Cyber risks can be challenging to understand, especially for people who are not risk management professionals. This makes it harder for companies to take proper precautions to address threats, since management teams might need to grasp the residual risk after implementing a suite of controls.

Ignoring residual risk can leave serious security gaps in your company’s risk management strategy. Those gaps can cost you dearly, measured in dollars and reputation.

You must figure out how to identify residual risk in your risk assessment process.

What Is Residual Risk in Security?

Residual risk is the risk that remains after your organization has implemented all the security controls, policies, and procedures you believe are appropriate to take. Or, phrased another way: residual risk is risk that can affect your business even after taking all appropriate security measures.

Inherent Risk vs. Residual Risk

Inherent risk refers to the amount of risk that exists without any controls. This includes all threats to an organization before the organization implements any countermeasures.

For example, in cybersecurity, an inherent risk might be the threat of data theft when the company uses no encryption or security in its web browsers; or puts no access controls between a user and confidential data the company wants to protect.

Residual risk refers to those risks that remain even after applying all the controls you intend to use. For example, suppose you implement a password policy that requires employees to use complex passwords. You enforce the policy by asking employees to change these passwords weekly.

While the residual risk of hackers guessing the password would be low, the residual risk of employees using new passwords that vary only slightly from the old (or perhaps jotting them down on a post-it note) would be high. So you need to decide the amount and type of residual risk you’re willing to accept.

Why Is Residual Risk Important?

Understanding residual risk is essential for regulatory compliance. For example, the ISO 27001 standard to manage information security requires companies to monitor residual risk. To be ISO 27001-compliant, businesses must have residual and inherent security checks.

Companies generally pay more attention to reducing inherent risks – but just because you’ve put up a fence against potential threats, that doesn’t mean you’ve stopped all risks. Some risks will always remain; you can never eradicate them all. So you need to balance the reduction of inherent risks and the monitoring of residual risks.

Striking the right balance allows a security team to respond to risks more confidently. The team can identify potential security threats faster and more accurately, and understand how those risks might affect a company and its data.

How Can an ERM Maturity Model Help?

A Risk Maturity Model (RMM) provides essential metrics and activities to manage risks. That information can then support a larger enterprise risk management (ERM) program that is sustainable, repeatable, and mature.

Companies may determine how well their current risk management procedures align with RMM indicators by conducting a risk maturity assessment. At the end of the assessment, each company receives a maturity score for its program, from the lowest level of maturity, Ad-Hoc, to the most advanced level, Leadership.

An ERM maturity assessment helps risk management teams, senior management, auditors, and regulators to evaluate the effectiveness and adequacy of an organization’s risk management program, and then determine where and how to improve it.

The RIMS Risk Maturity Model identifies seven qualities for effective enterprise risk management. Each attribute is assessed using the five-level maturity scale:

  • Level 1: Ad hoc
  • Level 2: Initial
  • Level 3: Repeatable
  • Level 4: Managed
  • Level 5: Leadership

The RMM employs those five levels to analyze an organization’s ERM procedures along the seven essential ERM qualities, listed below:

  1. Adoption of an ERM-based strategy. This feature focuses on the organization’s risk culture and the level of leadership support for an ERM-based approach.
  2. ERM process management. This feature considers how deeply ERM is integrated into the company’s culture and critical business processes, and how straightforward and repeatable ERM procedures are.
  3. Risk appetite management. This attribute concerns the entity’s understanding of risk/reward tradeoffs, risk tolerance, and gaps between perceived and real dangers.
  4. Root-cause discipline. This feature focuses on the attention focused on searching for root causes of risks, including risk classification, risk source identification, and a focus on enhancing internal control responses to risks.
  5. Uncovering risks. This characteristic emphasizes the scope of risk assessment and information sources, including the level of risk and opportunities.
  6. Performance management. This characteristic focuses on how well business risk goals and measurements are communicated throughout the organization and how ERM data is integrated into planning. It also analyzes how much quantitative and qualitative data are included in performance metrics.
  7. Business resiliency and sustainability. This feature evaluates the extent to which ERM data is used for the planning process, business continuity plan, and other scenario studies.

Best Practices for Managing Residual Risks

When scoring and measuring residual risk, you can choose from the following approaches:

  • Take a subjective approach and justify the residual risk after taking the necessary steps toward security and compliance.
  • Take methodical, data-driven steps to identify a clear interpretation of residual risk.

How do you ensure you make the best decision for your organization and third-party partners? By working with a vendor security response management platform.

This will allow you to automate vendor security assessments and update your security over time. Additionally, you can dig into both inherent and residual risk factors to identify applicable compliance standards and next steps you should take to adhere to those standards.

Besides risk avoidance and risk reduction, you can also use other strategies such as risk transfer and risk acceptance.

Under risk transfer, you might use a cyber insurance policy to share the residual risks of your cybersecurity program. On the other hand, risk acceptance means that sometimes the best course of action is to let the risk exist rather than ladle on more controls and procedures that might not be worth the cost and effort.

Manage Risk With Reciprocity ROAR

Assessing operational risks, adopting internal controls, and creating documentation at each stage can be time-consuming and inconvenient when done manually. Reciprocity ROAR software can help you stay on top of compliance changes and new risk factors while simultaneously identifying any blind spots during risk assessment.

Reciprocity ROAR is a governance, risk, and compliance (GRC) software tool that can assist you in developing, administering, and auditing your risk management process. Its workflow tracking can help distribute work to your business’s people in charge of risk assessment, risk analysis, and risk mitigation.

Reciprocity ROAR may also assist risk professionals in assessing and tracking your organization’s risk management maturity level with support from subject matter experts, dynamic visualization material, and other technical risk assessment tools.

Sign up for a demo and gain visibility across your organization to manage risks and promptly and effectively mitigate business exposure.

How to Approach Inherent
Residual Risk