What is Risk Management?
Structures Risks Management
Risk management structures are adapted to do more than just indicate existing potential risks. A risk management structure measures the uncertainties and predicts their impact on a business. As a result, it’s a choice between accepting risks or denying them. Acceptance or denial of risks is dependent on the tolerance levels that a business has already determined for itself.
If a business puts risk management in place as a disciplined and continuous process with the intent of identifying and addressing risks, then the risk management structures can be used to support other mitigation systems including planning, organization, cost control, and budgeting.
Risks response takes one of the following forms:
- Prevention: A business aims to remove a particular risk by eliminating its cause
- Mitigation: Minimizing the possibility of the occurrence of the risk
- Acceptance: Sometimes, a business is forced to accept the risk and develops contingencies to reduce the impact
While creating contingencies, a business requires to engage in an effective approach with a well-detailed plan that will enable it to handle barriers to its success by dealing with risks as soon as they arise.
How does Risk Management work?
There are various sources of risks that can be added to a checklist which will be used as a guide during the initial brainstorming session on risks
Those risks include:
- unfeasible schedule commitments
- no functional input in the planning phase
- no one owning the project
- poor control of design and customer changes
- problems between team members
- not understanding the project manager’s job
- wrong person assigned as project manager
- no integrated planning and control
- organization’s resources are overcommitted
- unreal planning and scheduling
- no project cost accounting ability
- conflicting project priorities
- not properly organized project office
- unplanned regulatory requirements
- natural disasters
- vandalism, sabotage or unexpected side effects
- market or operational risk
- currency rate fluctuations
- technology changes
- risks stemming from the design process
- violating trademarks and licenses
- sued for breach of contract
- labor or workplace problem
- litigation due to tort law
How to Improve Risk Management
Risk management implementations and functions often fail to deliver what is expected and top management feels that its investments in risk management systems are not delivering the expected returns. There are many factors to blame from several parts of the organization and its systems. So, the following ten key practices should not be neglected as they can help increase the organization’s ability to deal with the uncertain future, improve decision-making, and enhance the reliability of periodic forecasts. Understanding the hazards and suggesting solutions to them can provide internal auditors with a solid basis for helping to improve risk management in their organization.
Be clear on respective responsibilities and tasks
Any gaps in responsibilities or tasks across your business could cause an increased opportunity for risk. So, organizations should make sure that every employee knows exactly what part of the business and what activities and tasks they are responsible for.
Identify potential risks at an early stage
The sooner you identify the risks, the easier it will be to manage the risk. So, businesses should think about risk management at the start of every project or task.
Always be positive
All the risks are not negative and may present opportunities to improve and grow. Take cognizance of the potential positive impact.
Explain risk appropriately
As part of the risk evaluation process, describe the risk properly, differentiating between cause and effect.
Evaluate and prioritize risk
Businesses use a risk matrix to evaluate and prioritize all existing risks. You also can estimate the severity of risk by looking at both the probability and the impact.
Take responsibility and ownership
If anyone in the organization sees any potential safety issue, suspected fraud, or security breaches, they should take responsibility rather than wait for someone else to rectify the problem. Risk management works best when everyone is empowered to make a stand and take action.
Learn from the mistakes
It would be great to use historical data and anecdotes to learn from the mistakes that happened previously, ensuring they are never repeated.
Use suitable strategies to control risk
To control risk properly, organizations should use the 4Ts model involving,
- Transferring risk – transferring to an individual, group or third party to be responsible for the risk
- Tolerating risk – no action is taken to mitigate or reduce a risk
- Treating risk – controlling risk through actions that reduce the severity of the risk occurring or minimizing its impact prior to its occurrence
- Terminating risk – changing processes or practices to eliminate risk fully
Capture all risks in a risk register
To improve your information sharing and accountability, always capture all risks across the company, so that you can see who is responsible for what and appoint a risk owner too.
Continued monitoring and reviewing
The risk level we face every day is constantly changing with the new emerging and critical risks. It is important to have a risk management process in the workplace and also training your employee on what constitutes risk so that they know what to look out for and how they can contribute towards risk management by being proactive and regularly monitoring the risk factor.
Steps in Risk Management
The risk management process is a framework for the proper actions that need to be taken to protect property, avoid accidents, and keep customers and employees from harm. There are five fundamental steps that are taken to manage risk beginning with identifying risks, analyzing risks, prioritizing them, implementing a solution, and finally, monitoring the risk.
Now let’s dig into how these steps are implemented in a more digital environment.
Identifying the Risk
The initial step is to identify the risks within the business. There are various types of risks: environmental risks, market risks, legal risks, regulatory risks, etc. It is essential to identify as many of these risk factors as possible. In a manual environment, these risks are recorded manually while if the organization has a risk management solution, all this information will be embedded directly into the system. The main benefit of this approach is that every stakeholder in the organization can see all these identified risks with access to the system.
