A risk management plan documents potential risks to an organization and the steps employees should take to keep those risks at acceptable levels. An organization will have many risk management plans to address different risks.
Key stakeholders – senior management, compliance officers, and department managers – may develop a risk management plan to address high-level and strategic risks. Or in a project management setting, a project manager works with the project team to create a risk management plan related to project risks.
Regardless of the risk management plan’s scope, the plan is developed by a group of stakeholders who know how to identify various potential risks and perform risk analysis.
Many of us assume that a risk management plan and risk assessment are synonymous; they’re not. A risk management plan documents the whole process, including identifying, evaluating, and mitigating risk. It also includes risk control monitoring, cost-benefit analysis, and financial impacts.
A risk assessment is only one specific part of that larger risk management process. You categorize each risk by likelihood and severity to outline the possible consequences and prioritize steps to mitigate the risk. Risk assessment is a crucial element of the overall risk management process and mainly focuses on identifying and analyzing risks.
What Is Risk Management?
Every organization is exposed to risks. Risk management is how we handle those risks: developing plans and procedures for myriad uncertain events, from natural disasters to cybersecurity threats.
Risk management isn’t just a good idea to assure business continuity and profitability. Most laws, regulations, and industry compliance frameworks require proof of risk assessments and other measures to avoid data breaches and protect sensitive information.
All that said, risk management does not eliminate all risks. Instead, it determines the best course of action to strike the right cost-benefit balance between risk reduction and use of corporate resources.
Why Is Risk Management Important?
Cyber risks are becoming more sophisticated every day. These events can result in minor disruptions, such as inflated overhead costs, as well as catastrophic consequences that may lead to business closure.
Risk management helps you reduce these risks. With careful planning and optimization, you can allocate resources strategically toward reducing, monitoring, and controlling the effect of cyber attacks while maximizing the potential of positive events.
Risk management allows you to determine the most effective methods to identify, manage, and mitigate the significant list. This prepares IT teams to handle unexpected challenges and safeguard businesses from potential risks.
Risk Management vs. Risk Assessment
Risk management is a continuous and dynamic process that helps businesses identify potential risks, evaluate the likelihood and potential impact of those risks, and respond strategically. Risk assessment is a crucial part of this process, focused on detecting potential hazards and analyzing conceivable risks in an organization’s immediate workplace.
Risk management and risk assessment also differ in several other more specific ways:
- Risk assessment is a one-time or periodic process, while risk management is continuous.
- Risk assessment has a narrow scope focused on identifying and analyzing risks. Risk management has a broader scope that comprises identification, analysis, treatment, and monitoring.
- Risk assessment output is a report detailing identified risks and their potential impact, whereas risk management’s output is a set of strategies aimed at mitigating or eliminating identified risks and a plan for risk monitoring and adjustment.
Risk Appetite vs. Risk Tolerance
Risk appetite indicates an organization’s risk capacity, or the level of risk the business is ready to bear while operating. It provides a framework to guide decision-making processes by helping IT teams as they assess and manage risks.
Risk tolerance refers to the specific amount of risk an organization is willing to bear within a specific project, activity, or timeframe. Think of it as your total capacity to withstand potential losses or adverse events without risking company reputation, financial stability, and core operations.
A common metaphor to explain these distinctions is speed limit versus actual speed. The speed limit on a road might be 65 miles per hour; that is the overall risk appetite. In practice, however, many drivers might go somewhat over the speed limit at different times; that is risk tolerance. The greater risk tolerance you have, the faster you’re willing to drive – with potential adverse events such as accidents or speeding tickets.
Another important point to note in the debate over risk appetite versus risk tolerance is that the latter is a subset of the former. Measuring risk tolerance helps you determine the acceptable range of risk exposure for specific initiatives and align risk management efforts with your overall risk appetite.
Traditional Risk Management vs. Enterprise Risk Management
Under “traditional” risk management, risks are dealt with independently as they arise. Business leaders overseeing specific departments (example: CFO for financial risk, COO for operational risk) create systems to manage the specific types of risks related to their area of responsibility.
This approach aims to minimize damage to the organization, but may not fully consider the interconnectedness of risks or their cumulative impact on operations.
In contrast, enterprise risk management takes a more holistic and collaborative approach that recognizes risk as inherent in business strategy. It involves managers from different departments working together to identify and prepare for potential hazards that could impact the organization’s operations, finances, and objectives.
