Risk management is key to any business’s success. Businesses need to identify, assess and mitigate risks or they will get hit. This article will show you the top ways to manage risks and protect your business.
Quick Facts
Risk management is systematic identification, assessment and response to potential threats to organisational objectives.
Continuous monitoring and risk management as part of business strategy is key to adapting to change and being resilient.
Organizations must overcome common obstacles such as lack of oversight and resistance to change by implementing industry specific best practices, using technology and a collaborative risk management culture.
What is Risk Management?
Risk management is about identifying and evaluating potential threats to an organisation’s objectives.
By looking at possible problems it aims to reduce risk before it damages an organizations:
Reputation
Finances
Strategic Outlook
Knowing how much risk your organization is willing to take is key to making informed decisions that are aligned to the organizations goals.
Including risk management into organizational practices makes decision making more effective by having a structured way of looking at unknowns in strategies. Organizations that embed risk management into their culture see better performance and more stakeholder confidence.
Anticipatory actions in managing risk allows businesses to reduce investments exposed to volatility and strengthen overall financial position – that’s why proactive risk management is essential.
Well managed risk plays a big part in reducing financial losses from various hazards such as workplace breaches. It also enables innovation and business growth by managing competitive threats and opening up new opportunities. Indeed mastering risk management is key for any business to succeed in today’s fast changing business world.
Risk Assessment
Organizations start the risk management process by identifying risks.
Then those identified risks need to be assessed.
Risk assessments can be qualitative, using expert subjective judgement to evaluate risks or quantitative, using numerical data to determine probability and impact of risks. Combining both gives a full picture of all risks. These terms align with PMI’s risk assessment framework as outlined in the PMBOK® Guide (2021).
Regular risk assessments allows organisations to stay responsive to changing circumstances and new threats. To do an effective risk assessment there needs to be well defined categories of risk to help with understanding and communication of potential issues.
Using tools like SWOT gives an overall view of threat potential by looking at strengths within and weaknesses from external factors.
By rating the identified threats on likelihood and impact organizations can allocate resources to manage hazards more strategically. This methodical way of managing risk ensures attention is focused on mitigating major risks – and protecting the organization and its assets.
Developing Risk Management Strategies
Developing risk management strategies requires organizations to use methods that allow them to identify, assess and manage risk.
Typical responses to identified risks are dependent on if the risk is positive or negative:
Risk response strategies such as avoidance, mitigation, transfer, and acceptance are structured approaches commonly outlined in risk management methodologies, including PMI’s PMBOK® Guide (2021).
We only want to accept a risk when it’s tolerable.
We only do something like avoiding a risk when the negative consequences outweighs the benefits.
Reducing the risk is necessary when the threat is big and can’t be managed otherwise.
Determining how severe the identified risks are is key to deciding which ones need immediate attention and control measures. Sometimes the best strategy is to accept certain risks – especially if the probability of them occurring is low or the impact is negligible. Risk transfer is when you pass the uncertainty to someone else such as an insurer.
Continuity in managing risk helps an organization to be resilient to unexpected events and strategic decision making.
Companies need to reassess potential risks regularly so they can respond quickly and adapt their management practices to changes within the internal and external environment – an effort that keeps operations running and protects against disruption.
Risk Management Programs
A risk management program requires defined roles and responsibilities to hold people accountable. To develop an operational risk management framework there needs to be alignment across the organization to identify and mitigate risks.
This ensures no risks are missed.
Put controls and metrics in place and monitor and control major risks. Centralizing risk information helps operational effectiveness and creates an environment where risk awareness exists. Combining these two enables organizations to manage their exposure to many threats better and be more resilient.
Centralizing risk information and creating an environment where risk is aware within institutions is key to good risk management. This way operations works better and everyone is aligned when dealing with different types of uncertainty or danger.
Monitoring and Reviewing
Monitoring within organizsations helps to identify emerging risks quickly so you can contain them.
