What Is Risk Management? (Crucial Steps And Strategies)
By Indeed Editorial Team
Published 4 May 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Management of risk is a continuous and repetitive process of identifying and mitigating the impact of natural or manmade risks, hazards and threats to a business operation. It is an integral part of business planning and decision-making. Knowing how to manage risks can prevent loss or damage to a business, and improve the employability of administrative professionals. In this article, we examine what risk management means, the different steps involved in the process, its importance and the most common risks that businesses face.
What Is Risk Management?
Risk management is an indispensable part of business operations. Businesses identify risks relating to security, legal compliance, strategy and finance in its processes and develop mechanisms to eliminate those risks. If a company has no plan, it may find itself unprepared to face an unprecedented risk or threat. Lack of preparedness could result in additional costs, financial burden, loss of data, security breaches or even business closure. To prevent and avoid such damages, businesses set up a systematic and integrated process to assess, identify, reduce and reverse the impact of potential risks and threats.
What Are The Most Common Business Risks?
Disruption of operations and processes can sometimes be unavoidable for a business. Despite investing time and effort towards preparation, a business may sometimes face issues that it is unprepared for. Some of the most common risks that businesses face include:
Cybercrime, hacking, data breaches, network failure and system failure
Supply chain and logistics breakdown
Human error and legal issues
Natural disasters like hurricanes, typhoons, earthquakes or flooding
Government policies like new sanctions, legislation and tax laws
Introduction of new technologies like 5G, AI, cloud computing or 3D printing
Loss of reputation due to bankruptcy, poor product quality or financial irregularities
Market influences like economic depression, stock volatility, share market plunges and inflation
What Are The 4 Crucial Steps For Managing Risk?
Management of risk is a committed process that combines resources, technology and processes to control and mitigate risk. It is important that a business's management processes comply with statutory, technological, legal and ethical guidelines. A comprehensive management process for risk consists of four important steps. They are:
1. Risk identification
The first step of a management process for risk is identifying and assessing potential risks and threats to an organisation's employees, assets, financial and client information, technical infrastructure and operations. Threats an organisation may face can vary depending on its domain, size, location and the type of technology it uses. This step identifies what could go wrong by looking at worst-case scenarios, breaking down the company's systems and processes, identifying vulnerable areas and researching threats that similar business ventures face. Companies may also hire professionals to assess operational risks.
2. Risk assessment
The second step in the process is to assess the magnitude and impact of potential risks. Assessment is necessary for initiating measures and controls to prevent or reduce the impact of risks on business operations. The risks that organisations face may differ depending on their domain. While IT companies may face higher security risks, finance agencies may have higher compliance-related risks.
Risk assessments can be quantitative, where managers map the probability of a risk occurring in numerical values. Qualitative assessments may rank risks in the order of the magnitude of loss they can potentially lead to. Risk assessment involves the following steps:
Collecting data and listing risks that can negatively impact the business
Determining assets like critical infrastructure, operations, reputation or employees that are prone to a risk
Evaluating risks and creating control measures and process
Documenting the assessment for future reference
Reviewing assessment processes periodically
3. Risk analysis
Risk analysis is the process that examines probable outcomes and impact of a certain risk. Businesses may analyse both quantitative and qualitative impact of risks to initiate meaningful control measures. Risk analysts use the following parameters to analyse the impact of a risk:
Probability of risk occurrence: high, medium-high, medium-low and low
Risk impact: catastrophic, critical and marginal
Risk exposure: high, medium-high, medium-low and low
Risk occurrence time frame: within a month, next two to six months, later than six months
Risk response planning: short-term, long-term and strategic plans to respond to a risk
4. Risk monitoring and mitigation
Risk monitoring and mitigation is a continuous and iterative process of developing systems, processes and protocols to reduce and remove threats to business goals and assets. It also activates the steps that a company typically initiates in the event of a risk. The crucial steps involved in risk monitoring and mitigation are:
Assessing risk periodically to identify new or unknown ones
Assessing old or existing risks
Tracking risk triggers
Monitoring triggers that may cause long term critical impact
Assigning every risk with a response and action plans
Reporting risks to stakeholders using a register
How Do Companies Design A Management Plan For Risks?
Businesses and financial managers formulate specific management plans to deal with risks unique to their business or industry. When professionals implement a management plan, it is important that they keep industry-specific objectives in mind. The strategies they employ can fall under one of five categories:
1. Risk avoidance
The primary goal of a management plan for risk is to manage the impact of risks and prevent their occurrence. Some industries may face higher risks and addressing them can prevent loss to life and property. Avoiding a specific risk also alleviates subsequent legal issues and claims for compensation. Examples of risk avoidance include avoiding using banned or hazardous chemicals, using licensed software and dismantling old equipment to prevent accidents.
2. Risk reduction
Risk reduction is a strategy that prescribes countermeasures to reduce risk. Businesses plan to reduce overall risk and mitigate its impact or consequences. Some risk reduction strategies include using protective gear in a manufacturing unit, installing fire extinguishers in a storage building or installing anti-virus software for IT infrastructure.
3. Risk retention
Also known as risk acceptance, retention is a process through which a company that faces loss or damage due to risk takes responsibility and accepts current or future losses. Risk retention is crucial to managing a company's brand value and finances. Risk retention strategies may pick risks that cause minimal or marginal damage over ones that can potentially destabilise the business operation.
4. Risk sharing
A risk sharing strategy distributes risk among multiple entities of a project or interest. When a business shares its risk, every participant involved, including shareholders, department heads and third parties like vendors, accept a part of the damage that the risk can cause. In a small partnership, the partners may share the risk amongst themselves.
5. Risk transfer
Risk transfer is a strategy where a business transfers risks that may occur to a third party through a legally binding agreement or contract. Businesses may pay a premium to insurance companies who pay for damages and liabilities. They can also outsource the entire effort of managing risks to a third-party vendor. Businesses can protect themselves financially in an emergency when insurance companies pay for settlements or repairs.
Why Is Management Of Risk Important?
An effective management process for risk allows business leaders to prepare for the unexpected while avoiding damage to profit, investments and reputation. A company can stay in business with a good management strategy, using it to define its objectives and realise greater opportunities. Management of risk also has implications for society at large. Depending on the type of business you are involved in, the risks you face can impact the environment, employees, residents and everyday consumers.
For example, if a business has many liabilities and invests most of its capital in the stock market, the risks involved can undermine the long-term viability of the investment. The investments may not yield high returns. When a business takes on too much risk without a reliable management strategy, it can also impact its credit rating. This can result in investors withdrawing support and the company may become forced to lay off employees or sell crucial assets. If a business has a well-defined management plan for risks, it can mitigate its losses, increase profit and save jobs and assets.
What Are The Standards For Managing Risk?
Standards for managing risk include a set of strategic processes that list the goals of an organisation and help identify, control and mitigate risks. National and international agencies design and create management frameworks for risk and assist companies in setting up a process as per their requirements. Companies introduce standards for management of risk when they begin to set up a new process or feel that their current processes are inadequate for controlling risk.
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