce the unwanted outcome you’re trying to avoid.
A risk management framework such as the Committee of Sponsoring Organizations (COSO) Enterprise Risk Management-Integrated Framework or ISO 31000 can help guide you through decision-making in the risk management process.
Circumstances change over time. Regulations and industry standards get updated; cyber criminals adopt new techniques for breaching systems. As a result, staying on top of risk is a constant process and can be challenging. Fortunately, digital solutions can automate much risk management work. That leaves you free to focus on the business: keeping your clients and customers satisfied and maximizing profits.
Why Are the Five Steps of Risk Management Critical?
An organization will become more robust and resilient as it formalizes its risk management procedure and creates a risk culture. Making better judgments will also lead to more robust performance over the long term by thoroughly understanding the organization’s operational environment.
Risk Management Steps Best Practices
Business risk, according to the American Institute of Certified Public Accountants (AICPA), “results from major situations, events, circumstances, acts or inactions that may negatively influence an entity’s capacity to achieve its objectives and execute its plans.” In essence, how well you manage your firm’s risks determines its success and operability. That has always been true, but it is increasingly becoming more true as the business environment becomes more and more complex.
Here are five crucial risk management best practices to consider.
Engage Your Stakeholders
An organization’s stakeholders – investors, employees, customers, business partners, regulators, and more – should be included at every stage of the risk management process, starting with the initial risk assessment. Many will have valuable insights into what your biggest risks might be, and how to manage those risks smartly.
Have a Strong Tone at the Top
Organizations need to develop a strong “risk-aware culture” among employees, and that culture is guided by statements and behaviors at the top. Management and the board of directors need to develop a thoughtful approach to risk management, assure that it’s implemented, and communicate to all stakeholders why staying aware of risk is important.
Communication is crucial to risk management. Senior executives must communicate the need for strong risk management practices downward throughout the enterprise; and employees should then have an easy way to communicate observations about risk back upward to the senior offices, so that leaders can digest the new information and repeat the cycle all over again. The smoother that cycle of communication flows, the more agile and responsive to risk your organization can be.
Use Prudent Risk Management Procedures
Are your risk management policies written down? Are positions and duties specified in detail? Do policies and processes to mitigate risk use clear definitions? Do you have plans to handle unexpected risks, such as a business continuity plan and an incident response plan? Those are all examples of risk management procedures and activities that you should have in place to assure that risks are getting the attention they deserve. Use a risk management framework to guide your efforts, figure out the right procedures to use, and implement them.
Monitor Risks Continuously
After doing your first risk assessment and implementing the necessary procedures to manage and mitigate these risks, implement monitoring procedures to see how well your efforts work. Also monitor new potential threats that might need to be incorporated into your program. Repeat risk assessments, and necessary changes, at least annually.
Types of Risk
Customer Credit Risk
One significant risk in the retail industry is customer credit: the risk that customers might not replay their balances due promptly, which can hurt retailers’ profitability.
When a business performs a customer credit risk analysis and finds that things aren’t going so well, the retailer can then manage that risk – for example, by stopping invoice extensions or refusing to deliver goods until debts are repaid; or by dropping the customer entirely.
Every organization must maintain regulatory compliance. Compliance risk is the chance that you might not be fulfilling those regulatory obligations, which exposes your business to enforcement from regulators, with potentially painful monetary penalties or other punishments in tow.
Information Security Risk
A company’s most valuable asset is its data. Information security risk is the risk of that data being compromised – stolen by hackers, shared in violation of privacy agreements, altered to make it useless, locked down due to ransomware, and so forth. Organizations need to implement controls to keep their data safe, secure, and in compliance with any privacy or security obligations the organization might have.
Tackle Risk Management With ZenRisk
Risk management can be a daunting task. Reciprocity’s ZenRisk platform is an excellent supplement to your cyber risk management strategy if you find all this overwhelming. You may go forward with risk appraisal, risk management, and continuous risk monitoring by using this unified platform, which offers superior insight across the enterprise.
ZenRisk is a helpful tool to avoid changing security threats and reduce company exposure. Contact an authorized ZenRisk salesperson for more details about ZenRisk or one of our other risk management products, or schedule a demo!