What is Risk Management? And Why Should you Care?

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Risk management is the process of identifying, assessing and controlling threats to an organization’s capital and earnings. These threats, or risks, could stem from a wide variety of sources, including financial uncertainty, legal liabilities, strategic management errors, accidents and natural disasters. IT security threats and data-related risks, and the risk management strategies to alleviate them, have become a top priority for digitized companies. As a result, a risk management plan increasingly includes companies’ processes for identifying and controlling threats to its digital assets, including proprietary corporate data, a customer’s personally identifiable information and intellectual property.

Risk management standards

Since the early 2000s, several industry and government bodies have expanded regulatory compliance rules that scrutinize companies’ risk management plans, policies and procedures. In an increasing number of industries, boards of directors are required to review and report on the adequacy of enterprise risk management processes. As a result, risk analysis, internal audits and other means of risk assessment have become major components of business strategy.

Risk management standards have been developed by several organizations, including the National Institute of Standards and Technology and the ISO. These standards are designed to help organizations identify specific threats, assess unique vulnerabilities to determine their risk, identify ways to reduce these risks and then implement risk reduction efforts according to organizational strategy.

The ISO 31000 principles, for example, provide frameworks for risk management process improvements that can be used by companies, regardless of the organization’s size or target sector. The ISO 31000 is designed to “increase the likelihood of achieving objectives, improve the identification of opportunities and threats, and effectively allocate and use resources for risk treatment,” according to the ISO website.  Although ISO 31000 cannot be used for certification purposes, it can help provide guidance for internal or external risk audit, and it allows organizations to compare their risk management practices with the internationally recognized benchmarks.

The ISO recommended the following target areas, or principles, should be part of the overall risk management process:

  • The process should create value for the organization.
  • It should be an integral part of the overall organizational process.
  • It should factor into the company’s overall decision-making process.
  • It must explicitly address any uncertainty.
  • It should be systematic and structured.
  • It should be based on the best available information.
  • It should be tailored to the project.
  • It must take into account human factors, including potential errors.
  • It should be transparent and all-inclusive.
  • It should be adaptable to change.
  • It should be continuously monitored and improved upon.

The ISO standards and others like it have been developed worldwide to help organizations systematically implement risk management best practices. The ultimate goal for these standards is to establish common frameworks and processes to effectively implement risk management strategies.

These standards are often recognized by international regulatory bodies, or by target industry groups. They are also regularly supplemented and updated to reflect rapidly changing sources of business risk. Although following these standards is usually voluntary, adherence may be required by industry regulators or through business contracts.

Risk management strategies and processes

All risk management plans follow the same steps that combine to make up the overall risk management process:

  • Risk identification. The company identifies and defines potential risks that may negatively influence a specific company process or project.
  • Risk analysis. Once specific types of risk are identified, the company then determines the odds of it occurring, as well as its consequences. The goal of the analysis is to further understand each specific instance of risk, and how it could influence the company’s projects and objectives.
  • Risk assessment and evaluation. The risk is then further evaluated after determining the risk’s overall likelihood of occurrence combined with its overall consequence. The company can then make decisions on whether the risk is acceptable and whether the company is willing to take it on based on its risk appetite.
  • Risk mitigation. During this step, companies assess their highest-ranked risks and develop a plan to alleviate them using specific risk controls. These plans include risk mitigation processes, risk prevention tactics and contingency plans in the event the risk comes to fruition.
  • Risk monitoring. Part of the mitigation plan includes following up on both the risks and the overall plan to continuously monitor and track new and existing risks. The overall risk management process should also be reviewed and updated accordingly.

Risk management approaches

After the company’s specific risks are identified and the risk management process has been implemented, there are several different strategies companies can take in regard to different types of risk:

  • Risk avoidance. While the complete elimination of all risk is rarely possible, a risk avoidance strategy is designed to deflect as many threats as possible in order to avoid the costly and disruptive consequences of a damaging event.
  • Risk reduction. Companies are sometimes able to reduce the amount of effect certain risks can have on company processes. This is achieved by adjusting certain aspects of an overall project plan or company process, or by reducing its scope.
  • Risk sharing. Sometimes, the consequences of a risk is shared, or distributed among several of the project’s participants or business departments. The risk could also be shared with a third party, such as a vendor or business partner.
  • Risk retaining. Sometimes, companies decide a risk is worth it from a business standpoint, and decide to retain the risk and deal with any potential fallout. Companies will often retain a certain level of risk a project’s anticipated profit is greater than the costs of its potential risk.

What is a Risk Management Plan and Why do you Need One?

According to Australia’s business.gov.au website, a risk management plan sets out the strategies and the processes you’ve put together to help you manage any risks associated with running your business.

Typically, a good risk management plan should:

  • Ensure that risk management becomes a priority at all levels of your business
  • Create a clear flow of information so you can identify and deal with risks
  • Enable you to quickly respond to changes in your business environment, and help you make decisions.

Identify your focus areas

Before setting out a risk management plan for your business, you should consider which areas of your business it will refer to. For example, you might only be interested in hazard based risks. Some of the internal and external things to think about when creating your plan are:

  • social, cultural, political and regional issues
  • economic, technology and competitive trends
  • government policies and law
  • your business aims, policies and strategies.

Commit to your plan

Some business owners don’t see risk management as an important issue. However, committing to quality risk management can help you to create a stable business that’s prepared for unexpected events.

As a business owner, it’s a good idea to:

  • make sure that your business aims and risk management plan are linked
  • clearly describe your risk management plan to everyone involved in your business
  • show support for risk management
  • set up a way of measuring the success of your risk management plan
  • regularly check that your way of measuring is giving you useful information
  • make it clear who’s responsible for what
  • provide enough resources at all levels of your business
  • ask for feedback from everyone involved in your business, including customers and suppliers
  • use the feedback to update your plan
  • explain risk management to new employees and in training programs.

Consult with stakeholders

Your risk management plan will be more specific and useful if you ask for feedback from your stakeholders. Stakeholders are people, businesses or organisations that:

  • are affected by the actions of your business
  • can affect your business with their actions.

Stakeholders of your business can include:

  • employees, contractors and sub-contractors
  • clients, customers and suppliers
  • business financiers, investors and insurers
  • your local communities and local media
  • government agencies.

Consulting with stakeholders will help you to:

  • work out what your business considers as high and low risk
  • get support for your risk management plan
  • bring together different views and areas of expertise
  • keep your risk framework up to date
  • respond to unexpected risks.

Work out your risk criteria

Once you’ve gathered all the information you need from your stakeholders, it‘s time to decide on the risk criteria for your plan.

You should state the level and nature of risks that are acceptable or unacceptable in the workplace. Risk criteria set a standard you can use to assess risks to your business.

Example: John’s story

John runs a construction business. While creating a risk management plan he identifies safety of his employees as one of his main business aims.

After talking with employees, contractors and clients, he sets his acceptable level of risk for safety procedures to zero. In his internal risk policy, he notes that safety procedures must be upheld at all the times and that no injuries or fatalities are acceptable.

He makes sure all his stakeholders are aware of this policy. He provides safety training for his employees and explains who is responsible for specific safety risks.

Understanding Risk Management

What is Risk Management?

Risk Management is one of these vaguely scary phrases that most workers and contractors are apprehensive of, but don’t always fully understand. In this blog post, we’ll explain what exactly risk management is, why it’s an essential tool for a successful business, and why directors and managers shouldn’t be afraid of Risk Management in the workplace. Read More