Most organizations today function in a risk-prone environment. Those threats include operational, strategic, financial, cybersecurity, geopolitical, compliance, and third-party risk – and when you get to specific risks, depending on an organization’s size, location, and industry, the full number becomes enormous.
Any of those risks might have a catastrophic impact on the company and long-term sustainability. Reactive risk management, where you respond to a threat only after it emerges, is no longer adequate. Modern organizations now need proactive risk management.
Proactive risk management is a forward-thinking approach that focuses on anticipating risk to prevent damage, instead of simply reacting to a risk and minimizing damage. Companies that practice and implement proactive risk management can control or even eliminate potential risks before such threats can harm the business and its profitability.
The Need for Proactive Enterprise Risk Management
The primary aim of enterprise risk management (ERM) is to deflect the effects of uncertainty and minimize any potential losses. Appropriate risk management strategies can enhance the organization’s ability to deal with unwelcome surprises.
When implemented smartly, risk management can help the company to seize new opportunities, drive competitive advantage, and ensure sustainability and growth. It also allows the business to optimize the use of its resources, assure continuous improvement, and reassure stakeholders about its long-term prospects.
Effective risk management improves enterprise-wide awareness of risk drivers and guides the risk mitigation steps you take with timely business intelligence. It enhances business decision-making, and helps to create a more agile and resilient organization that’s prepared for the future.
But all of this can only happen if organizations can anticipate risk and implement the right solutions to avoid (or at least minimize) it. Traditional, reactive risk management programs attempt to reduce damage and losses after a risk event has already materialized. They do little to prevent the threat from arriving in the first place.
Here’s where proactive risk management comes in.
Organizations that practice proactive risk management analyze situations and assess business processes to identify potential risks. They also identify drivers of risk and try to understand root causes. Finally, they aim to determine each risk’s probability and potential impact.
All these activities allow risk managers to prioritize the identified risks. More importantly, they help risk managers to prepare a robust plan to manage these risks and minimize harm to the organization.
Proactive vs. Reactive Risk Management
Proactive Risk Management
Proactive risk management aims to prevent risk and avoid the damage it may cause if realized. This style of risk management is based on measurement and observation, as well as predictive analyses and root cause analyses.
The central thesis here is assessment of potential risks. Risk managers who adopt this approach identify relevant risk drivers and calculate the probability of:
- The risk event happening
- Its potential impact
- The forces driving this impact
- The probability of loss
Such calculations help risk managers to develop plans that can reduce the harm of the risk, prevent future risks, and minimize the likelihood of a risk event from recurring.
Proactive risk managers analyze past, current, and future data to identify risks before they occur, determine root causes, and develop plans for both unforeseen and known risks. This adaptive risk control strategy leverages data analytics, process automation, and artificial intelligence tools for risk analysis and contingency planning.
Closed-loop feedback is also an important element of proactive risk management. Risk personnel establish parameters to define acceptable risk levels. They also test various risk scenarios and implement strategies to eliminate the risk or to bring it to acceptable levels.
Reactive Risk Management
In contrast to the above, reactive risk management is a response-based risk control strategy. It focuses on events rather than root causes, and is mainly about reacting to a risk and reducing the fallout to the company.
Reactive strategies investigate risk events and aim to mitigate against future occurrences. Such investigations and mitigations, however, only occur after a negative risk event has already harmed the company.
Reactive risk management strategies rely on analyses of responses to risks that affected the organization in the past. Risk managers generate accident scenarios based on known or potential risks and analyze risk drivers that may result in the accident or adverse event.
These analyses are rigid and limit the organization’s ability to address challenges and prevent damaging risk events. Moreover, they don’t incorporate predictive analysis or AI tools for root cause analyses or creative problem-solving; that limits risk prevention and risk avoidance all the more.
Benefits of Proactive Risk Management
Reactive risk management enables the organization to implement preventive measures against known risks. It can’t shield the business against future risk. For this, proactive risk management is required.
Proactive risk management allows an organization to manage and sometimes even avoid existing and emerging risks. It attempts to reduce the likelihood of unwanted events or unexpected crises while also helping the firm to adapt quickly to these events and crises.
This risk management strategy incorporates both risk management and risk mitigation elements. Risk managers assess potential risks, identify the root causes, identify the key risk drivers, and calculate the probability of loss. They also develop contingency plans to prevent damage from both current and future risks.
Furthermore, proactive risk management allows organizations to prioritize risk and implement robust risk mitigation and prevention controls. They can act quickly to avoid or control unexpected losses and make better and more informed business decisions through greater awareness of risk drivers.
Implementing Proactive Risk Management
Proactive risk management should be an integral part of the organization’s overall business strategy and building a risk-aware culture. It is a continuous process and requires enterprise-wide commitment and effort.
With a proactive risk management strategy, enterprises can limit risk exposure and enhance stakeholder value. But to achieve such results, they need to implement the right tools and processes. A centralized risk management tool can provide greater clarity into the organization’s risk posture. It would integrate with existing workflows and policies, and promote more efficient and effective risk management across the enterprise.
Proactive risk management also requires process automation, data analytics, and AI tools for effective risk analyses and accurate risk-related measurements. Organizations must also remove data silos that prevent the sharing of risk data and limit the efficiency of risk management.
Finally, to ensure an effective proactive risk management program, these aspects are vital, too:
- Tone at the top
- Appropriate risk mitigation actions
- Communication channels among stakeholders
Examples of Proactive Risk Management
An emergency action protocol (EAP) is one example of a proactive risk management tactic. The EAP includes relevant policies and procedures for responding to an adverse event; it also details who is responsible for what in the event of such an incident. The goal is to remain prepared for adverse events and assure fast action if they occur.
Employee training is another example of proactive risk management. Through walkthroughs, drills, and other practical actions, the organization can better prepare its workforce to recognize potential hazards and act appropriately to minimize damage.
A third example are robust cybersecurity controls to prevent cyberattacks and data breaches. For instance, vulnerability management software enables security teams to find and fix security gaps before threat actors can exploit those gaps and harm the company.
Strong access controls, closed-circuit cameras, and security guards can secure physical enterprise environments. Similarly, digital access controls can protect the IT network and prevent unauthorized or malicious users from compromising assets or data.
Safety policies and rules are also an example of proactive risk management. Instead of waiting for a tragedy, the enterprise enforces strict rules to mitigate safety concerns and implements emergency protocols to deal with dangerous situations. Such proactive actions can minimize the harm of accidents and also decrease their likelihood.
Manage Risk Proactively with ZenRisk
As your organization’s risk landscape evolves, you must keep track of changing risks, potential threats, and emerging risk management trends.
ZenRisk will help you get this visibility to better manage risks and mitigate business exposure.
This centralized platform will help you streamline your risk management process. Create risk heat maps and dashboards to operationalize risk management and to communicate the current risk status to relevant stakeholders. ZenRisk will also help with continuous risk monitoring with its streamlined workflows and real-time updates.