Analyzing the Risk
After identifying the risks, their severity and seriousness need to be analyzed. It is vital to understand the scope of the risk within the organization. In a manual risk management environment, this risk analysis is used to do manually. But when a risk management solution is implemented, it is important to map risks to different documents, policies, procedures, and business processes that will evaluate risks and let you know the major impact of each risk.
Prioritizing the Risk
Once the risks are identified and analyzed, they need to be evaluated and prioritized. There are different categories of risk management solutions depending on the severity of the risk. It is necessary to rank risks because it enables the organization to gain a holistic view of the risk exposure of the entire organization.
Implementing a Solution
After prioritizing the risks, the next step is to eliminate or contain the risks as much as possible by experts. In a manual environment, this is done by contacting each and every stakeholder and then setting up meetings so that everyone can talk and discuss the issues. The problem arises when the discussion is broken into many different email threads, across different documents and spreadsheets, and many different phone calls. But if a risk management solution is implemented, all the relevant stakeholders can be sent notifications and the discussion regarding the risk and its possible solution can take place from the system. Everyone can get updates directly from the risk management solution instead of everyone connecting with each other to get updates.
Monitoring and Reviewing the Risk
There are two risks that always need to be monitored and reviewed, named market risks and environmental risks. In a manual environment, monitoring happens through professionals who keep a close eye on all risk factors. In a digital environment, the risk management system monitors and reviews the complete risk framework of the organization to ensure business continuity.
ComplianceQuest Solutions for Risk Management
ComplianceQuest’s Risk Management Solution provides an entire and proper picture of the risk landscape across product lines, business processes, and business units. Risk assessments can be done from anywhere within the ComplianceQuest platform to analyze hazards associated with any process or activity such as audits, CAPAs, change, customer complaints, deviations, nonconformances, etc. ComplianceQuest’s Risk Management solution provides a comprehensive set of solutions, tools, reports and dashboards to identify, assess, evaluate, treat and monitor risks regularly across the enterprise. The CQ Risk and Compliance solution provides a framework for determining operational risk tolerance thresholds and policies complying with these thresholds are employed and followed for risk assessment and required analysis across the organization.
Frequently Asked Questions
What is Risk Management?
Importance of Risk Management
Risk management is a strategic process because it allows a business with the necessary tools to properly identify and deal with potential risks. Once the risks are identified, it is then easy to reduce them. For a business, risk assessment and management are the best way to prepare for contingencies that may come in the way of progress and growth. When a business assesses its plan for handling potential threats and then develops structures to address them, it improves its odds of becoming a successful entity. Efficient risk management also ensures high priority risks to be dealt with early. Also, the top management should have all the necessary information to make decisions and ensure that the business remains profitable.
The objective of risk management is to:
- Find out possible risks.
- Mitigate or manage risks.
- Plan and provide a reasonable basis for better decision-making for all risks.
Besides, effective risk management will also:
- Manage high-priority risks cost-effectively throughout the project.
- Provide the required information to the management to make informed decisions on critical issues.
What is the risk management process?
The risk management process is a continual process of identifying, analyzing, treating, and then managing risks to help an organization save money, and protect people, income, property, assets, and time. Through the risk management process, the organization can also protect a company’s brand image, manage legal liability, and protect the environment. Identifying and tracking risk offers significant advantages, including:
- More effective resource planning by making previously unexpected costs visible
- Better tracking of project costs and more accurate estimation of return on investment
- Enhanced awareness of legal requirements
- Better prevention of physical injuries and damages
- Flexibility when any changes or challenges do emerge
Risk management is a robust problem-solving approach that uses different tools of assessment to calculate and rank risks for the purpose of evaluating and resolving them. Here is the risk management process:
- Risk identification
In the first step of the risk management process, risk identification generally involves brainstorming. A business can review all the various sources of risk with the help of its employees. The next step is to organize all the identified risks in order of priority. Prioritization ensures those identified risks that can affect a business are dealt with more urgently as it is not possible to mitigate all existing risks at a time.
- Risk assessment
After identifying the problem, finding an appropriate solution is required. However, before understanding how best to handle risks, a business should identify the cause of the risks by finding out the cause and the impact.
- Develop an accurate response
Once a business entity is set on mitigating identified risks and preventing their recurrence, it needs to ask the following questions: What measures can be taken to avoid the identified risk from recurring and what is the best thing to do if it does recur?
- Implement preventive mechanisms for identified risks
Starting with the highest priority risk first, organizations should assign the tasks to their team for either solving or at least mitigating the risk so that it’s no longer a threat.
- Risk monitoring & review
Clear understanding among workers and stakeholders is vital when it comes to ongoing monitoring of potential risks. Through risk monitoring and review, the risk management process helps to rectify problems before they occur. This makes for happier, stress-free project teams and stakeholders. The final outcome is that you reduce the influence of project threats and tap the opportunities that occur for business success.