Beyond the global health crisis and market turmoil of our current moment, nearly all companies across industries require dynamic and flexible risk management to navigate through and thrive in these uncertain times. How can organizations successfully implement their strategic objectives and strategies while appropriately managing enterprise value and risk exposures?
Risk Management Defined
Risk management is the process that identifies, assesses, and controls potential disruptions, threats, and failures to an organization’s resources, assets, and operations. Unlike strategic management that focuses on the opportunities, performances, and successes, risk management focuses on the most consequential, inherent losses and negatives that can happen to an entity and design a plan to reduce or eliminate those risks.
When businesses make an investment decision, it exposes itself to a number of risks including financial uncertainty, accidents and natural disasters, strategic management errors, legal liabilities, and other risk exposures. Risks exist when there are opportunities for a profit or a loss. The extent of a risk is defined as follows:
Risk = Probability x Severity
Probability indicates how likely risks may occur while severity refers to the scope, extent, and cost of exposure and consequences from said risks.
Risk management matters because this enables organizations to prepare for the unexpected. The whole goal of risk management is to make sure that businesses only take risks that will help accomplish tasks and achieve primary objectives while keeping all other risks from wreaking havoc. Effective risk management means proactively taking control, as much as possible, future outcomes and reducing the possibility of risk occurrence and its subsequent negative impact.
Why Risk Management Matters
Risk management is necessary to identify risk events and create a plan of action to avoid these identified risks. This will help organizations minimize the negative impact from risk exposure, gain confidence in making business decisions amidst existence of risks, and achieve business goals even when risks happen.
Furthermore, risk management for uncertain times can help in these aspects:
- Creating a safe, secure, and stable work environment
- Protecting workforce, stakeholders, customer base, and resources
- Increasing soundness, efficiency, and reliability of business while also decreasing financial obligations and legal liability
Categories of Risk
Know the various types of risk an organization might face:
- Operational Risk: Loss or damage due to system failure, improper process implementation, insufficient resources, or other external events risks.
- Infrastructure Risk: Low quality or complete failure of infrastructure project due to improper planning.
- Schedule Risk: Delay or conflict of project schedule that may lead to project cancellation or failure.
- Budget Risk: Wrong budget estimation or expansion of project scope beyond allotted budget that may lead to delay of delivery or incomplete closure.
- Business Risk: Non-availability of resources within the organization, purchase orders from business partners, or proper inputs from clients
- Information Security Risk: Theft, breach, or loss of confidentiality, integrity, and access of business data.
- Technology Risk: Related to the introduction of a new technology or a complete change of technological resources.
- Programmatic Risks: External risks beyond an organization’s control or a business’ operational limits.
- Quality and Process Risk: Risks due to deviation from guidelines, procedures, and processes specifically tailored to the project.
- Technical and Architectural Risk: Failure of functionality, efficiency, and continuous performance.
Risk Management Program: What does it look like?
Risk management programs is all about establishing an actionable plan that analyzes risks, validates policies, and maintains internal audit system.
- A risk analysis refers to the identification of threats and vulnerabilities, characterization of business assets and resources, and execution of protective security measures and mitigation controls.
- There is a need for documentation of policies, procedures, and processes:
- personnel responsibility for the plan implementation
- criticality of the risk to the mission/vision of the organization
- budget allocation or resource utilization
- timetable for plan execution
- frequency of review for the effectiveness of action plan
- The role of internal audit, according to the Institute of Internal Auditors, “is to provide independent assurance that an organization’s risk management, governance, and internal control processes are operating effectively”. This will enable organizations to change, improve, and customize policies, procedures, and processes for current risk management program.
Risk Management Process
Uncertain times have magnified the importance of developing an effective risk management process. Below is a good framework for effectively managing risk and risk exposure.
- Establish the Context
This is the first and foremost step in effective risk management process. Organizations will have to do the following:
- define the scope and framework of the entire process
- categorize risks arising from external or internal influences
- determine business objectives and strategies
- identify stakeholder concerns and expectations
- set the criteria against which the risks will be assessed
- Risk Identification
The foundation of any effective risk management process is built on the basis of risk identification. The most basic thing required is the knowledge of the different types of risks that relate to the organization’s context and business goals. Organizations must identify what can happen, where and when it can happen, and the vulnerabilities that come with risk exposure.
- Risk Assessment
In this step, organizations must assign an overall risk rating for each identified risk event by using these parameters:
- The possibility and consequence of a risk event in an uncontrolled environment
- The effectiveness of existing tools and control systems in the occurrence of a risk event
- The possibility and consequence of a risk event in the current control environment
- Risk Treatment
This involves developing appropriate risk treatment options and prioritizing the option that will address the highest rated risk. Options available will depend on the nature, complexity, and cost of exposure to an identified risk event:
- Avoidance – cancellation, delay, or adjustment of business activity that leads to risk occurrence or risk exposure
- Retention – making a unified, informed decision that the cost of risk treatment outweighs the benefits and accepting that the risk rating is manageable during implementation of the business activity
- Sharing or Transfer – adopting other business strategies such as outsourcing to third-party service providers to decrease risk exposure and consequence
- Reduction – executing a plan of action to decrease risk exposure and consequence during implementation of the business activity
- Risk Monitoring and Review
This involves regular surveillance, results recording, and evaluation of all steps of the risk management process. This will help organizations to continuously improve their risk management capabilities as the nature, complexity, and speed of business change. Use the following questions as a guide:
- In what ways are the tools and control systems in place effective and efficient in both design and operation?
- Did new risks and risk exposure emerge even after these tools and controls systems have been implemented?
- Are there any changes in the external and internal context e.g. risk criteria and risk treatments?
- Are there any risk management process ‘blind spots’ warranting attention or revision?
- What opportunities are available to enhance the effectiveness and efficiency of the risk management process?
The business environment is taking head-on rapid change, competition, and uncertainty simultaneously. Against rising expectations and risk levels, organizations must reevaluate and recalibrate their risk management structures and programs to enable business agility and resilience in the new normal.
However, if still don’t have an effective Risk Management process in place, we can help. Schedule for a FREE CONSULTATION today.