Cyber risks can be difficult to understand, especially for non-experts. This makes it harder for companies to take proper precautions to address a potential threat, since management teams might not grasp the residual risk that remains after they implement a suite of controls.

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

It’s why you need to 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. Put another way, residual risk can affect your business even after taking all the security measures.

Inherent Risk vs. Residual Risk

Inherent risk refers to the amount of risk that exists absent any controls at all. This includes all risks to an organization before the organization implements any countermeasures.

For example, in the accounting world, an inherent risk might be management using its own judgment for key estimates included in financial statements — judgments made without following any specific procedure, or without requiring any documentation to show why management picked the estimate it did. In cybersecurity, an inherent risk might be the threat of data theft when the company uses no encryption or no security in its web browsers.

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 decide to make the policy stricter by asking employees to change these passwords every week.

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. You now have to decide the amount and type of residual risk you’re willing to accept.

Why Is Residual Risk Important?

Understanding residual risk is important for regulatory compliance. The ISO 27001 standard to manage information security, for example, requires companies to monitor residual risk. To be ISO 27001-compliant, businesses must have residual security checks in place along with inherent security checks.

Companies generally pay more attention to eliminating inherent risks — but just because you‘ve put up a fence against potential threats, that doesn’t mean you’ve eliminated all risks. Some risks will always remain; you can never eradicate every one. That’s why you need to strike a balance between managing inherent risks and monitoring residual risks.

Getting this right will allow a security team to respond to risks more confidently. They can identify potential security threats faster and more accurately, and understand how these threats might affect a company and its data.

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

How do you make sure you’re making 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 deep into both inherent and residual risk factors to identify the next steps and applicable compliance standards.

Besides risk avoidance and risk reduction, you can also use other strategies like 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 leave the risk as it is, rather than ladle on more controls and procedures that might not be worth the cost and effort.

Minimize Risks With the Help of ZenGRC

Reciprocity’s ZenGRC software can help you stay on top of compliance changes and new risk factors while simultaneously identifying any blind spots during risk assessment. The tool’s compliance, risk, and workflow management software exist in an intuitive platform that allows you to keep track of your workflow and helps you find areas of high risk before they turn into a real threat.

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