Get to know the basics of what risk management is and the strategies you can use to minimize or completely nullify it.
In a fast-changing business world, there are risks at every turn that can threaten every part of an organization.
Whether it’s their funds, sensitive customer data, corporate assets, or even the health and safety of the employees, there are countless events that could cause problems for any type of business.
Taking proactive steps to mitigate the effects of those risks, and ensure that any adversity to the business is minimized, is at the heart of effective risk management.
In this blog, we’ll explore the basics of risk management for business, and take a look at the concepts that can help you devise a strong, effective risk management strategy.
What is risk management?
Risk management is the ongoing process within a business of ensuring that any risks are appropriately addressed.
It is a constant task for all organizations to maintain good risk management because they are often aiming at a moving target - new risks can emerge and recede at any time, and can rise or fall in importance or threat level.
Without risk management, businesses aren’t as prepared to respond to events that can have a negative impact on their operations and profitability.
The ramifications of these realized risks are many: financial, reputational, operational, and even legal.
That’s why a good risk management strategy, ideally encompassing these four areas, is so important:
1. Identifying risk
Firstly, it’s important to identify any risks that may be present: after all, you can’t protect against risk if you don’t know that it exists.
Sometimes a risk can manifest itself by sheer accident or coincidence, but it’s far more effective to implement tools and processes that can flag them up at the earliest opportunity.
2. Assessing risk
Any risks identified can then be assessed, in order to work out the level of threat that they could pose to the business.
This should include working out how likely it is to become a problem, how severe the problem could be, and the scale of the impact that it could have on the business.
This allows auditors or other risk management staff to prioritize risk management strategies so that the biggest and most threatening risks are dealt with first or with greater resources.
3. Responding to risk
With those risks assessed, a business can then set about putting the right solutions or initiatives in place to address those risks.
For risks within business processes, for example, this could involve putting certain controls or checks in place that ensure that risks are mitigated as part of normal everyday work.
4. Monitoring risk
In most cases, risks aren’t fixed and so an ongoing approach to monitoring risk levels is vital.
Tracking the execution of risk management processes and solutions to see how effective they are is crucial for understanding where improvements are necessary.
They can also quickly pinpoint areas where risks have increased to levels where new risk management strategies and responses are required.
How to prioritize risks
Risk prioritization is an essential component of this process. Subjectively, we all have an idea of what we are and are not willing to accept as a threat, but with so many factors at play, prioritizing risks can be a daunting task.
The first step in risk prioritization is to understand the types of risks facing an organization.
Examples include financial risks, operational risks (e.g., supply chain disruptions), regulatory compliance issues, market volatility, and technology changes.
Evaluating these types of risks helps organizations set goals and objectives that are consistent with their overall strategic direction and identify areas that need attention.
Once the types of risk have been identified, organizations should assess each one against criteria such as:
- Impact on the business,
- Likelihood of occurrence,
- Timeline for resolution,
- Cost of mitigation efforts, and
- Other relevant factors.
By evaluating each risk according to these criteria, organizations can ensure that resources are allocated appropriately and focus on those areas most likely to yield a return on investment.
Additionally, this assessment process allows for increased transparency surrounding resource allocation decisions across departments and divisions within an organization.
In addition to assessing individual risks according to criteria such as impact and likelihood of occurrence; you should also consider more subjective measures such as public perception or cultural sensitivity when developing risk management strategies.
This ensures that organizational objectives remain consistent with stakeholder expectations while balancing interests among all stakeholders involved in the decision-making process.
Finally, companies should review their risk management strategies regularly to ensure they remain current with changes in technology or regulations within their sector or industry that may affect their ability to meet organizational goals.
Having a comprehensive plan in place will help companies respond quickly when new threats emerge or existing ones intensify over time.
While there is no one-size-fits-all approach to ranking risks, having an effective strategy in place helps businesses prepare for whatever lies ahead .
Good strategies for risk management
With the above areas taken care of, businesses are then able to make the right decisions about how to manage those risks.
This will vary on a risk-by-risk basis, depending on the individual characteristics of each one: obviously, a potential trip hazard in the office will need a different approach compared to the security patching of new hardware.
However, most risk management strategies tend to fall into one of these four categories:
1. Risk acceptance
This is the act of noting that a risk exists, but deeming that no action is required in response because the risk is unlikely to occur or will have only a small business impact.
In some cases, the action that would be required to mitigate the risk would take up so much time or would cost so much money, that it far outweighs the impact of the risk being realized.
2. Risk transference
This is where a risk is identified, but action is taken to transfer the risk to another party. For example, if you happen to crash and damage your car, there will inevitably be financial consequences for getting it repaired.
Your risk transference in this case is your car insurance policy: you have paid a company to deal with the financial burden of funding the repairs should you have an accident.
