The last year has been full of unexpected twists and turns that have tested the risk management process at many organizations.
Resilient organizations are able to bounce back quickly when a challenge or setback arises. One way to achieve that resilience is to implement a formalized risk management process within the organization. Following a step-by-step process to manage risk can help you improve the effectiveness of identifying and addressing risks to your business, your projects, or your industry.
Simply going through the risk management process raises awareness of risk, educates employees across the organization about those risks, and ensures no risks are inadvertently overlooked.
5 Steps to Begin the Risk Management Process
To take control of your risk environment, you first need a deep understanding of your risks. You also must decide how much risk your organization is willing to tolerate and what your options are for dealing with those risks. A formalized risk management process will help identify which risks are most critical so you can take steps to proactively manage them.
Here are five steps to define your risk management process:
1. Identify Potential Risks – What Could Harm Your Organization?
Anticipating all the risks that could harm your organization or your project may seem overwhelming at first. But identifying the challenges and risks your organization faces can be a powerful and rewarding experience.
Be sure to consider specific risks in all categories across the organization, including:
- Health & safety risks (e.g., workplace hazards, a pandemic)
- Operational risks (e.g., employee turnover, supplier failure)
- Financial risks (e.g., interest-rate fluctuations, credit availability)
- Strategic risks (e.g., new competitors, brand reputation)
- Regulatory risks (e.g., data-privacy laws, OSHA)
2. Analyze Your Risks – How Likely Is It That the Risk Will Happen – And How Would the Business Be Impacted?
Next, think about the frequency and severity of each named risk. In other words, consider how likely it is that a risk will materialize. And if the worst happens, will it bring your whole business to a standstill or will it be a minor inconvenience? Knowing which risks are more impactful can
help you determine where to focus and how to prioritize limited resources, including money and people.
Many organizations use a heat map to visualize risks and their magnitude. This helps communicate priorities more clearly so that stakeholders can make better strategic decisions.
3. Evaluate Your Risks – What Do You Want to Do with Each Risk?
Once you have assessed your risks and set your priorities, consider how you want to handle each one. Generally, there are four main options:
- Accept the risk. Recognize that some risk is necessary to grow the business. There are risks inherent in any business activity, but in some cases, the possible benefits outweigh the cost.
- Avoid the risk. Some risks simply aren’t worth the potential damage. Stop the activity.
- Control the risk. These are risks you are willing to accept – but at a reduced level. This option puts in place mitigating controls to limit potential damage to the business.
- Transfer the risk. This option gives responsibility for the impact to another party. Typically, this means buying insurance for a certain risk, which transfers the financial burden for damages to an insurance company.
4. Implement a Plan – What Do You Need to Put Your Plan into Action?
Once you have determined the actions that will lead to the best outcome, find the resources you need – financial and human – to execute your plan. You may need to budget for additional software or training. And you likely will need to gain approval from senior management. Finally, set up a formal process to implement the solution consistently across the organization.
5. Monitor Results – What Processes Are Needed to Make Continuous Improvement?
Effective risk management is an ongoing process, not a destination. New risks will emerge and established risks will constantly change in size and scope. Keeping up with this dynamic environment requires continuous monitoring and regular adjustment to your plan. The ability to apply learnings and make these adjustments in a timely manner is what will make your organization more resilient.
A formalized risk management process will help you make more informed decisions about your risks, while minimizing costly surprises. Putting a structure in place also helps promote a culture of risk awareness, where risk is factored into every important decision. While it may take some effort at first, a well-defined risk management process is sure to make a positive impact on the organization’s future – and the bottom line.
For more on upgrading your approach to risk management, check out our e-book, Still Managing Risk with Spreadsheets? and learn more about Riskonnect’s RMIS solution.