Reviewing risk management strategies regularly is key to ensure they are aligned to business objectives and stakeholder expectations. Keeping an eye on potential threats is critical in a fast changing business environment.
Having a structured risk management framework makes the identified risks transparent to all parties involved. Having access to current data makes risk assessments more accurate by using up to date information.
Automating monitoring tasks helps to streamline by integrating information from multiple risk indicators in real time.
Periodic reviews based on this data helps to identify emerging risks early so you can adjust your risk management approach as needed. Being forward thinking helps you to stay alert and prepared for any potential threats.
Financial Risk Management
Financial risk management involves using various systems to identify, assess and manage different types of financial risks including credit risk, liquidity risk and market risk.
Market risk includes systemic risks such as equities, interest rates, foreign exchange and commodities. To know how changes in certain variables will affect a portfolio and to calculate the maximum loss it could take, techniques such as regression analysis and Value-at-Risk (VaR) are used.
Organizations use scenario analysis to quantify risk by building models that simulate potential future stress events and their impact. Risk can be transferred through contracts or insurance policies for organizations that want to reduce their financial exposure and overall risk footprint. When an entity chooses to accept risk without mitigation – like a commodity producer deciding to absorb price volatility – it is accepting risk.
The practical application of this is when shipping companies use it to manage the fluctuations in fuel costs and changes in currency exchange rates. The actions taken are to protect the profit margins from adverse movements. These real life exam
Financial risk management strategies often align with structured risk assessment techniques outlined in the PMBOK® Guide, Project Management Institute, 2021.
Operational Risk
Operational risk is losses or disruption from failed internal processes or human error and external events.
A big category of operational risk is internal fraud which can cause significant financial loss. Delta Airlines faced operational risk when they cancelled flights due to a computer outage.
Process failures can expose organisations to operational risk if the processes are flawed or not followed. A maritime transportation company revamped their operational risk management to address regulatory scrutiny and avoid financial penalties from near miss incidents.
Operational errors can make or break an organization. Addressing these risks proactively helps to smooth operations and avoid big disruptions. Operational risk management is key to organizational stability and efficiency.
Emerging Risks and Trends
Each year, it seems to grow more dangerous in the risk landscape.
External fraud through cyber attacks is critically threatening operational resilience and highlights the need for stronger cybersecurity defences. Geopolitical risks such as local disputes and political instability are some of the fastest moving events that impact business operations.
Managing AI risks is becoming more important with concerns like:
- Biased algorithms
- Misleading results
- Ethical issues.
A quick risk for any organization implementing current AI processes is to watch for inconsistencies and inaccurate information!
There is a trend within organisations to align their risk management with environmental, social and governance (ESG) and sustainability risk management – which is a convergence of managing risks and pursuing broader goals tied to corporate responsibility.
Organizations must stay ahead of the curve by monitoring these emerging risks continuously. By understanding these trends fully and planning for it will ensure businesses are equipped to navigate this complex landscape of modern day risks.
Risk Management Teams
Having a dedicated team for risk management is key to not missing any risks which can lead to expensive problems.
In larger organizations there is an enterprise risk management team that monitors risks across the organization and ensures the risk management processes are followed. A center of excellence for risk enhances an organization’s risk management strategy by refining the tools, policies and how resources are deployed.
Leaders at the top need to be champions of risk management if these programs are to succeed. The key is to communicate transparently to all stakeholders the risks that matter so they can understand the impact and significance.
Well established risk management practices build trust with customers, clients and investors alike and opens up opportunities for growth.
Risk Management requires engagement across the organization, including those who lead it, finance, HR, legal and others. By creating team environments and clear lines of communication helps not only with mitigation of threats but also overall protection.
The role of risk management teams follows structured best practices from industry frameworks, including PMI’s PMBOK® Guide.
Risk Management and Business Strategy
Integrating risk management into the business planning helps to inform decision making with timely insights. It enables organizations to address risks before they become big problems. This integration is key to identifying and neutralizing threats and seizing opportunities. A single risk management approach brings together all risk related functions across the organization.
