The risk management process involves identifying, monitoring, and managing potential risks and their negative impacts on a business. Examples of potential risks include data loss, cyberattacks, security breaches, system failures, and natural disasters.
A risk management plan enables a company to understand and control risk so it can make better business decisions and reach its business objectives. One of the benefits of risk management is risk identification.
It’s critical for a company to identify possible risks before they can harm the business. Identifying the potential risks makes it easier for the organization to take the appropriate steps to prevent them from happening. This is also known as risk response.
Understanding risk is also important to project management because with every new project comes new project risk. By crafting an effective risk management strategy, an organization can identify the project’s strengths, weaknesses, opportunities, and threats.
Risk management plans follow these steps that comprise the overall risk management process:
- Determine context: The organization has to understand the context in which the rest of the risk management process will take place. Additionally, the company should establish the criteria it will use to evaluate potential risks and define the structure of its analysis.
- Risk identification: The organization has to identify and define potential risks that might negatively affect a particular process or project.
- Risk analysis: After the company has identified the specific types of potential risks, it must determine the odds that those potential risks will occur as well as what will happen if they do occur. The goal of risk analysis is to better understand each specific risk, and how it could affect the company’s projects and objectives.
- Risk assessment and evaluation: The organization further evaluates each potential risk after it determines how likely it is that the potential risk will occur and what the consequences will be if it does occur. This allows the company to decide whether a risk is acceptable and if it is willing to accept the risk based on its risk appetite.
- Risk mitigation: The company reviews its highest-ranked risks and develops a plan to mitigate these risks using specific risk controls. Such plans include risk mitigation processes, risk prevention tactics, and contingency plans to handle the risks if they should occur.
- In addition, there are four types of risk mitigation: Accept the risk, choose to avoid the risk, decide to transfer the risk, or work to reduce the risk.
- Risk monitoring: The mitigation plan includes following up on the potential risks and continually monitoring and tracking new risks as well as existing risks. The risk management plan should also be reviewed and updated as necessary.
- Communicating and consultation: The organization needs to include internal and external shareholders in communication and consultation at each step of the risk management process.
A company that plans for potential risks will be able to more quickly respond to those potential risks. Successful project managers understand that risk management is important because successful projects depend on planning, preparation, results, and evaluation.