Every organization faces the danger of unforeseen, detrimental events that might cost the organization money or even bankrupt it. 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 to implement a risk management program to confront the threats that your own business might face.
What Is Risk Management?
Risk management is the set of steps a business takes to reduce the potential consequences of an unwanted event, or even to prevent such unwanted events from happening at all. In other words, 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 the definition of “risk.”
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) and a damaging 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 leading to the next and each important to your risk management program.
Risk Management Steps
Numerous bodies of knowledge that describe the steps businesses must take to manage risk have been released by the risk management discipline. 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 assessment
- Risk analysis
- Risk evaluation/prioritization
- Rick treatment/mitigation
- Risk monitoring/review
Let’s explore each of the above steps in more detail.
Risk assessment involves two parts: risk identification and risk analysis.
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.
Types of risk include the following:
- Financial risk
- Audit 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. Therefore, it’s crucial to keep your risk management process and program flexible. Plan to review this list regularly and establish contingency plans for new and unforeseen risks.
In the risk 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 mitigations or risk controls.
All risks are not created equal. Some are potentially more damaging 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.
On a risk register chart, 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
- Risk avoidance, perhaps by not performing the action that incurs it
- Risk transfer, usually to an insurance company
- Risk reduction, usually with risk controls
A risk management framework such as 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; cybercriminals adopt new techniques for breaching systems. Staying on top of risk is a constant process and can be challenging. Fortunately, digital solutions can automate much risk management work for you, leaving you free to focus on the business: keeping your clients and customers satisfied and maximizing profits.
Types of Risk in Risk Management
Some of the most typical instances of risk management are included in the article below, along with explanations of what they mean.
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 firm must maintain regulatory compliance, which also carries considerable risk. Therefore, businesses must ensure they have safeguards to check on keeping frequently.
They must maintain track of all current practices, procedures, and technology to comply. You may accomplish this with the use of a risk management system.
Consider the manufacturing sector, for instance. One business is working on a new product. Before starting production, they must first do a thorough risk analysis to ascertain the level of risk that the company may experience.
Then they may determine if the advantages of developing the new product outweigh the risks involved.
Risk to Information Security
The process of cybersecurity includes this. A company’s most valuable asset is its data, which must be protected. Data theft is a serious concern for any company and may happen in several ways.
One of the numerous methods to reduce this risk is to implement controls for all incoming communications, including emails. They must be checked to ensure no dubious ones enter the company, and if they do, they must be dealt with appropriately.
Let ZenRisk help you manage risk in your organization
Risk management can be a daunting task. If you find all this overwhelming, Reciprocity’s ZenRisk platform is a great supplement to your cyber risk management strategy. 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!