Businesses leaders today are navigating increasingly complex environments that are changing at an unprecedented speed. As a result, organizations are forced to make quicker decisions while at the same time avoiding or mitigating risks from competitors, internal processes, cyberattacks and many other challenges.
Managing risk effectively can be the difference between success and failure for many organizations. In this post we will introduce you to the core risk management principles and practices to help you succeed.
If you don’t invest in risk management, it doesn’t matter what business you’re in – it’s a risky business.
– Gary Cohn, CEO, IBM
What is risk management?
Risk management is the identification, analysis, and response to specific risks facing your business or organization. Effective risk management means attempting to control, as much as possible, future outcomes by acting proactively rather than reactively. Therefore, effective risk management offers the potential to reduce both the possibility of a risk occurring and its potential impact.
Identifying Risks for your organization
The unique risks facing each organization will vary by sector along with economy, geography, politics and many other issues. Additionally, each organization will have a different appetite for risk. The most common risks faced by organizations include:
- Strategic: Business risks like competition from new businesses or innovations
- Compliance: This may include the introduction of specific sector requirements/legislation
- Financial: This could include non-payment by customers, an increase in banking costs or expenses associated with running your business
- Operational: This could include failure of tools or machinery that are vital to the operation
- Reputational: Damage to your brand via actions or practices by the company, directors, employees, partners or consultants
The process of managing risk can be lengthy, but it is time well spent for an organization. By preparing for risk you are positioning your business for long-term success with the ability to ‘weather the storm’ should it arrive.
5 key steps in risk management
- Identify: To manage risk, you must first know what the risks are. Some will be obvious; others may take more thinking. Consider engaging your team as part of an official risk identification process where they are all catalogued. In many cases, there are ‘unseen risks’ that only some employees will be aware of. The key element of this process is to be open and honest about how your organization operates – avoiding difficult subjects won’t make the risk disappear.
- Assess: Now that you’ve identified the risks, it’s time to assess the severity of each one to determine the impact on your business. When assessing the risk you’ll want to consider how likely is each to happen and what would be the potential impact of such an occurrence? Consider adding a scoring rubric to this process where you can multiply likelihood by impact to get an overall risk score. This will help in the steps that follow.
- Control: Some risks are easily eliminated through process changes or other changes. Others will require more effort to lessen the impact. Although some risks can’t be completely removed, at least they have been identified and lessened where possible.
- Monitor: Once you’ve identified your risks and put controls in place, the next steps is monitoring. This could include both internal and external monitoring to reduce risk. Internally, you may implement regular reminders about changes in internal processes to reduce risk. Externally, you may have monitors in place to identify new competitors or legislations being introduced that may impact the business. Make sure you have monitors in place for all of your most impactful risks so that you can be prepared if/when it happens.
- Communication: Be sure to include internal and external shareholders in each appropriate step of the risk management process. Their advice and support will be valuable as part of both the proactive and reactive efforts.
In order to grow, most organizations will need to take risks. Having the ability to manage and mitigate them will ultimately allow businesses to know which risks are worth taking and which are not.
Need more support around your organization’s risk management exercise? We have expertise in all aspects of risk management – contact us today.