Risk management aids businesses to evaluate and forecast potential risks.
Identification, analysis, ranking, treatment and monitoring are the five steps of risk management.
The faster a business identifies risks, the more time it has to mitigate the risk.
Risk assessment helps narrow down the risks that need instant attention.
To attain a holistic view of the organisation, it is crucial to rank and prioritise the risks.
Some risks are omnipresent, meaning that they cannot be eliminated
“We don’t manage risks so we can have no risk. We manage risks so we know which risks are worth taking, which ones will get us to our goal, which ones have enough of a payout to even take them.”
– Alla Valente, Senior Analyst at Forrester Research.
What is risk management?
Every business, irrespective of whether it’s just starting out or is already well-established, attempts to experience stable growth. However, the path to growth is laden with numerous risks that a business needs to encounter and overcome.
Lately, businesses have come across perilous risks more than ever. Climate change is now regarded as a “threat multiplier.” Similarly, external risks like Covid-19 are emerging as existential threats. We can also see several companies struggling with cyber attacks.
In such situations, business owners need to not only be aware of these risks but also effectively manage them.
Risk management is a business practice that aids businesses to evaluate and forecast potential risks. It identifies the threats to capital and earnings and finds routes to control. Risk management is essential to fit the risk appetite and risk tolerance of a business.
The steps of risk management
Every risk management process consists of five significant steps.
1) Identify the risk
Risk management starts with identifying the pitfalls existing in the business ecosystem. Speed is vital in this process. The faster a business identifies risks, the more time it has to mitigate it.
Legal risks, environmental risks, and regulatory risks are some of the risks that exist in the market.
Nowadays, businesses prefer to employ risk technology for detecting them instead of manually noting them. This ensures efficiency and accessibility.
Due to the changing nature of risks, frequent re-visitation is required. It is a deliberate system that includes documenting and communicating the potential risks.
2) Analyse the risk
The next step is risk analysis to determine the scope of the risks and prioritize the most important of them. Based on the number of functions being affected by the risks, one can understand the underlying factors like probability and severity of risks. The outcome of this step is usually a list of risks with an estimate of the likelihood of occurrence and severity of impact.
This step helps to certify the risks that need instant attention and the risks that only need monitoring for the time being. It assesses the probability of realisation of risks and their ramifications.
Putting risks through a microscope also helps to uncover any common hidden issues in the organisation’s management.
3) Evaluate and prioritise the risk
To attain a holistic view of the organisation, it is crucial to rank and prioritise the risks based on the likelihood of occurrence and the severity of impact. Not all risks have the same degree of impact. Some risks might have a crippling impact on an organisation, shaking it to the core, while others might be only touch-and-go in nature.
Companies with a management solution have inbuilt categories of risks based on severity and likelihood. Risks attached to minor inconveniences to the organisation get a low rank whereas, catastrophic risks are allotted a higher rank to garner immediate upper management involvement.
Such risk management platforms help achieve workable solutions without interrupting the function of the organisation.
There are two types of risk assessments,
- Qualitative risk assessment
Risks are inherently qualitative as most of them cannot be really quantified. It is more subjective in nature and takes relatively less time and resources than quantitative assessment. It prioritises risk on its likelihood and impact.
- Quantitative risk assessment
This is possible in cases where figures are involved, for example, finance-related risks. This assessment is relatively easier to automate and is far more objective than a qualitative assessment. It is a systematic way to determine and measure the risks.
4) Treat the risk
This is the stage where the organisation needs to dispatch its plan to eliminate, contain or mitigate risk to the highest extent possible.
In the case of a manual system, the risk is treated by contacting each stakeholder to resolve the issue. The manual system is tedious and difficult as the resolution of risk is scattered over several email chains, documents and phone calls.
However, a risk management solution offers more competency as notifications can be sent to all the stakeholders. The discussion can take place from within the system, enabling upper management to keep an eye on the entire progress. Thus, the extra effort to contact everyone individually is avoided.
Accepting the risk, avoiding the risk, controlling the risks and transferring the risks are a few ways of mitigating the risks.
5) Monitor and review the risk
Some risks are omnipresent, meaning that they cannot be eliminated. Often, there are risks that are constant and need continuous monitoring and review, such as market risks and environmental risks.
Under a risk management system, the entire risk is monitored by the digital system and does not require employee involvement. Any change in risk or discrepancy is easily highlighted by the system while ensuring continuity. This system can be used to obtain the best results if there is proper training.
However, in the case of a manual system, the risk monitoring is undertaken by employees who are responsible for keeping a close watch on all the risk factors.
Thus, every company, be it of whatever size and mass, requires an effective risk management system to sustain and grow in the current business backdrop. This is essential because every company faces some kind of risk. However, the risk management system mostly stays the same for every organisation.