Risk management is a process that allows organizations to identify the risks that threaten their value, capital, earnings, and reputation and decide what they can do to prevent them or lessen their impact.
Conventionally, organizations use the risk management process to avoid specific risks, but some go beyond traditional risk avoidance. Instead, they utilize the enterprise risk management framework.
Traditional Risk Management Versus Enterprise Risk Management
Traditional risk management focuses mainly on insurable risks or risks the business can cover with insurance. For example, the risk of causing a third party bodily injury is insurable; you can use general liability insurance to mitigate it.
Enterprise risk management, meanwhile, looks at both insurable and non-insurable risks. No ready insurance cover exists for non-insurable risks, but they can have grave consequences on an organization’s value and reputation. An example of such a risk is a former employee or a disgruntled customer slandering a business on TikTok or Twitter.
Traditional risk management is often past-oriented, focusing on preventing incidents from happening again. However, enterprise risk management proactively plans for potential risks.
Traditional risk management is also often the domain of division heads. Meanwhile, enterprise resource management is top-down and approaches risks from the perspective of the entire organization. This ensures that risks are evaluated within a greater context (i.e., how they will affect the whole organization) and their impact assessed beyond their silo (i.e., the department or division where they have been identified or are likely to occur).
Whether a company is doing risk management to avoid particular risks or proactively mitigate all business risks, it is likely to use the 5-step risk management process.
The 5 Stages of the Risk Management Process
There are five stages to the risk management process. Of course, the actual implementation can be more involved and complex, especially for enterprise resource management, but the general process flow should still look like the following.
1. Risk Identification
Identifying the threats to your organization’s capital, earnings, value, and reputation is the first step in risk management.
There are different categories of risks, including the following:
- Hazard Risks
These are risks from hazards, such as fires and electrocution. In meat packing plants, repetitive motion injury is a persistent hazard. Equipment can cause harm in factories, while falls and falling objects are prevalent dangers in construction. - Operational Risks
Operational risks include not having enough people to fulfill orders, human errors causing losses, product design flaws, loss of power, supply delivery delays, and extreme weather. In other words, they’re risks that can derail company operations. - Financial Risks
Financial risks are threats to earnings and profits caused by market movements and economic factors, including foreign currency exchange rates and fluctuations in commodity prices. For instance, a business relying heavily on imported raw materials can be at significant financial risk if its home country’s currency weakens against the currency of the country from which it sources its raw materials. - Strategic Risks
Strategic risks typically stem from leadership changes, the introduction of new products and services, new competitors, and disruptive technologies.
Actionable tip: You must identify all risks and create a corporate risk register that all stakeholders can access. To determine all business risks, consult your people, asking about past and potential risks. You should also consult industry professionals and risk management experts.
2. Risk Analysis
Risk analysis involves assessing a risk’s velocity, longevity, and holistic impact. In other words, you must understand how severe or profound the risk is, and how broad and far-reaching its effects can be.
Risk assessment can be quantitative or qualitative, depending on whichever is appropriate. Quantitative risk assessment applies when impact can be quantified. Otherwise, use qualitative risk assessment.
Actionable tip: In the end, you should clearly understand which risks will lead to minor inconveniences and which will cause your business to shut down, suspend business operations, or incur significant financial losses. An enterprise risk management consultant can provide invaluable assistance at this stage.
Risk analysis is a prerequisite for the next step.
3. Risk Prioritization
You must rank all business risks according to their impact. Risk prioritization ensures you can appropriately allocate your people and resources to your risk control strategies.
Actionable tip: Put risks with the more severe impact on top of your risk prevention and mitigation priority list. In other words, act on the more serious risks first.
4. Risk Prevention and Mitigation
At this point, you will create a risk management plan to do one of two things: preempt the risk so it doesn’t become a problem or mitigate it if you cannot prevent it.
Actionable tip: Expert guidance from risk management professionals will prove invaluable at this stage. They will be able to help you devise suitable risk mitigation and control strategies, communicate your risk management plan to stakeholders, and provide implementation guidelines.
A risk management system should also help universalize access to your organization’s risk management strategies.
5. Risk Reviewing and Monitoring
If you cannot eliminate certain risks, you must monitor them to ensure you are correctly implementing the strategies that will control them and lessen their impact. You should also be aware of any changes in your risk factors that might affect their assessed effect. Likewise, your organization should have an ongoing system in place for identifying and dealing with new risks.
Actionable tip: Your company must conduct an internal audit regularly for an unprejudiced assurance that your organization’s risk management processes and strategies are functioning as they should.
Risk Management: Essential Function
Risk management involves identifying, analyzing, prioritizing, controlling, and monitoring risks. You can do this from a limited scope (traditional risk management) or the perspective of the entire organization (enterprise risk management).
Enterprise risk management is more proactive, is forward-looking, and helps protect your interests from more risk categories.
Affility Consulting is a comprehensive advisory services firm that provides various business consulting solutions, including internal auditing and enterprise risk management. Contact us for help with risk identification, analysis, prioritization, mitigation, and monitoring.