The 8 Crucial Principles of Risk Management
While there is no step-by-step risk management plan that will work for every industry, there are a number of practices, frameworks and processes that have been laid out by the International Organization for Standardisation (ISO) to guide businesses in effective risk management. These come under the key principles of risk management.
What is Risk Management?
Risk management is defined as the identification and evaluation of all risks threatening a business or project, along with the strategic implementation of resources to mitigate, manage, minimise and monitor the impact thereof. Effective and successful risk management requires a holistic, consistent approach which takes into account all of the sources from which risks can stem, including global economic uncertainty, project failure, resource shortages, legal issues, natural disasters and political instability.
What are the eight principles of Risk Management?
There are eight principles that are believed to be at the core of effective risk management, with value creation and protection as the chief objectives of risk management in business. The aim of risk management can be considered twofold: firstly, it needs to add value and/or promote value creation within the business; secondly, it must protect the value which has been created, whilst continuing to grow, expand and develop. Here we unpack these principles and what they mean for businesses:
Businesses have long since realised that risk management is not something that can be done in isolation; it is critical that risk management is integrated across all aspects and activities of the organisation. That means that risk evaluation needs to stretch across departments and organisational levels, and should be seen as an essential part of all processes. The best thing you can do is create a culture of risk-awareness at your organisation, to ensure that risk identification and evaluation is incorporated into all discussions and planning across all departments.
2. Structured and Comprehensive
Effective risk management is impossible without a thorough, well-organised identification and evaluation process for a number of reasons. Firstly, you can’t compare apples with oranges.
An important part of risk management is consistent monitoring and reevaluation, which requires that risks are reported in a standard, structured way that can be repeated again and again. This way, trends and patterns can be tracked and used to predict and extrapolate events that could affect the business. Secondly, risk managers need to take all aspects of a business into account, which means recording information across a number of different departments, levels, projects and people. This cannot be done without a thorough, comprehensive reporting structure that lists each and every detail in need of assessment.
This is not to say that plans, solutions and processes cannot be changed; there is always room for improvement and growth. Rather, the format and structure of risk management assessment tools and processes should be set up in such a way that it covers all bases in a systematic way that, ideally, allows for easy tracking and evaluation of problem areas.
Every business and project is different, and each will have its own unique risks. It is, therefore, important that the risk management process is customised for each case. If a generalised process is used, such as a template from a website or course, you may not account for certain risks that could cause huge problems in the future. Therefore, you should choose processes and programmes that suit the product or service that you are offering, the team who is actually doing the work, the customers you are targeting, and the state of global affairs.
Furthermore, customising your risk management plan allows you to ensure that you are honouring the rest of the principles on this list. As will be discussed in the next point, inclusivity is an essential part of effective risk management; with a customised approach, you will be able to accommodate every member of your team. Furthermore, you can work to create a collaborative process in which all team members are included and empowered to offer feedback, suggest improvements, propose ideas and implement solutions.
Although businesses will generally have a designated risk manager, one of the essential principles in the risk management process is inclusive of everyone who plays a part in the work done by the company. This means that you need to consider the input of stakeholders, investors, executives and employees. The reason for this is that different people will be able to provide unique perspectives on problems which could arise, thus allowing you to make your risk management as comprehensive and multifaceted as possible. Furthermore, allowing workers to have input in this essential process will help to foster empowerment, motivation and agency.
It is important for your risk management approach to be both proactive and responsive. This is because the world is in constant flux, and the risks posed to your business will change according to a wide range of factors including economics, politics, globalisation and digitalisation.
You need to be mindful of the changes happening in the world and how these could threaten or benefit the business and its projects; you also need to be willing and able to adapt according to unforeseen circumstances which may arise. The best way to practice dynamic risk management is to have a diverse, empowered and well-equipped team; this allows for more eyes on the ground and ensures that you are guarding against risk from all angles.
6. Get the best available information
Unfortunately, you will never have 100% of the information that you need or want when it comes to mitigating risk. This principle in risk management is all about accepting the fact that you will have to make some difficult decisions about the problems you are faced with and the solutions you implement. You will often be unsure if you are doing the right thing. To be an effective risk manager you need to learn to trust your knowledge, training and skills to point you in the right direction. And to trust yourself, you need to give your best; be alert, be proactive and never allow yourself to become complacent. If you put in the work, you have no reason not to trust yourself- you’ve got this.
7. Remember human and cultural factors
When developing risk management plans and solutions, you need to take into account the fact that human beings with needs and limitations will need to be consistently applying risk management practices while performing their daily work. Allow for the fact that mistakes will be made and work with the strengths and weaknesses of your team. Furthermore, tailor your solutions to the specific needs of your team members and allow them to give input. It is essential that each person is equipped with the approach and resources they need to tackle problems with confidence and efficiency.
Alongside tailoring your approach, you should work to train employees in risk management in order to create a competent, confident team with a culture of risk-awareness. A great way to grow this awareness and competence is to enrol your team in an online course that allows them to learn and improve whilst continuing to fulfil their work responsibilities.
8. Continual improvement
Aiming for continuous improvement in risk management is the best way to build a business’ resilience; furthermore, ensuring that this principle is incorporated into your approach will encourage dynamic practices. If you and your team are determined to explore opportunities for improvement throughout projects and business operations, you will be more likely to develop future-fit solutions that speak to consumer needs and our ever-changing world.
The principles of Risk Management in a nutshell
As mentioned above, there is no step-by-step plan that will work for every business or project; however, these principles provide an excellent starting point for developing a risk management approach that:
- Is integrated across all aspects of the business
- Follows a clear, standardised structure that allows for easy progress monitoring and considers all business or project factors
- Can be tailored to the specific needs and risks of your specific business or project
- Includes the input and perspective of all relevant team members and stakeholders
- Is able to be dynamically adapted and developed according to global events, competitor activity and consumer needs
- Allows you to utilise the best available information and proceed with confidence and competence
- Takes into account the limitations and individual needs of your team members, while building a culture of risk-awareness
- Encourages continuous improvement and equips team members to identify opportunities for growth and refinement
It will take time, dedication and hard work to successfully implement these principles and build a successful risk management approach. It may not be easy, but the combination of these factors is sure to set you, and your business, up for success in today’s volatile, ever-evolving world.
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