An in-depth look at the risk management process
By: Nicholas Mistretta
In this article, we’re going to break down the five steps in the risk management process, share some thoughts on the basics of risk management, and provide a little insight into risk management evaluation. But let’s begin by backtracking a little.
In our introductory article on risk management, there were some important concepts that bear repeating, namely the two ways that all organizations should perceive risks:
- There are risks that affect upside opportunities.
- There are risks that include downside threats.
We tend to mostly focus on risks as threats, but the important takeaway here is that risks are also related to opportunities that can be missed, squandered, miscalculated, and so forth.
Another important takeaway from the introductory article is how all-encompassing risks are and how they affect each of us all the time, whether we recognize them or not. They affect us as individuals, as business owners, as members of a particular industry, and as citizens of a country or member of a society.
Also, even though we focused on the four main types of risk management – enterprise risks, risks in project management, financial risks, and credit risks – there are many others. Plus, each type of risk has many subtypes. This speaks again to how pervasive risks are regardless of industry.
The risk management framework doesn’t change
The basic processes of risk management that we’re about to share with you have been the same for decades and will likely remain so for many more. They fit during an industrial revolution and also during a digital revolution.
What does change, however, is how we perform risk management and how efficiently we are able to undertake risk management strategies in our modern age. What was once a manual process has in recent decades become mostly a digital process. And this enormous technological change will no doubt affect the steps below.
Change is a normal part of life, especially in our digital world where things seem to be moving faster than ever. New risks are being discovered, mostly due to new technologies. One area that easily comes to mind is the risks associated with cybersecurity and data protection.
Modern problems will always require modern solutions. And while risk management strategy and the tools we use may change with the times, the risk management process below likely will not.
5 steps to the risk management process
The risk management process includes five steps:
- Identify risks
- Measure risks
- Examine solutions
- Implement solutions
- Monitor results
Risk management isn’t a one-time process. To be most effective, it should be ongoing and conducted at regular intervals. It also requires some investment in resources like time and money. And if done correctly and routinely, it can provide individuals and organizations with the kind of safeguards that tip the balance between success and failure.
1. Identify risks
Identifying potential risks is an obvious first step in the risk management process. It’s important to identify all risks that a business or organization may be exposed to. To do this, you’ll want to employ as many methods as possible, including:
- Personal experience
- Recent history
- External research
- Interviews with industry professionals
- Group brainstorming sessions
There are also different categories of risks to consider, such as:
- Operational risks – turnover, supply issues, etc.
- Hazards – natural disasters, accidents, fires, etc.
- Financial risks – industry economics, inflation, recessions, etc.
- Strategic risks – brand reputation, competition, etc.
You can also include IT security risks and legal risks. Once you look at the different types of risks that are in play for your business using the methods above, it’s important to define exactly how each affects your organization.
You can note the risks manually or input them into a risk management software product. Then you’ll want to share these risks with all of the stakeholders involved, rather than lock them away in a report that simply gathers dust.
And don’t forget – the risk environment is fluid, so revisit this first step regularly.
2. Measure risks
Once you have identified risks, you’ll need to analyze them. Two ways of looking at the risks you’ve identified are by frequency and severity.
What is the likelihood of a risk occurring? How often might it occur? How devastating would the impact of that risk be if it comes to pass?
Your goal during this step of the risk management process is to:
- Understand the scope of each risk
- Understand the link between the risk and the various factors in your organization
- Understand how many business functions the risk can potentially affect
By analyzing each of these, you’ll have a better understanding of the severity or seriousness of each risk. Some risks are nothing more than minor inconveniences, while others can result in ruin and bring an organization to its knees, so to speak.
This risk analysis and measurement step can be done manually, like the prior step. Or if using a risk management digital solution, you can map out the risks to various business processes, procedures, policies, and documents.
Your risk management system will then have a framework in place for evaluating each risk. Knowing the potential frequency and severity of each risk is critical, as is knowing where and how to allocate your resources.
3. Examine solutions
In this step, organizations will examine alternative solutions and seek to evaluate and rank the risks. It’s important to know how to prioritize each risk. Most risk management solutions will provide a grade for each risk based on the severity.
Risks that are merely inconvenient will rank the lowest. Risks that are potentially catastrophic will rank the highest. Ranking risks in this way will provide the organization with a holistic view of the entire organizational risk exposure picture.
A business can be vulnerable to several low-ranking risks that may not warrant intervention by upper management. And that same business can be vulnerable to one high-ranking risk that requires an immediate intervention.
However, dealing with a risk or not dealing with a risk aren’t the only options. An organization has four options for dealing with risk:
- Accept the risk
- Avoid the risk
- Control the risk
- Transfer the risk
Let’s take a quick look at each option.
Accept the risk
If the risk is minor and simply an inherent cost of doing business and if the benefits outweigh the potential risks, acceptance is a prudent strategy.
Avoid the risk
An organization can choose to avoid a risk by avoiding participation in the activity where the risk is present. Perhaps, in this case, the risk outweighs the benefit.
Control the risk
If the risk is more serious but the benefits justify taking the risk, a business can find ways to prevent or mitigate the risk by reducing the impact on the organization if it does occur.
Transfer the risk
Transferring the risk involves giving the negative outcome to another party if the risk occurs. A good example of this would be when an organization purchases insurance.
4. Implement solutions
Your goal in this step of the risk management process is to eliminate or contain the risks you’ve chosen using the solutions you’ve decided on. This may entail meeting with stakeholders and upper management to get approval on your plans, especially if the risk is serious.
Once you have identified your risks and your solutions, it’s time to allocate resources toward those solutions. This includes setting up processes to implement each solution, finding personnel and funding, and training team members.
5. Monitor results
Not all risks can be eliminated. Some risks will always be present. Questions that an organization should be asking during this step are:
- Were the initiatives for mitigating or eliminating the risk effective?
- Are changes or updates required?
If the risk solution strategies prove to be ineffective, the team may need to start over. If changes or updates are required for certain strategies, you’ll want to monitor these more closely going forward.
Organizations should always approach risk management as a process rather than a project. There is no completion or finish line to cross. Treating it like a process will help develop a risk culture that prioritizes risk management, which in turn, makes businesses more agile and resilient to risks.
Two risks that will always require monitoring to ensure continuity are market risks and environmental risks. These are two risks that have more fluidity than others. Therefore, it’s wise for an organization to assign employees or a team to monitor these two risk types, along with their subtypes.
If a factor or a risk suddenly changes, you’ll want to know quickly, and adjustments will need to be made. Computers are better at reading data and monitoring risks than people, so finding a risk management solution has obvious benefits.
The importance of risk management evaluation
Risk management efficiency and success depends on better processes for risk management evaluation. Evaluating risks helps organizations better understand their capabilities, vulnerabilities, and strengths.
Better evaluation leads to better insights on where the risk management framework needs to be improved. And technology will continue to play a pivotal role in all aspects of risk management evaluation and assessment.