The 5 Steps of an Effective Risk Management Process
Five Steps to Enterprise Risk Management
With the changing business environment brought on by events such as the global financial crisis, gone are the days of focusing only on operational and tactical risk management. Enterprise Risk Management (ERM), a framework for a business to assess its overall exposure to risk (both threats and opportunities), and hence its ability to make timely and well informed decisions, is now the norm.
Ratings agencies, such as Standard & Poors, are reinforcing this shift towards ERM by rating the effectiveness of a company’s ERM strategy as part of their overall credit assessment. This means that, aside from being best practice, not having an efficient ERM strategy in place will have a detrimental effect on a company’s credit rating.
Not only do large companies need to respond to this new focus, but also the public sector needs to demonstrate efficiency going forward, by ensuring ERM is embedded not only vertically but also horizontally across their organisations. This article provides help, in the form of five basic steps to implementing a simple and effective ERM solution.
Step 1: Identifying Risks
They can be classified into four major categories of risks: hazard risks like accidents, fires, or natural disasters, strategic risks like new competitors or viral negative feedback, financial risks like economic recession, and operational risks such as supplier failure or employee turnover.
Try to identify as many risks as possible and categorize them based on the above four types to streamline your risk management strategy. Some good ways to identify risks include:
Once you have compiled a list of all possible risks, make a record of them in a project risk log or project risk register. This will help you monitor risks throughout a project. The log serves as an ongoing database of risks in every project. So, it not only helps you control for current risks, but also serves as a historical reference for past projects, making it a valuable project management tool.
In an offline environment, this register is done by hand, but if you have a risk management solution like Pulpstream , you can insert all this information directly into the system. The risk data would then be visible to all stakeholders in the project, making it easy for the entire team to manage threats.
The risk management framework doesn’t change
The basic processes of risk management that we’re about to share with you have been the same for decades and will likely remain so for many more. They fit during an industrial revolution and also during a digital revolution.
What does change, however, is how we perform risk management and how efficiently we are able to undertake risk management strategies in our modern age. What was once a manual process has in recent decades become mostly a digital process. And this enormous technological change will no doubt affect the steps below.
Change is a normal part of life, especially in our digital world where things seem to be moving faster than ever. New risks are being discovered, mostly due to new technologies. One area that easily comes to mind is the risks associated with cybersecurity and data protection.
Modern problems will always require modern solutions. And while risk management strategy and the tools we use may change with the times, the risk management process below likely will not.
5 steps to the risk management process
Risk management isn’t a one-time process. To be most effective, it should be ongoing and conducted at regular intervals. It also requires some investment in resources like time and money. And if done correctly and routinely, it can provide individuals and organizations with the kind of safeguards that tip the balance between success and failure.
1. Identify risks
Identifying potential risks is an obvious first step in the risk management process. It’s important to identify all risks that a business or organization may be exposed to. To do this, you’ll want to employ as many methods as possible, including:
You can also include IT security risks and legal risks. Once you look at the different types of risks that are in play for your business using the methods above, it’s important to define exactly how each affects your organization.
You can note the risks manually or input them into a risk management software product. Then you’ll want to share these risks with all of the stakeholders involved, rather than lock them away in a report that simply gathers dust.
2. Measure risks
By analyzing each of these, you’ll have a better understanding of the severity or seriousness of each risk. Some risks are nothing more than minor inconveniences, while others can result in ruin and bring an organization to its knees, so to speak.
This risk analysis and measurement step can be done manually, like the prior step. Or if using a risk management digital solution, you can map out the risks to various business processes, procedures, policies, and documents.
Your risk management system will then have a framework in place for evaluating each risk. Knowing the potential frequency and severity of each risk is critical, as is knowing where and how to allocate your resources.
3. Examine solutions
In this step, organizations will examine alternative solutions and seek to evaluate and rank the risks. It’s important to know how to prioritize each risk. Most risk management solutions will provide a grade for each risk based on the severity.
Risks that are merely inconvenient will rank the lowest. Risks that are potentially catastrophic will rank the highest. Ranking risks in this way will provide the organization with a holistic view of the entire organizational risk exposure picture.
A business can be vulnerable to several low-ranking risks that may not warrant intervention by upper management. And that same business can be vulnerable to one high-ranking risk that requires an immediate intervention.
Accept the risk
Avoid the risk
Control the risk
If the risk is more serious but the benefits justify taking the risk, a business can find ways to prevent or mitigate the risk by reducing the impact on the organization if it does occur.
Transfer the risk
4. Implement solutions
Your goal in this step of the risk management process is to eliminate or contain the risks you’ve chosen using the solutions you’ve decided on. This may entail meeting with stakeholders and upper management to get approval on your plans, especially if the risk is serious.
Once you have identified your risks and your solutions, it’s time to allocate resources toward those solutions. This includes setting up processes to implement each solution, finding personnel and funding, and training team members.
5. Monitor results
If the risk solution strategies prove to be ineffective, the team may need to start over. If changes or updates are required for certain strategies, you’ll want to monitor these more closely going forward.
Organizations should always approach risk management as a process rather than a project. There is no completion or finish line to cross. Treating it like a process will help develop a risk culture that prioritizes risk management, which in turn, makes businesses more agile and resilient to risks.
Two risks that will always require monitoring to ensure continuity are market risks and environmental risks. These are two risks that have more fluidity than others. Therefore, it’s wise for an organization to assign employees or a team to monitor these two risk types, along with their subtypes.
If a factor or a risk suddenly changes, you’ll want to know quickly, and adjustments will need to be made. Computers are better at reading data and monitoring risks than people, so finding a risk management solution has obvious benefits.