Having an integrated risk management framework helps businesses to weather market downturns better. A risk management strategy should be tailored to the organization’s unique goals and competitive strengths so that everyone is accountable for risk at all levels to build a risk culture.
For example a luxury fashion brand overhauled their risk management processes to ISO 31000 so they could protect their brand reputation in the face of global supply chain risks. By embedding risk management into their overall business strategy companies can develop operational models that are more resilient to unexpected events and more agile to change.
Risk Management Challenges
Organizations face challenges in managing risk such as resource constraints, lack of oversight and resistance to change. Labor costs are increasing so securing and retaining talent is key for businesses. When oversight is missing in risk management frameworks big gaps can emerge that impact decision making.
Businesses also face external challenges such as economic volatility and operational risks which they need to navigate. A reluctance to adopt new ways can hinder effective risk management by making managers overestimate their ability to mitigate risks.
Organizations need to be proactive in managing risk and committed to continuous improvement.
By recognizing these common obstacles to managing risk effectively institutions can develop more robust risk mitigation strategies and overall resilience to threats.
Risk Management Best Practices
Following industry best practices is key to risk management. Organizations can use risk management technology to simplify the process and improve the effectiveness of their controls. By incorporating AI and automation into their operations organizations can reduce costs and increase the accuracy of their risk assessments.
Organizations may use a range of tools including AI applications, GRC platforms and open source resources to build their risk management processes. These tools help to refine data collection methods for risk and enable monitoring and action as required.
Effective risk management strategies will vary across industries and projects.
By incorporating these best practices into your organization’s processes they will help you to manage risk better and gain a competitive edge. These strategies aren’t just to mitigate threats but to enable companies to seize opportunities that arise from managing risk well.
Real world case studies provide valuable insights into how organizations manage risk and achieve their goals.
For example a regional transport company adopted a comprehensive risk management approach to address increasing accident frequency and insurance costs and were able to improve safety and reduce operational costs. As part of this approach they upped employee training and improved existing safety protocols.
A mid-sized insurer improved their efficiency and profits by updating their risk assessment methods due to an increase in claims from natural disasters. This involved bringing in advanced analytics and refining data.
And then there’s the biotech company that wanted to improve project risk management as they were facing rapid research breakthroughs and growing market demand. By making their risk management more efficient they could not only navigate industry complexity but also grow the business.
How You Manage Risks
In this guide we have covered the basics of risk management which includes recognizing and identifying risk and developing and applying effective strategies. By following a risk management process organizations can improve their decision making, reduce financial loss and turn threats into opportunities.
In summary managing risk is more than just avoidance. It’s about navigating through them with insight and foresight. By including risk management in your organizational strategy and risk awareness across your workforce and monitoring emerging new risks you can ensure the long term sustainability and prosperity of your organization.
Use these methods to face the future head on.
FAQs
What's the first step in the risk management process?
The first step in the risk management process is to identify risk which means conducting regular internal and external reviews, engaging stakeholders and maintaining a risk register.
This sets the foundation for risk management.
How do organizations assess risk?
Organizations can assess risk by using both qualitative and quantitative methods and by doing risk assessments and prioritizing risk by probability and impact.
This structured approach covers all the bases.
What are the common risk responses in risk management?
Common risk responses in risk management are avoidance, reduction, acceptance and transfer and the choice depends on the severity and likelihood of the risk.
Choosing the right response is key to risk mitigation.
Why is monitoring ongoing?
Monitoring is important in risk management because it allows organizations to identify risk in real time and adjust to changing circumstances.
This forward thinking approach means risk management stays current.
How does technology help risk management
Using technology makes risk management practices more efficient and data more accurate so you can monitor and respond to risk in real time.
Risk response strategies such as avoidance, mitigation, transfer, and acceptance are part of standard risk management methodologies, including PMI’s PMBOK® Guide (2021).
The Risk Blog is a subcomponent of Forty-Four Risk PM, LLC.
