What is risk management?
Risk management is a crucial component in business to control and mitigate any risk that might threaten the health and growth of the company. It is the process of identifying, analysing and reducing threats, especially to the company’s earnings, employees and profits.
Risks might come from a wide range of different places, both internal and external to the company. It is important that risk management exists to avoid the negative consequences of risk that the company might face in every department. This includes financial risk, legal concerns, strategic errors, accidents and information technology (IT) breaches.
The risk manager is in place not to avoid risk-taking (because with risk comes the possibility of reward), but to avoid the uncontrolled threats and the negative side of risk, if things don’t work out. This means putting strategies in place to prepare for the unexpected and mitigate risks that won’t pay off in the future.
The risk management process
The risk management process refers to the bodywork for actionable steps to take to mitigate risk. The framework includes five basic steps taken to manage threats to the business operations and profit opportunities. It’s crucial to analyse which risks are worth taking and which should be avoided. From beginning to end, the risk management process should be automated where possible but manually monitored if needs be.
The first steps in the risk management process are:
Step 1: Identify the risk
It’s important to identify any risks that the business and its operations and systems might be exposed to, within different departments.
There are different types of risks to look out for, such as legal risk, environmental and external risk, profit and market risk, sales and marketing risks, brand image management, regulations and more. When doing a risk analysis, identification to as many risks as possible is the first step – and arguably one of the most important ones to take to reduce unnecessary costs to the company from bad risk management.
Any identified risks are to be noted manually if the process is done manually. From there, the information should be open to all members involved in order to ensure the right processes and protocols are followed to reduce the threats. If automated, the identified risk should be monitored by the risk management team. This helps ensure everyone is aware of the risks that have been identified. It’s also important to develop systems to consistently monitor the risk once it has been analysed, evaluated and treated.
Step 2: Analyse the risk
Once identified, the risk needs to undergo analysis for several reasons. It’s important to determine the scope of the risk to understand the sort of posed threat. This helps immediately note how many business operations might be affected. There are some risks which might only insignificantly impact one or two departments without any short or long-term major concerns. There are others, however, which might bring all gears to a complete halt.
It’s important to establish which risks might have far-reaching impacts and build a framework to avoid these.
Step 3: Evaluate the risk
Every identified and analysed risk needs to be ranked and then prioritised. The evaluation of risk places it into a category which will determine the risk management solution plan of action. This depends on the severity of the risk. For example, risks which result in minor inconveniences across a department would be a low category risk. A risk which might devastate the business would be classified as a high risk. This high risk would need to find a resolution quickly.
The evaluation step in risk management is important to offer a full overview of all risks a company might be facing and which need to be prioritised and which can be tended to later. The evaluation of risk also helps determine who and which parties will be needed to treat the risk. A low risk, for example, will not need upper management and chiefs of departments for resolution. On the other hand, a major risk might need intervention from team leaders.
Step 4: Treat the risk
Once risks have undergone evaluation, it is important to contain or eliminate it. This is done by discussing with the team involved and ensuring the right people, experts or departments are briefed correctly. Dealing with the matter becomes an easier process if everyone remains on the same page.
Treating the risk can take more time than might be anticipated, especially when it is a major risk which requires shareholder attention, but coming to a compromised resolution before anything gets out of hand is imperative.
In the risk management solution, communication is crucial so that everyone can keep close eyes on the matter. It’s important to ensure resolution is met and plans are followed or updated accordingly with everyone involved kept in the loop. Having automated systems or a centralised approach to keep all parties updated helps ensure that no vital information goes amiss.
Step 5: Monitor the risk
Some risks will always be present and require monitoring rather than complete elimination. Market risks, for example, are ever-present and cannot be eradicated because the factors are external. It’s also difficult, and sometimes impossible, to contain environmental risk completely. The best way to deal with these risks is to keep a close eye on them. From there, it’s easier to prepare for a scenario where things might turn for the worse.
It’s important to make sure communication is an active component in risk monitoring. If everyone is aware of any changes, it is easier to manage a risk than if a team has to scramble to make a plan or follow an action strategy. This not only helps risk resolution, but it also creates a culture of team trust and continuous communication which helps other aspects of business operations and better processes overall.
The five important risk management strategies
Risk management is an inherent part of all business management systems. It’s important to put the right strategies in place to deal with risk. While the risk management process deals with the steps to avoid risks, the approach to risk management strategies deals with the practical methods of combating the unexpected events which could threaten business success. The five risk management strategies to incorporate in your business are:
Risk management strategy 1: Avoidance
Preparation is key in risk avoidance. It’s the process of mitigating risks which might unfold unpredictably. The key is foreplanning and comprehensive thinking about things which might go wrong in business operations. This entails data collation and gathering as much information as possible to have the best approach to identify any risk before it becomes a problem. With the right information and solid planning in place, it is possible to avoid unsavoury scenarios and risky situations.
