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, including 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 particular to project risks.
Regardless of the risk management plan’s scope, the project 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 identification, evaluation, and risk mitigation. It also includes risk control monitoring, cost-benefit analysis, and financial impacts.
In contrast, a risk assessment is a specific part of the 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-risk response planning for myriad uncertain events, from natural disasters to cybersecurity threats.
Risk management is not only wise to assure business continuity and profitability. Most laws, regulations, and industry compliance frameworks require proof of risk assessments and other methodologies to avoid data breaches and protect sensitive information.
Risk management does not eliminate all risks. Instead, it determines the best course of action to optimize the cost-benefit relationship between risk reduction and the use of corporate resources.
What Are the Steps in a Risk Management Plan?
Creating a risk management plan has several steps. It’s crucial to follow all 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 if prevention and mitigation actions are working as expected.
Example of a Risk Management Plan
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 best 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 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, etc. This diverse group comprehensively represents all facets of your business and the associated risks.
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.
Organizational-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.
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