The Importance of Risk ManagementPublished January 25, 2021 by Reciprocity • 3 min read
In business and in life, fear of the unknown can leave us paralyzed and unable to act. What is known, on the other hand—that’s more manageable.
Understanding what confronts us (a single person, a team, a whole corporate organization) gives us the wherewithal to strategize, anticipate, develop contingency plans, and then move ahead despite whatever uncertainty may lie ahead. And should misfortune occur, the organization can address it with as little loss to the business as possible.
That process—identifying, assessing, and mitigating the effects of risk on business operations—is the essence of risk management.
Without risk management, business executives can’t make the best decisions for the enterprise. For example, how can you seize opportunities that might arise without knowing the harms they might bring, and being prepared to address them? If you’re stuck rectifying prior mistakes all the time, you can’t move onto new business effectively. To a dynamic, forward-thinking, competition-crushing enterprise, the importance of risk management cannot be overstated.
The Risk Management Process
Each organization and project is unique, and will have different goals and outcomes in its risk management program. But the process of managing risk is basically the same for all, involving these steps:
- Context determination. You need to understand the context in which the risk management process will take place: what your organization actually does, and what objectives it wants to achieve. Additionally, the company should establish the criteria it will use to evaluate potential risks and define the structure of its analysis.
- Risk identification. Identify all your enterprise’s or project’s risks, both actual and potential. For this step, list every possible risk you can think of. Types of risk include:
- External risks such as natural disasters or pandemics;
- Operational risks such as IT system failures;
- Financial risks, such as fluctuations in interest rates;
- Cybersecurity risk, including internal issues such as employee leaks of sensitive data;
- Compliance risks, where your business fails to meet certain regulatory obligations it has.
- Risk assessment. Categorize your identified risks and prioritize them in order of their likelihood and the severity of impact to your business.
- Risk mitigation. Starting with your highest-ranked risks, develop a plan to mitigate those threats using policies, procedures, and controls as necessary; and then implement that plan.
- Risk treatment. Determine how you would respond to each risk, using specific risk controls. Your answer will depend in part on your risk appetite, which is the amount of risk your company is willing to tolerate. Risk treatment includes risk mitigation processes, risk prevention tactics, and contingency plans to handle the risks if they should materialize. Some risk responses include:
- Mitigate the risk
- Avoid the risk entirely
- Transfer the risk, such as through an insurance policy
- Accept the risk, if the impact is likely to be minimal
Your Risk Management Plan
Risk identification, assessment, and treatment are all part of your risk management plan.
A risk management plan allows a company to understand and control risk, so executives can make better decisions and pursue objectives more efficiently.
One of the greatest benefits of risk management is risk identification. It’s critical for a company to identify potential risks before they can harm the business. Identifying the potential risks helps the organization to take appropriate steps to prevent those issues from happening.
Understanding risk is also important to project management because with every new project comes new project risk. By crafting an effective risk management strategy, an organization can identify the project’s strengths, weaknesses, opportunities, and threats.
A company that plans for potential risks will be able to respond to them more quickly—which, as good project managers know, increases the chances of success.
It’s a Journey, Not a Destination
Once you’ve completed your risk management plan and put it into effect, your work is far from done. New risks arise constantly; existing risks evolve into something else. To stay aware of everything, you need risk monitoring, as well as periodic reviews and updates of your risk management plan.
You also always need to be communicating and consulting with others on your team or in your organization. Managing risk isn’t a solitary endeavor; everyone needs to be “risk-aware” as they carry out their role in the organization.
Benefits of Risk Management
Having a strong, comprehensive risk management plan benefits your enterprise in countless ways. One example: it allows you to take risks such as new business ventures, or mergers and expansion, with more confidence.
Risk management also helps to
- Improve your decision-making
- Handle the unexpected, such as unforeseen costs in projects and systems
- Comply with regulations and industry standards
- Gain the trust of your customers
- Save money by focusing on necessary controls
- Prioritize business resources
How to Simplify Risk Management
Managing risk can be a complex, time-consuming task—but it doesn’t have to be. Today’s software can do much of the work for you.
ZenGRC, our governance, risk management, and compliance (GRC) software-as-a-service (SaaS) shows on color-coded dashboards and heat maps where your enterprise risk management and cybersecurity vulnerabilities are, and how to correct them.
Zen also helps you evaluate risks using customizable, multi-variable scoring; and monitors your control environment and workflows, providing real-time alerts.
Risk management doesn’t need to be so hard. Contact us today for your free consultation, and start down the worry-free path to GRC—the Zen way.