To avoid risk:
- Plan comprehensively;
- Conduct thorough research before launching any new systems;
- Make information gathering a continuous strategy;
- Prepare for worst-case scenarios.
Risk management strategy 2: Acceptance
Some risks are not worth changing systems to mitigate. The inconvenience caused by the possible risk might be insignificant enough that accepting the risk is the best strategy to take. This decision should be made with a solid base of information.
It’s important to weigh up the advantages and disadvantages of the risk and commit enough resources to analyse the possible fallout if accepting the risk. Once accepted, plans to deal with any resultant consequences should be made as soon as possible.
Risk management strategy 3: Mitigation
Mitigating risk refers to the steps taken to reduce or eradicate the risk or negative events as a result of risk acceptance. Minimising the impact of an unfavourable situation is a crucial component in risk management and should be treated in combination with preparation or precautionary strategies.
Risk mitigation can come in the form of precautions and planning for negative events including insurance. This way, if something adverse happens, the fallout is reduced and provisions are in place to limit the severity.
Staff training is a part of risk mitigation, especially when contingency plans are in place and are trained or are communicated clearly across staff. This teaches positive approaches to dealing with risk as well as highlighting the need for safety and responsiveness to negative scenarios.
Risk management strategy 4: Transferral
Risk transferral is the process of delegating risk if there is a need to do so. This only happens when someone or a team might be better equipped at handling the risk or dealing with the situation. Risk transferral is only successful with open lines of communication and trust in team members or external parties who might undertake the risk reduction.
If risks are transferred, it’s important to recognise that the resources needed might put strain on another department or the person who will take on dealing with the risk. For example, if there are management concerns, transferring the risk to human resources would take time out of that department which might put that team under pressure with other work. Therefore, risk transferral needs to be taken knowing that time is a limited resource and should only occur knowing that the person or team would be better equipped.
Risk management strategy 5: Exploitation
While risk has a negative connotation and avoiding negative scenarios is recommended, there is a possibility for opportunity with risk. As the expression goes, “high risk, high reward.”
One of the most ideal methods of handling risk is looking for ways to exploit the situation to find the best outcome possible. This means analysing a situation from all different angles and looking at the ones which might yield the best result.
This can be especially beneficial if the rewards come from a financial risk taken successfully. It’s difficult to navigate the exploitation of risks and it could result in a scenario worse than if the risk was reduced or avoided, but it can also pay off if the opportunity is taken well.
How do you identify risk in your business?
1. Break them down to bite-sized chunks
The risk management process can seem like an overwhelming task especially at the beginning. The best way to start the process is to break down the risks in terms of urgent and deal with individual concerns one at a time rather than trying to deal with everything at the same time.
Begin at the beginning and consider the most obvious things which can be resolved. Look at what risk needs crucial attention with a high-level approach across the company. Once those are tackled, break down the risks by department or internal category and delegate accordingly. Financial risk, for example, can be mitigated by the financial team. Operational risks can be reduced by the ops team. This not only deloads the risk manager’s plate from an overwhelming task, but it also means that the right team will be dealing with the risk. It should be noted that following delegation, it’s important to have oversight with team managers in order to ensure systems are operating as they should with the right risk avoidance strategies in place.
2. Think of the worst possible scenario
This takes a little bit of pessimist thinking. Consider what the worst case would be and what you would do if it was to happen. Imagine everything that could go wrong did go wrong and identify what you would do to get everything back and running smoothly as quickly as possible.
This is possibly difficult to do, because it’s easy to imagine that “this would never happen” and avoid planning for the worst, but assuming the worst can put you in the best place to manage risk successfully.
3. Gain expert insight
This method of managing risk goes hand-in-hand with knowing who might be the best handling person or team to handle different risks. Asking advisories, whether internal or external, can help gain insight into possible risks that you might be struggling to resolve or not able to see.
It’s helpful to build and leverage relationships or partners with expertise in certain fields. For example, looking to legal or financial advisors might go a long way in identifying, evaluating and mitigating possible risks with their experience and practical skill sets.
It further helps if you can lean on relationships who are familiar with your business and can offer both expert and familiar insight into assessing business risks.
4. Conduct thorough internal research
Your team and internal staff are likely most familiar with the business systems, operations and approaches. This is both beneficial in building efficient practices, but can leave room for a lack of innovation if systems don’t change. Researching and observing what risks the staff might face, both organisational and personal, can help reduce that risk and lead to better operations.
