What Is Risk Management?
Risk management is a process to protect the organisation, its capital, earnings and operations. This is done by identifying, measuring, monitoring and controlling threats. Most businesses have complex networks and this complexity increases the risk. The aim of risk management practices is not to eliminate all risks but to preserve and add value to enterprise by making smart risk decisions. It is important to first decide how much risk the company can accept. These accepted risks will not need any further action, while other risks should be mitigated to reduce potential negative effects. Thus, the risk management process should be aligned with organisation’s strategy.
What Are The Objectives Of Risk Management?
The objectives of risk management are to find out the risks that a business faces and mitigate them. This is done by identifying, measuring, monitoring and controlling the risks. The overall objective is to enhance the safety of the operations and capital of the business. Risk management reduces the harmful effects of the risks and saves companies from losses. These are the objectives:
Identify
The first objective of risk management is to identify the risks. Business operations have many variables that run them. Some variables are positive, while others may move negatively. These negative movements may become a risk for the company. As a primary objective, risk management needs to identify these risks. They need to collect information from different sources to identify the losses that the company may have.
Measure
The next objective is measuring the risks. Once the risks have been identified, it is important to find ways to measure the impacts those risks can have. ISO 31000 standard of risk management updates the risk register. The risk register is a document that is used to determine the possibility of the risks materialising and to quantify risk values in monetary terms. This will help to measure the potential amount that can be lost through a risk. Measuring risk is important for business as it helps to pave the way to mitigate it.
Monitor
Once the risk has been identified and measured, the next objective is to monitor the risk continuously. Risks are not static, they keep fluctuating from time to time. Keeping an eye on the risk helps to understand its nature and as a result, develop a strategy to control it.
Control
The final objective is to control risk. Finding the best way to manage or control risk is the ultimate goal of risk management. The aforementioned value at risk is important since many risk management techniques that are accessible to businesses come at a cost. When determining whether a risk is worthwhile, an organisation must take into account if it can bear the expense of risk management. Transferring, tolerating, treating or terminating are the four ways in which risk can be managed.
- Risk is transferred through the use of contracts such as insurance contracts. This method is generally used for high-value, low-probability risks.
- Tolerating risks as a necessary aspect of conducting business is acceptable in some situations. In cases where the dangers have low probability and low value, this method is typically used.
- One approach to risk control is treating risks, which aims to protect a company from the risk. This is accomplished by modifying the company’s internal mechanisms to stop the recognised risk from posing a problem in the future.
- In some circumstances, terminating the risk completely could be the best course of action, especially if the value at risk and the probability both are very high.
What Are The Benefits Of Risk Management?
Effective risk management decreases the losses and increases the efficacy of the business operations. These are the benefits of implementing risk management strategies:
- The awareness about risks increases across all levels of organisation.
- Increased assurance in the aims and ambitions of the company when strategy takes risk into account.
- Regulation and internal compliance demands are more effectively and efficiently complied.
- Increased operational effectiveness by applying risk procedures and controls more consistently.
- Enhanced security and safety at work for both clients and staff.
- A market-based competitive differentiator.
What Are The Challenges Of Risk Management?
Risks are unpredictable and fluctuate from time to time. These challenges may pose a hindrance in mitigating risks. These are the challenges faced:
- Risk management programs are expensive. They require costly software and services. This may increase the expenses of the company.
- Businesses will need to invest more time and money to comply with the rules of risk management.
- It is difficult to analyse the severity of the risk and its treatment all the time. Sometimes it leads to risk analysis paralysis.
- It is challenging to convince executives of the benefits of risk management when you are unable to provide them with concrete data.
Related: Company Policies: 10 Policies To Consider For Your Business
Risk Management Standards And Frameworks
The government has added many compliance rules for the companies in the past two decades. Furthermore, scrutiny of corporate risk management practices has also increased. Due to this risk analysis, internal audits and risk assessments have now become a major part of the business strategy. These are the widely recognised frameworks for risk management:
COSO ERM Framework
This framework was launched in 2004. It highlights the importance of embedding risk considerations into business strategies. It offers precise guidelines for risk management, identifies important ERM ideas and principles and establishes a standard vocabulary for ERM. The main components of this framework, developed by consulting firm PwC, are governance and culture; strategy and objective setting; performance; review and revision; information, communication and reporting.
ISO 31000
This framework helps organisations apply risk management mechanisms to operations and the processes of identifying, evaluating and mitigating risks. This is a shorter document than other frameworks and provides more strategic guidance on ERM. It highlights how important senior management is to risk programs and how risk management procedures should be integrated across the entire company.
BS 31100
This British Standard risk management code of practice provides a process for implementing concepts of identifying, assessing and responding to risks and then reporting on and reviewing risk management activities.
NIST’s Risk Management Framework
This framework provides a detailed process for integrating security, data privacy and cybersecurity management initiatives into the system development cycle.
How To Create And Apply A Risk Management Plan?
A risk management plan helps the organisation manage or mitigate its risks. It discusses the organisation’s risk approach, duties of risk management teams, resources used in the process and internal policies. ISO 31000 provides a seven-step process for creating and applying an ERM framework. Here it is:
Communication
The risk management team should develop a communication plan to convey the risk policies and procedures of the company to the employees and other parties. This step aids in raising risk awareness. Once every relevant person is aware of the risk, it becomes easy to take advantage of positive risks and mitigate negative ones.
Setting scope and context
In this step, the risk appetite and risk tolerance of the company is defined. This helps to understand the amount of risk a company can take and the factors that contribute to overall risk. These factors include business objectives, company culture, regulatory needs and political environment.
Risk identification
In this step, risk situations are defined. These situations can have a positive or negative impact on the business operations of the company. These risks are identified and recorded in a risk register.
Risk analysis
Here, different risk factors are analysed and a risk assessment matrix is created. This matrix helps to provide a visual representation of the nature and impact of a company’s risks.
Risk evaluation
In this step, organisations decide how to respond to the risks. They use four approaches to do so. First is risk avoidance, when the organisation seeks to eliminate or not be involved in the potential risk. Second is risk mitigation, when organisation takes action to limit risk. Third is risk sharing or transfer, where a contracting third party bears some or all costs of the risks that may or may not happen. Fourth is risk acceptance, when risk is within the limit of organisation’s risk appetite and can be accepted.
Risk treatment
In this step, the agreed-upon controls and procedures are put into practice and their intended functionality is verified.
Monitoring and review
Monitoring activities measure the performance of the control applied and look for key risk indicators.
Businesses are becoming more complex. To manage these complexities, risk management is becoming an important part of organisation’s strategies. Risks are very uncertain and arise from a variety of sources. An effective risk management program increases the productivity of the organisation by mitigating all the risks it faces.
