Enterprise risk management (ERM) is the process of identifying, assessing, managing, and monitoring potential risks. Its overarching goal is to minimize the harm that risks might cause an organization.

Most organizations do face many risks, after all. Examples include cyber attacks, data breaches, operational disruptions, system failures, economic or political crises, and natural disasters. With an effective risk management process, a company can identify which of these risks pose the biggest threats, and then implement the best measures to those risks at acceptable levels.

This risk management process consists of a series of steps or activities. This article explores these steps in detail so that you can set up an effective risk management program within your own organization.

What Are the Benefits of a Risk Management Process?

A reliable risk management process and a detailed risk management plan can help you understand and control risk. That, in turn, empowers management to make better decisions and assure the company achieves its objectives.

The key benefits of a risk management process are below.

Effective risk identification and response

One benefit of a risk management process is risk identification. Identifying risks early, before they can harm the business, is critical. By identifying current and potential risks, you can take appropriate steps to prevent them from happening and protect the organization from material damage.

Optimize the enterprise risk strategy

A risk management process helps risk managers to craft an effective risk management strategy that guides the organization’s risk mitigation efforts.

Efficient use of resources

A proper risk management process lets employees perform critical risk management tasks consistently and efficiently, without wasting resources, time, or effort.

Standardized risk reporting and clear risk communication

A systematic risk process can improve risk reporting and make it easier to quantify and communicate risk-related information to relevant stakeholders.

Create a risk-focused corporate culture

An effective risk management process requires a strong tone from the top (senior management and board) as well as sustained effort from middle managers and rank-and-file employees. As an organization-wide effort, ERM increases risk awareness and reinforces appropriate risk-averse behaviors. Over time, it helps create a robust and beneficial risk-averse corporate culture.

The 5-Step Risk Management Process

The best risk management programs follow a five-step risk management process. These steps will prepare your firm to identify, treat, and manage possible risks. They will also help you manage and monitor risks, which is essential to protect the company from adverse circumstances.

Step 1: Risk Identification

Every organization has its own “risk profile” – the assortment of risks that might strike, as well as the chance and severity of each risk that happens. Hence it’s vital to identify which categories of risks pose threats to your company. These risks include:

  • Cyber risk
  • Operational risk
  • Geopolitical risk
  • Legal risk
  • Compliance/regulatory risk
  • Financial risk
  • Strategic risk
  • Environmental risk

The extent to which these risks might affect the organization will become more apparent during Step 2, risk assessment and risk analysis.

Best practices for risk identification

It can be difficult to identify all the risks relevant to the organization; that’s why brainstorming is useful. Leverage the collective knowledge of management and employees! Ask them about the risks they have experienced or may have insights about. This exercise is a great way to identify as many risks as possible, improve risk communication, and foster cross-functional learning.

Create a risk log or risk register to document current risks and track risk management activities. Finally, establish the criteria you will use to assess and prioritize potential risks in Steps 2 and 3, respectively.

Step 2: Risk Assessment and Analysis

Once you identify the risks that are relevant to the organization, clarify two key pieces of information:

  • The odds that those potential risks will occur (likelihood)
  • What will happen if they do occur (impact)

The goal is to better understand the company’s exposure to each risk that may affect its operations and goals in the short, medium, and long term. The analyses will also inform your risk response and management approach, which in turn will:

  • Protect the organization’s assets
  • Improve enterprise-wide decision-making
  • Optimize operational efficiency
  • Avoid material damage
  • Save money, time, and resources

Best practices for risk assessment and analysis

Evaluate how many business functions are affected by each risk, and to what extent (risk scope). Also map the identified risks to the different business processes, policies, procedures, and documents to determine the effects of each risk.

Such an analysis will guide your risk prioritization efforts in Step 3. In most cases, the greater the number of functions that are affected by the risk, the higher its severity and response priority. The smartest and fastest way to carry out these activities is to use an automated risk management solution like Reciprocity’s ROAR platform.

Step 3: Risk Evaluation and Prioritization

After completing the risk assessment, evaluate each risk by comparing it against the risk criteria you established in Step 1. Some examples of risk criteria are:

  • Associated costs and benefits
  • Socio-economic risk factors
  • Legal or compliance requirements

Then analyze each risk and determine its potential for disruption or damage. Ask yourself these questions to guide your analysis:

  • How likely are these risks to occur?
  • If they do, what will the consequences be?

These answers will help you determine the severity of each risk. You can then rank and prioritize them, and determine the appropriate risk response. Risks that will lead to minor inconvenience should be a lower priority, while those that can cause catastrophic losses should be at the top.

Best practices for risk evaluation and prioritization

While ranking risks, consider both likelihood and potential effect. Your business may be vulnerable to a risk with a very high probability of occurrence but a low impact. In this case, you may not want to prioritize it for immediate action. On the other hand, a high-impact, low-probability risk may require urgent action and even upper management intervention.

Also prepare the company’s risk profile, which consists of its risk appetite and risk tolerance. Some organizations are comfortable accepting many risks, while others want their risk exposure to be zero. Determine where your company falls on this spectrum.

Step 4: Risk Response and Treatment

Risk treatment involves implementing controls, policies, and procedures to avoid, minimize, or mitigate identified risks. In general, you can choose from one of four risk responses:

  • Avoid risk
  • Accept risk
  • Transfer risk
  • Reduce risk

Your chosen risk response will vary depending on the likelihood and impact of the risk. It’s crucial to map these choices to specific actions for effective risk management.

For example, if a data breach could severely harm business continuity, then accepting, transferring, or reducing the risk may not be the appropriate response. Instead, you should act to avoid the risk with robust cybersecurity and information security controls.

At the same time, you may not be able to avoid every kind of cybersecurity risk. You can, however, reduce the potential financial harm of a cyberattack by purchasing cybersecurity insurance. This risk response is an example of risk transfer where you transfer risk to a third party: an insurance company.

Best practices for risk treatment

Review all highest-ranked risks and plan measures to mitigate them. Also update the risk management plan with these risk response tactics. Make sure the plan includes details about:

  • Risk mitigation strategies
  • Risk prevention methodology
  • Contingency plans to handle the risks if they occur

Step 5. Risk Monitoring

Risk management is an ongoing process that doesn’t end with risk identification or mitigation. To minimize the organization’s risk exposure, it’s crucial to monitor the risk landscape on an ongoing basis.

If you identify new risks, make sure to update the risk management plan, risk register, and risk responses. An updated register and plan will help with active risk management so you can mitigate more risks than would be possible with traditional reactive approaches.

Best practices for risk monitoring

Include internal and external shareholders in all risk communication at each step of the risk management lifecycle. If a risk changes or a new risk emerges, everyone should be kept informed so they can work towards a common solution to protect the organization from harm. Also revisit all risk management policies regularly to keep them up-to-date and relevant.

Simplify the Risk Management Process with Reciprocity ROAR

In today’s digital economy, IT and cyber risks are among the biggest risks to your organization. See, understand, and act on these risks to protect your enterprise with Reciprocity’s Risk Observation, Assessment and Remediation (ROAR) platform.

ROAR will give you a unified, real-time view of risk framed around your business priorities. You will get the contextual insights you need to understand relevant risks and make smart, strategic decisions to minimize risk exposure and maintain business continuity.

Schedule a demo to learn more about ROAR’s built-in content library, automated workflows, and pre-built integrations.

How to Build a
Risk Management Plan