3. Risk avoidance
Under a risk avoidance strategy, you deliberately bring the likelihood of a risk being realized down to zero by not doing whatever it is that could lead to that risk.
Perhaps the most basic example of this is if you’re playing roulette in the casino.
There’s a risk of losing all your money if you place it all on red and the ball lands on black - but you avoid the risk of financial loss by not placing the bet at all.
This strategy should be used in a balanced way: it’s excellent for cutting out major risks, but trying to cut out everything may hold a business back.
4. Risk reduction
Taking action to reduce the likelihood of a risk occurring, or the severity if it happens, is risk reduction.
In the workplace, protective personal equipment (PPE) is a common area of risk reduction: for example, safety goggles reduce the risk of an eye injury in hazardous areas.
Another example would be the implementation of quality control within a manufacturing process: if products are sent to customers despite not meeting requirements, this can impact profitability and potentially could breach legal regulations.
Quality control ensures that only products that meet the correct specification are sold and delivered.
Risk traceability analysis
A risk traceability analysis is when you figure out how likely a risk will happen, how bad it would be if it did, and what you can do to stop it or lessen the damage.
One example risk traceability analysis might be related to the potential disruption of a company's supply chain.
First, the impact of such a disruption should be assessed:
- What would be the financial losses associated with the disruption?
- What would be the direct and indirect costs incurred by the company due to the disruption?
- How would customer service or customer loyalty be affected?
- Would there be any long-term reputational damage to the brand due to customers being unsatisfied with their service?
Next, an assessment of likelihood should take place:
- How likely is it that this disruption will actually occur?
- What are some of the risks posed by external factors such as global markets, political uncertainty or natural disasters that could lead to such a disruption?
- How can these risks be minimized or mitigated?
Finally, once risk and impact have been assessed, companies must determine strategies for responding quickly and effectively in order to minimize losses:
- Which resources need to be allocated in order to respond to this particular risk most efficiently?
- What contingencies should be put in place in case of extreme scenarios where even best-case plans fail?
Developing a comprehensive risk traceability analysis helps your organization plan ahead for potential disruptions and respond appropriately when they arise.
It also allows you to set realistic expectations for stakeholders regarding acceptable levels of risk and reward.
A well-planned risk traceability analysis can make all the difference when it comes time for your organization to make difficult decisions under times of stress or uncertainty.
How to quantify risk
Risk quantification involves assessing the potential impact, likelihood, and consequences of an event.
Generally speaking, the greater the impact or likelihood of an event occurring and the more severe its consequences, the higher risk it may pose.
To quantify a risk, organizations typically use criteria such as cost-benefit analyses, financial models, and probability calculations to measure how much risk they can absorb.
One way to quantify risks is through cost-benefit analysis.
This involves assessing the expected costs of a project or process versus its potential benefits in order to determine whether it is worth pursuing.
Cost-benefit analysis helps organizations identify if something is worth investing in by taking into consideration not only tangible costs like materials and labor but also intangible factors such as reputational damage.
If the expected costs outweigh the potential benefits then it may be best to avoid taking on that particular risk.
Financial modeling is another method of quantifying risks by measuring their effects on expected returns over time.
This type of analysis allows organizations to analyze data from past projects and investments in order to predict future outcomes.
By forecasting different scenarios based on changes in key variables such as market conditions or customer demand, businesses can better understand what risks are involved in any given investment decision and anticipate potential outcomes with greater accuracy.
Finally, probability calculations are used to estimate how likely an event is to occur or how much effect it would have if it did happen.
This type of quantitative analysis looks at historical events and uses mathematical models to assess the chances that a certain outcome may occur in any given situation.
By measuring how likely something is to happen, businesses can adjust their strategies accordingly in order to minimize potential losses while maximizing opportunities for success.
Cost-benefit analysis, financial modeling, and probability calculations all provide valuable insight which can help businesses make informed decisions about taking on new challenges while minimizing their exposure to potentially costly risks over time.
Execute your strategy with i-nexus
Establishing and maintaining effective risk management strategies can be complex, and can consume significant time and human resources.
The i-nexus solution for strategy execution can make this process easier, across planning, execution, and tracking.
Take a closer look at how we can help you simplify your risk management here.
Learn more about strategy execution
Take the next steps in your journey by exploring our strategy execution resource hub or any of the below:
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About the author
James Milsom is Head of Marketing at i-nexus.
As Head of Marketing, his drive is to raise awareness and understanding of enterprises' challenges in delivering strategic goals amidst changing markets and the obstacles traditional tools and methods present leaders.
If you’d like to talk more about strategy, reach out to James on email@example.com or connect with him on LinkedIn for the latest insights.