By taking a big-picture perspective, enterprise risk management helps managers shape the organization’s overall risk position and seize opportunities to achieve its goals.
Here are the main differences between traditional risk management and enterprise risk management:
- Traditional risk management is mostly reactive and aims to prevent incidents from reoccurring. Enterprise risk management (ERM) tries to anticipate and prevent future risks.
- Traditional risk management focuses on risk avoidance. ERM considers both risks and opportunities, making it more balanced.
- ERM takes a holistic view of the entire organization and is top-down, while traditional risk management may only focus on a specific area.
- Traditional risk management is standardized and established. ERM is more dynamic, agile, and adaptable to different situations or organizations.
What Are the Steps in a Risk Management Plan?
Creating a risk management plan has several steps. It’s crucial to follow the steps in order. This guide can be a template for a comprehensive program addressing known and emerging risks and identifying new threats.
First, the team members must review business or project objectives, whether the goal is a product development project or an initiative to develop third-party business partnerships. The risk management process must align with current and future goals by starting with business objectives.
The second step is to review digital assets such as systems, networks, software, devices, vendors, and data. Cataloging these assets allows the key stakeholders to brainstorm and identify risks corresponding to each.
A risk can be a positive or negative condition with financial, operational, or reputational consequences. Each identified risk is recorded in a risk register.
After risk identification, the risk management team assesses the known risks. For example, you might find that positive risks, such as early product delivery, lead to adverse risks, such as a customer’s inability to meet a payment schedule. So, again, the project team will brainstorm to analyze potential impacts.
For each risk identified and assessed, the project team must look at the likelihood of the risk and then estimate its potential impact. This activity will help the team prioritize the risk events requiring the most attention and robust mitigation strategies.
A risk assessment matrix is often used to visualize the potential impacts. Measure the likelihood from low to high on one axis and the severity from low to high on the other axis. Risk events in the upper right quadrant should be prioritized first because they have a high probability and the worst severity.
Determine risk tolerance
Knowing an organization’s risk tolerance aids in its risk management plan and influences how resources are invested in managing risks. For example, if an organization’s risk tolerance is low, it will invest more heavily in information security controls to protect sensitive and confidential data.
Create risk mitigation strategies
The project team will design the risk mitigation strategies for the risks it decides to transfer, mitigate, or avoid. Therefore, this section should include mitigation actions, dependencies, risk response, and contingency plans.
Risk monitoring activities should also be designed in this phase so the project team can determine whether prevention and mitigation actions are working as expected.
Examples of Risk Management Plans
The risk management plan is the final document containing all the factors in risk management, risk register, analysis, tolerance, and mitigation actions.
A comprehensive project risk management plan template provides the project team with consistent processes and beneficial tools to ensure a successful project. This template should include an integrated overview of the planning phase, milestones, and deliverables to ensure no skipped steps.
Risk Management Best Practices
You should consider these risk management practices to build an effective risk management plan.
Create a strong risk-aware culture
An essential step in any effective risk management program is the development of a solid risk culture. Risk culture is often defined as the shared values, beliefs, and attributes about risk throughout the organization. Senior management and the board of directors are responsible for creating the company culture and setting the tone from the top, which should flow down through the rest of the organization.
Make stakeholders aware of the process
To manage risks effectively, engage key stakeholders every step, starting with the initial planning phase. Stakeholders come from different functions inside and outside your organization: employees, customers, vendors, and so forth. This diverse group represents all facets of your business and the associated risks.
Establish proper risk management policies
Having well-defined roles, responsibilities, and templates in a documented policy is crucial for a comprehensive risk management strategy. This definition will assist you in identifying all potential risks that could have a bearing on your business, a consistent evaluation of the impact of those risks, and how you intend to mitigate risks.
Organization-wide awareness of risks and mitigation strategies is imperative to ensure buy-in and adoption.
Evaluate and persist
Transparent risk monitoring processes ensure that all risk mitigation endeavors work as expected. Risk management is an ever-evolving and constant process. Hopefully, these best practices in risk management have guided you in sketching a strategy for your organization.
Manage Risk with the RiskOptics ROAR Platform
The RiskOptics ROAR Platform is an integrated cybersecurity risk management solution that provides actionable insights into your business processes to help you identify, assess, and mitigate IT and cyber risk effectively.
With ROAR, you gain the visibility needed to stay ahead of threats and communicate the impact of risk on high-priority business initiatives. These contextual insights allow you to prioritize investments and make informed business decisions while optimizing security.
Schedule a demo today to learn more.