Whether you are a small to medium-size enterprise or a large corporation, risk management is a key function. For this reason, it’s critical that every business has an effective risk management strategy.
Some risks are likely to affect every type of business. On the other hand, some risks are unique to the nature of your business and the specific operations involved.
Types of Risk
There are several types of risk that a business can be exposed to:
Strategic Risk
Strategic risk is the risk of failure caused by poor strategies or decisions. It can be due to poor planning, execution, or both.
Operational Risk
The risk associated with systems, processes, policies, and procedures.
Legal Risk
The risk of legal violations or actions that can be taken against the company. Product liability lawsuits and patent violations are just a few examples.
Compliance Risk
This is a very broad category that includes compliance with employment, environmental, safety, and industry-specific regulations.
Competitive Risk
Competitive risk is generally associated with staying ahead of your competitors. However, this can also include such factors as market conditions and any other factors that prevent you from reaching your goals.
Economic Risk
This includes such macroeconomic risks like changes in exchange rates, government regulation, political instability, or a slowing of the economy as a whole.
Every type of risk can expose you to unplanned situations. These disrupt the normal activities of your business. However, with a strong risk management strategy in place, you can minimize the risk associated with a project or an initiative.
Develop Your Risk Management Strategy
Developing a strategy for risk management involves the following steps:
1. Identify the Risks
The first step for developing a risk management strategy is identifying all the risks that pose a threat to your organization. You can do this through a variety of techniques. One of these techniques is a PESTLE analysis.
A PESTLE analysis looks at political, environmental, social, technological, legal, and economic factors. For this reason, this is a good starting point for identifying your risk profile.
Surveys and Workshops
You can also carry out surveys or conduct workshops for risk identification. This should already be a part of your strategic planning process. If it isn’t, you can also conduct it as a stand-alone exercise.
This step is one of the most important aspects of your risk management strategy.
If you are unable to identify every possible risk that may threaten a project or your organization in general, then how can you be prepared to handle it?
Conduct a workshop to identify the potential risks associated with a project. When you do, be sure to consult individuals on every level. This can help you gather a variety of input from different sources. For instance, someone in management is likely to anticipate different risks than those identified by a non-manager.
2. Risk Assessment
Once you have identified all the potential risks associated with your organization, you must assess these risks. Risk assessment is based on two aspects.
- You must assess the likelihood of occurrence associated with the risk.
- You must determine the resulting impact.
Classify the potential risks identified into three categories:
- High-level risk
- Medium-level risk
- Low-level risk
Risk assessment can help you determine the severity of a risk. For instance, a high-level risk can have a low chance of occurrence. On the contrary, a medium-level risk can have a high chance of occurrence. In this case, you must develop a strong strategy for the medium-level risk first.
3. Develop Responses
Once you have assessed the severity of a risk, you can start developing a set of standard responses for managing the risk.
This step is extremely critical.
You must make sure that your response is effective in neutralizing or minimizing the damage caused by a risky situation. Developing a response to manage risk involves the following:
- Identifying a risk threshold
- Evaluating the cost of the risk
- Identifying, analyzing, and choosing the best solution
- Assigning responsibility for risk management to a person-in-charge
The person responsible for a particular risk must develop a plan based on day-to-day actions that can help detect or prevent the risk. Many risks can be mitigated by purchasing insurance. Others require developing policies, outsourcing risk management, or assigning further responsibilities.
4. Monitoring and Reporting
The 4th step of your risk management strategy is to monitor, as well as track the risk identified. Monitoring the risk involves keeping track of the risk management activities that were identified in the third step. Make sure that these activities are being carried out regularly to control a potential risk. This is particularly important for risks that have a high chance of occurrence.
You can monitor risks through day-to-day observations and keep a track through word documents and spreadsheets. These documents can also track a particular risk along with listing the persons responsible for managing it.
All observations and documents prepared must be reported to the individual in-charge as well as management. This is important for identifying any discrepancies between your plan and the actual performance.
5. Risk Review
Risk management is a continuous process. You must make sure to review the activities being carried out and evaluate their effectiveness. Conducting a risk management review also involves identifying changes in the internal and external environments and the potential risks associated with these changes.
It is also important to remember that an initial risk management strategy may not be completely effective. A change in the circumstances and your experience with risk management will propel you to conduct further analysis and review your strategies.
An effective risk management strategy will:
- Identify all potential risks related to your organization
- Assess the severity of the risks
- Include an appropriate response to each risk
- Assign responsibilities for risk management
- Monitor the activities being carried out as part of your strategy
- Include regular reports to the top management
- Conduct reviews to determine the effectiveness of the strategy and also to identify new risks
Conclusion
Having an effective risk management strategy in place can have a significant impact on the outcome of an unplanned event. As a result, that strategy will help you avoid risks or control the resulting damage.
Failing to identify and manage risks can expose you to financial loss. The public image of the organization may also suffer. If you want to protect your business as much as humanly possible, a well-planned risk management strategy is essential.