Recognising the systems work well and which might need improvement is crucial to building better, safer, more efficient workflows which can help avoid negative outcomes.
This requires conducting data and system analysis to explore where negative results exist and how incidents and accidents happen. In observing these, it might be possible to address risk areas and reduce any future problems.
5. Look to gain external assistance
There are firms designed to help manage risk and it is sometimes worthwhile tapping into these as external resources. Learning from professional organisations who can help provide deeper insight into possible risk analysis can be a once-off or continuous event, depending on resources and requirements.
External firms can also help identify risks that are isolated to your organisation – which is easier to avoid – or external factors in the market or industry – which might require accepting, mitigating or another innovative approach to resolve. This helps gain insight and understanding into competitor companies and the risks they might be facing too. If competition is also facing similar risks, it could lead to exploring options to exploit them to gain an upper hand.
6. Get consistent internal feedback
Getting feedback from your staff consistently is different to conducting research into the systems and looking out for possible risks. Having open lines of communication with your staff and asking for feedback about what they think might lead to negative outcomes as a result of systems, management, or general operations can help in reducing the number of risks faced. If handled well, employees can be one of the most important human resources in identifying risks or improving systems to reduce risk.
To gain feedback and set up systems where consistent feedback loops are possible, work out ways which suit your company and employees best. This might be in one-on-one meetings, through anonymous forms, or in team and group settings. Depending on how close team culture is, anonymous communication might yield the most honest responses which lead to higher identified problems or internal risks.
7. Ask for and respect customer feedback
Internal feedback from your staff is important. Gaining external insight from customer feedback is also vital. If customers are consistently commending one aspect of your company, but complaining about another, it’s worth looking to resolve the problem area.
Customer insight can offer valuable information about what risks your company might be facing from an external point of view. The associated risk which comes from complaints can be avoided if customer feedback is taken and observed.
Offering possibilities for your customers to offer their feedback is critical. This can be in the form of anonymous feedback forms, complaint hotlines, customer service evaluation and a rating system either in store or online.
8. Automate risk management where possible
There are software and technology-based systems in place to handle automated risk management. These can help identify and classify risk without the manual input and human resources involved. Risk mapping, automated SWOT analysis and simulated scenario-softwares can help take the hassle out of the risk while ensuring risk management is ensured. While it might be an initial expense, automated risk management can pay off in the long term.
Types of risk management
Risk management, at the heart of it, is the reducing the possibility of loss. This can refer to the loss of profit, brand image, employee satisfaction, growth, or customer experience.
Reducing the risk of loss is important to ensure the possible gains can be explored and enjoyed. The different types of risk to manage include:
This refers to reducing the chance that profits and funds will run out. Reducing longevity risk relies on long-term financial planning, funding the future with saving and investment and focusing on how to make and retain passive income so that finances don’t slowly dwindle.
There is always a risk that the economy will turn and inflation will skyrocket. The risk of inflation is an external factor which might be impossible to avoid. However, exploiting the risk inflation with hedge funds and assets which might soar if inflation hits can help alleviate the possibility of financial loss.
Interest rate risk
This refers to the negative impact that interest rate movements could have on your company’s profits or balance sheets. Reducing the risk means longer-term health of the company and more money to navigate other risks.
Liquidity risk is negative in the event of not being able to sell locked assets if the market looks good or making a badly timed trade. This results in the unnecessary loss of money or the loss of possible profit. Diversifying your assets across your business or having a flexible portfolio can help alleviate liquidity risk.
Internal business risk
Under the event of mismanagement or ineffective leadership, internal business risk can be at its height. Having human resources in place and employee feedback opportunities available can help alleviate internal business risks. In turn, this helps ensure systems are in place to make sure things run smoothly and staff remains happy and customers therefore will receive the best service and products possible.
External business risk
Not everything is controllable from inside a company’s operations. The external business risks refer to external environmental challenges your company faces. Having contingency plans in place can help ensure these risks don’t damage your business too severely.
Sometimes it feels like technology, which is built to help, is a hindrance to efficient workflow. When it seems as though the printer is conspiring against you, it’s as a result of minor technology risks, as a trivial example. The bigger technology risks can be detrimental to business operations and should be treated with care and caution. These are best avoided with strong information technology (IT) teams in place and preparations for worst-case scenarios if any important tech fails at a crucial time.
Study risk management
Taking a course or gaining practically-implementable knowledge in risk management is vital in up skilling your understanding of identifying and avoiding risks in your business.
Take a short course in risk management to discover the tools, practices, assessment methodologies and necessary insights into learning how to combat risk and tackle the challenge head-on.