What is Risk Management?
Risk management is the process of identifying, assessing, and controlling threats to an organization’s capital and earnings. The risks could evolve from various sources such as financial risk, legal risk, strategic risk, nature’s apathy, etc. The risk management strategies to reduce the risks have become a top priority for companies.
A risk management plan also includes companies’ processes for identifying and monitoring threats to its assets, including data, personal information (with respect to vendors and customers), and intellectual property owned by the Organization.
Every business and organization faces the risk of uncertainties that can cost the company money or may impact the going concern. Risk advisory allows organizations to minimize risks and reduce costs or increase profits wherever possible.
What is the Risk Management process?
Following is the process for managing risk associated with the businesses:
- Establish context. The criteria that will be used to evaluate risk should also be established and the structure of the analysis should be defined.
- Risk identification. The company identifies and defines potential risks that may negatively impact a specific company process or project.
- Risk analysis. The goal of risk analysis is to further understand each specific instance of risk, and how it could influence the company’s projects and objectives.
- Risk assessment and evaluation. The risk is then further evaluated after determining the risk’s overall likelihood of occurrence combined with its overall impact. This helps organization to define the risk-taking ability i.e. risk appetite.
- Risk mitigation. During this step, companies rate their risks from high to low and develop a plan to mitigate them using specific risk controls.
- Risk monitoring. Risk Management is a continuous process. The overall risk management process should also be monitored, reviewed, and updated accordingly.
- Communicate and consult. Internal and external shareholders should be included in communication and consultation at each appropriate step of the risk management process. Risk Management is not a separate process, it is an integral part of all the processes.
Advantages of Risk Management
Considering the various potential risks or events before they occur through robust risk management, an organization can proactively manage risk and ensure it does not impact them. This ability to act and manage risk will allow organizations to feel more certain about their business decisions. Furthermore, strong corporate governance policies that focus specifically on risk management can help a company to meet its objectives.
Other important benefits of risk management include:
- Creates a safe and secure work environment for all stakeholders.
- Increases the stability of business operations while also decreasing various risk attached to the business.
- Provides protection from the risks that can impact both the company and the environment.
- Protects all involved people and assets from potential harm.
Risk advisory should advise management strategies that should be able to answer the following questions?
- What can go wrong? The risk universe of the organization.
- How will it affect the organization? Rating of the risk from high to low depending on the likelihood and impact of the risk on the organization’s goals.
- What can be done? Risk mitigation, reviewing, and monitoring.
What are the possible ways to manage the risks for an organization?
An organization can use the following approaches to deal with various risks:
- Risk avoidance. While the complete elimination of all risk is rarely possible, a risk avoidance strategy is designed to deflect as many threats as possible in order to avoid the costly and disruptive consequences of a damaging event.
- Risk reduction. Companies are sometimes able to reduce the amount of effect certain risks can have on company processes. This is achieved by adjusting certain aspects of an overall project plan or company process, or by reducing its scope.
- Risk sharing. Sometimes, the consequences of a risk is shared, or distributed among several of the project’s participants or business departments. The risk could also be shared with a third party, such as a vendor or business partner.
- Risk retaining. Sometimes, companies decide a risk is worth it from a business standpoint, and decide to keep the risk and deal with any potential fallout. Companies will often retain a certain level of risk if a project’s anticipated profit is greater than the costs of its potential risk.