Understanding the Risk Management Process

In order for businesses to run smoothly, risks need to be identified and managed. This is especially true in our increasingly volatile global economy.

The risks involved, for example, in project management are different in comparison to the risks involved finance. This accounts for certain changes in the entire risk management process.

However the ISO has laid down certain steps for the process and it is almost universally applicable to all kinds of risk. The guidelines can be applied throughout the life of any organization and a wide range of activities, including strategies and decisions, operations, processes, functions, projects, products, services and assets.

But what makes a good risk management strategy, and what do organizations need to know to create one?

In this article, we will explore risk management and look at some real-world examples of organizations who implemented risk management strategies to stay ahead.

Key Takeaways

• Risk management is the process of identifying, assessing, then managing risk in a business.

• The aim of risk management processes is to reduce operational risk, but also to identify opportunities.

• An effective risk management process includes identifying risk, managing and monitoring it, then taking proactive steps to mitigate it.

What is Risk Management?

Risk management is the process of finding, analyzing, then managing risks as they emerge.

Managing risk is important for businesses to maintain stability and sustain their growth. But it also helps to protect their reputations. The only way organizations can manage risks properly is to understand what good risk management is and what it requires.

How can businesses manage risk?

Risk management is essentially just the process of:

• Identifying risks that could hurt an organization’s objectives and operations

• Assessing the likelihood and the severity of these risks impacting the organization

• Mitigating these risks

This may seem simple enough, but good risk management is vital to organizational operationality. A good risk management strategy will help businesses prepare for uncertainties, and protect themselves from potential losses.

What are the goals of risk management?

The goal of risk management is not to get rid of the risk completely – this would be near impossible. Rather, the role of risk management is to reduce the potential damage of the risk, strategically manage the risk, and recognize the opportunities that the risk presents.

Ultimately, when businesses understand risk, they can use it to their advantage to increase growth and innovation.

The Risk Management Process

How do businesses manage risk? With a good risk management process.

Step 1: Identifying Risks

The first step to managing a risk is to identify the risk. A potential risk can originate from something external like:

• Changes in the economy

• Market trends

• Regulatory changes

Or, a potential risk may come from an internal source like:

• Operational inefficiencies

• Employee error and misconduct

• Cybersecurity threats

How to Identify Risks

One way to help identify risks is to run risk workshops where you conduct brainstorming sessions and use data analysis. Create a risk register to record identified risks as they come up. Then, log what the potential impact on your organization would be for each risk, as well as how likely the risk is to occur.

Step 2: Risk Assessment

Now, it’s time to assess the risks based on their likelihood of occurring and the impact on the organization if they do. This is a risk assessment. These tools help organizations to decide which risks need immediate attention and which risks can be monitored over time.

Step 3: Risk Treatment

Risk mitigation, or risk treatment, is the way in which an organization deals with the risks it has identified. The purpose of risk treatment is to discover the best (or most cost-effective) way to deal with the potential risk. At the same time, keeping losses to a minimum and maintaining any operational or organizational objectives.

There are four main strategies for dealing with risks:

• Avoid: Changing plans or business processes to eliminate the risk

• Reduce: Putting measures in place to minimize the impact of a risk or how likely it is to occur

• Share: Transferring the risk to a third party through outsourcing operations or getting insurance

• Accept: Deciding to live with the danger of the risk if the cost of mitigation is higher than the potential impact

Step 4: Continual Risk Monitoring and Reporting

Risk management has no end. It is an ongoing process that must be continually carried out as risks evolve and new ones arise.

How can businesses monitor and report risks? They could set up dashboards to track Key Risk Indicators (KRIs) and hold regular review meetings to update stakeholders.

A strong risk-monitoring framework will help businesses to keep on top of threats and adapt quickly to challenges.

Step 5: Communication and Review

In order to manage risks, organizations need to communicate clearly with their stakeholders (investors, employees, clients, etc.). Keeping everyone up-to-date with current risks is the best way to guarantee a healthy and risk-aware business culture.

Businesses must then review their strategies to determine what worked, what didn’t, and how they can improve their processes next time. Learning from their mistakes can help organizations build more resilient risk-management processes for the long-term.

Risk Management Case Studies

Let’s look at two real-world examples of companies that managed to implement new risk management frameworks successfully.

Case 1: Luxury Fashion Brand

This luxury fashion house found that its reliance on global supply chains was becoming a risk. They mitigated this risk by implementing a framework called ISO 31000 Risk Management. The fashion house reduced profit volatility by 20% as a result.

How did they do it?

1. The company’s risk register helped them to see that supply chain disruptions and changes in regulations were a risk to their operation.

2. They then developed a risk treatment plan that prioritized risks based on a cost-benefit analysis.

3. Regular risk reports gave their stakeholders real-time insight. Plus, the reports allowed the fashion house to respond proactively to the risks.

Case 2: Retail Corporation

A multinational retail corporation faced notable financial threats after aggressive expansion into new markets.

The corporation amended its financial risk management framework to focus more on reliable risk identification, assessment, and proper mitigation. The corporation reduced its financial exposures by 20% and improved resilience and productivity.

How did they do it?

1. The retail corporation began a comprehensive risk assessment to identify actual risks.

2. They developed a strong risk management plan to address the threats.

3. They monitored their progress and the evolving market in which they were now working.

Final Thoughts

Risk management is not a “one and done” exercise. Rather, it is a continuous process that helps organizations to future-proof themselves.

When organizations identify risks and threats early on, they can assess their impact easily. Next, businesses can implement mitigation strategies that safeguard their operations, and ensure success.

In other words, when you integrate risk management processes into your business strategy, you become more able to anticipate challenges, deal with the risks, and go for opportunities.

Key Points

• Risk management must be the cornerstone of any successful business strategy.

• Businesses should identify potential risks before they become a problem to avoid unexpected losses and unhappy stakeholders.

• When organizations invest in risk management processes today, they will reap the rewards tomorrow.