Every business must contend with risks, some chosen deliberately and others an inherent part of the environment in which the business operates. Founding a business, launching products onto the market, employing people, collecting data, building systems—these are all essential to growing a successful business. They are also all sources of risk.
But a business doesn’t thrive for long if it fails to balance risk-taking with risk mitigation. That’s the role of risk management.
What is Risk Management?
Risk management is the process of mitigating risks to limit their impact on the health of a business. Business risk is any action or inaction that increases a business’s exposure to factors that might reduce its revenue, cause it to fail, or damage its reputation. The goal of risk management is to ensure that the business and its employees act to reduce exposure to those factors.
Every decision-maker in a business performs some type of risk management; in fact, you might define decision-making as the process of weighing up risks and benefits to discover the most beneficial and least risky course of action.
However, ad-hoc risk management is unlikely to contribute consistently to the business’s objectives. While many individuals manage risk in a limited domain, a coherent framework helps them to do so systematically in a way that accords with the business’s risk management policies and the regulatory environment in which it operates.
What Are The Components of Risk Management?
For risk management to be effective, it must be systematic, structured, collaborative, and cross-organizational. There are several ways to categorize an effective risk management process’s constituent elements, but at the very least it should incorporate the following risk management components.
1. Risk Identification
Risk identification is the process of documenting potential risks and then categorizing the actual risks the business faces. The totality of potential and actual risks is sometimes referred to as the risk universe. It’s important to systematically identify all possible risks because it reduces the likelihood that potential sources of risk are missed.
When identifying risk, it’s also important to not just think about the risks that the business currently faces, but those that might emerge in the future, as well. As technology evolves and businesses reconfigure, the risk universe changes too.
2. Risk Analysis
Once risks have been identified, the next step is to analyze their likelihood and potential impact. How exposed is the business to a particular risk? What is the potential cost of a risk becoming a reality? An organization might divide risks into “serious, moderate, or minor” or “high, medium, or low” depending on their potential for disruption.
The exact categorization method is less important than the recognition that some risks present a more pressing threat than others. Risk analysis helps businesses to prioritize mitigation. For example, a risk might have a potentially serious impact, but a very low likelihood. The business might choose to deprioritize mitigation compared to a risk with a high cost and a high probability of occurring.
3. Response Planning
Response planning answers the question: What are we going to do about it? For example, if during identification and analysis, you realized that the business is at risk of phishing attacks because its employees are unaware of email security best practices, your response plan might include security awareness training.
4. Risk Mitigation
Risk mitigation is the implementation of your response plan. It is the action your business and its employees take to reduce exposure. Following our previous example, the implementation might involve security awareness training, the creation of onboarding material to educate employees, and so on. The organization must design controls that reduce the risk down to appropriate levels. These controls must be tested to ensure they are suitably designed and operating effectively.
5. Risk Monitoring
Risks are not static; they change over time. The potential impact and probability of occurrence change, and what was once considered a minor risk can grow into one that presents a significant threat to the business and its revenue. Risk monitoring is the process of “keeping an eye” on the situation through regular risk assessments.
It’s important to understand that risk management is not a one-off event, it’s a process that recurs through the life of an organization as it endeavors to anticipate threats and proactively handle them before they have an adverse impact.