Risk management is a crucial part of new projects businesses undertake to support growth. A strong risk management process helps organizations to assure that they comply with all applicable laws and regulations. It also allows them to protect themselves from the potential harm of business and digital risks, including data breaches, cyberattacks, and other cybersecurity threats.
One fundamental part of risk management is risk evaluation: identifying and assessing your risks, so that executives can make more informed decisions about how to mitigate those risks. In this post we’ll review how risk evaluation works, so that you can get started developing your own risk identification, assessment, and mitigation plans.
The Factors That Drive Risk
Many factors, both internal and external to your organization, can drive the risks threatening your business. Every organization will have its own unique set of risk factors, but we can identify a few common factors that all businesses face.
Economic downturns or recessions can reduce demand for products or services, increase business finance costs, and affect suppliers’ reliability.
Changes in market demand, shifts in consumer behavior or purchase preferences, increased business competition, and market saturation can influence business risk.
This risk factor can have a variety of causes: disruptions in organizational supply chains, equipment failures, IT system crashes, natural disasters, human errors, and more. All can be potential hazards that will interrupt business operations.
Changes in corporate and consumer laws or regulations directly affect a company’s operations. These regulatory changes can have profound effects, especially in critical infrastructure industries such as the finance, healthcare, and energy sectors.
With today’s rapid advances in technology — the rise of ChatGPT and other generative AI products is a prime example — a company’s products, services, or IT systems can be rendered obsolete quickly. Advances in technology also spaw new cyber risks, which in our modern digital world can threaten any business.
Under the harsh and unblinking eye of social media, bad publicity can create risk for any business. This can lead to a significant loss of consumer trust and brand value due to real incidents, company responses, employee fraud, misconduct, or fabricated allegations.
Those are the factors that can drive risk. We still, however, need to answer our original question: how does a compliance officer evaluate risk?
Risk Evaluation Frequently Asked Questions
1. What is risk evaluation?
Simply put, risk evaluation is how you determine the severity of potential risks. The risk evaluation process has two components: risk assessment and risk analysis.
2. What’s the difference between risk assessment and risk evaluation?
The two terms might sound like they mean the same thing, but it’s important to appreciate the distinction between risk assessment and risk evaluation (also known as risk analysis).
Risk assessment is the process of identifying all the risks to your organization. Then, during risk analysis, you evaluate and define the characteristics of each risk and assign each one a score.
3. How do you evaluate risk?
To evaluate a risk we must determine its significance and severity. This can be done in two ways:
- Qualitative Risk Assessment
Qualitative risks are defined as uncertain events that could have a range of possible outcomes, from harmless to severe. Usually the risks are ranked on a high/medium/low scale.
A qualitative risk assessment typically maps identified risk factors along the x- and y-axis of a risk matrix, so that executives can address issues with the highest severity level first and then low-probability risks later.
This type of risk analysis is more subjective and experience-based than quantitative risk analysis. This makes it an ideal way to incorporate insights from those executives who know the business operations, but need more experience in formal risk management.
- Quantitative Risk Assessment
Quantitative risks receive an actual numerical value using algorithms and actuarial data with identified hazards. For instance, “A ransomware attack that locks us out of critical systems for four hours will cost us $100,000 in lost revenue.” While quantitative security risk assessment determines that numerical value, qualitative analysis is often used to determine the full impact of a defined operational risk.
Evaluation and prioritization are important because you can’t respond to every risk at once. Understanding risk impact lets executives sort out which issues require immediate attention versus those with an acceptable level of that can be addressed later.
4. What are the five stages of a risk assessment?
Risk assessment happens in five steps:
- Identify any potential risks within the organization, as well as risks your vendors or other third parties may pose.
- Evaluate risk criteria to determine the probability of a risk happening and its possible impact. (This includes vendor risk assessment tools as well.)
- Determine which risks can’t be eliminated, as well as acceptable risks; and set up a way to monitor them.
- Assess the extent of those outstanding risks.
- Design and implement risk management plans for each risk based on your risk ratings and priority level.
5. How does risk evaluation fit into risk management?
Risk evaluation is just one piece of a risk management plan. Let’s look at the other parts of a risk management plan to help you get a complete picture of how this all works together for an organization.
- Step 1: Assigning roles and responsibilities. Before embarking on this journey, leaders and other supporting team members must be identified, and each one must understand his or her role in the risk management plan.
- Step 2: Budgeting and cost-benefit analysis. You won’t be able to address all risks at once. Before prioritizing and mitigating risks, you should first determine the overall budget for your risk management plan. Then perform a cost-benefit analysis for each risk and its mitigation plans to assure that you spend your budget efficiently.
- Step 3: Process and timing. It’s imperative to lay out the risk management process and how risks will be evaluated before you start. It’s also key to clarify expectations around the timing and frequency of certain actions.
- Step 4: Risk evaluation and scoring. Once the groundwork has been laid, it’s time to define, score, and prioritize risks using both qualitative and quantitative risk analysis. Acceptable risks will be identified; unacceptable risks will be prioritized for remediation based on the level of impact. Methods and scoring must be determined in advance to ensure consistency.
- Step 5: Documentation and communication. Next, determine how risks will be documented and how your team will communicate during risk evaluation.
- Step 6: Tracking and auditing. This step guides how risk evaluation and treatment are recorded, reported, and stored for future auditing needs. This step can include checklists and other methods to support proper documentation.
How RiskOptics ROAR Can Support Your Risk Evaluation Strategy
ROAR provides your security and compliance teams with a single, integrated platform to uncover information security risks across your business. ROAR also includes a risk assessment template for a quick risk evaluation and decision-making for your teams.
ROAR simplifies risk management and compliance with complete views of control environments, easy access to information necessary for risk evaluation, and continual compliance monitoring to address high-risk and critical tasks at any time. The user-friendly dashboards show which risks need mitigating, how to do it, track workflows, and collect and store documents.
To learn more aboutROAR and how it can support your risk evaluation efforts, contact us now for your free consultation and demo.