What’s risk management and why is it important?
Risk Management is the discipline dealing with the management of all the possible risks that can have an impact on the company’s activities and can be useful for different areas: from finance to asset management, up to security management.
Its importance is key, since effective risk management allows to significantly reduce the possibility of any damage occurring, hence preventing its potential impact. In other words, managing risk means trying to control future outcomes as much as possible by acting in prevention rather than in reaction.
Identifying the possible risks for the company is the first step towards effective risk management. To do this, it is necessary to carry out an in-depth analysis of the company and its operating context, in order to identify all the risk factors. Then, a second step refers to the assessment of how they could occur and the extent of the damage they could cause. And as last step, it is necessary to develop an action plan to effectively manage the risks and minimize negative effects.
If a business sets up a proper risk management system with the purpose of identifying and resolving risks, it can bring many benefits, including:
- Reducing the number of accidents and related costs;
- Improving the quality of the service for customers and the company’s reputation;
- Increasing efficiency of business activities and safety at work.
For a company, risk assessment and management represent the best ways to find themselves prepared for any obstacles to progress and growth. When it evaluates its management plan for potential threats and develops methods to deal with them, it increases the chances of getting resilient towards harsh events and to keep operating even in difficult conditions.
What are risk management’s key factors?
Risk management is made of:
- Inside factors: the ones a company can directly control, such as human resource management or strategic planning;
- Outside factors: the ones a company can’t directly control, such as the competition or the market evolution.
In both cases, it is key to consider the risks in order to develop effective strategies to minimize their impact on the company’s activity.
How does risk analysis works?
An effective risk management must be structured in a system, collaborative and continuous. Hence, a proper risk analysis process shall be based on five main phases:
- Risk identification: in this phase, the possible risks for the company are identified and all inside and outside factors that could give a negative influence on the achievement of corporate goals are considered;
- Risk assessment: in this phase, the previously identified risks are assessed considering how and if they could occur and the extent of the damage they could cause. This assessment makes possible to rank the risks according to their importance and priority. Prioritization makes sure that risks with a possible deep impact on the business are addressed properly and with greater urgency;
- Develop a proper response: in this phase, it’s time to develop strategies to effectively manage risks and minimize their negative effects. For example, if during identification and analysis comes the realization for a company to be exposed to phishing or ransomware attacks because the employees are not trained enough, it might be a good decision to develop a training program to raise awareness and provide the needed skills to defend against these threats;
- Risk mitigation: once the response has been elaborated, the next move refers implementing the actions necessary to counter the risk. For example, if the company has chosen to develop a cybersecurity training plan, it will actually be set and made available to employees at this stage. It is important to note that the risk management process doesn’t end with the mitigation single risks, but once the measures to counter them have been taken, it is needed to keep checking if new threats have emerged;
- Monitoring and review: in this phase, the risks are kept under control to verify if the management strategies adopted are effective. If that’s not the case, it’s time to plan a few changes to the risk management system. It’s key to remember that risks are not static, but change over time along to the transformations of what happens inside and outside of the company. Hence, the risk management process must be continuous and set as a system to make the company ready to face the challenges on the way to carry on its business.
4 different risk management’s approaches
Risk Management, as already stated, is a discipline that deals with the management of corporate risks. Its purpose is to reduce the possibility that negative events may occur, yet keeping under control the side effects and impact they may cause.
When it comes to risk management, here are four different approaches to consider:
- Risk Avoidance: it is impossible to eliminate risks, however an organization can operate to reduce the costs related to these risks, developing effective and proper strategies;
- Risk Acceptance: in some cases, making a risk management strategy can be even much more expensive than any financial or economical waste of the risk itself. So, to reduce costs, a company may decides to accept the risk and take into account its possible impact for the future. For example, a manufacturing company always accepts the risk of producing imperfect products, but develops a complaint management plan to reduce the bad impact these could have on the company’s whole reputation;
- Risk Reduction: although risks are impossible to avoid in business, they can be reduced to some extent by changing certain aspects of the project or by reducing its amount. For example, if a company identifies a risk related to employees safety, it can adopt measures in order to reduce the possibility of occupational accidents;
- Risk Sharing: in some cases, it is possible to transfer the risk to a third party, such as the insurance company. This solution can be particularly useful in the case of risks related to health and safety at work, such as accidents or occupational diseases.
In order to choose the most effective risk management’s solution for the company, whatever strategy you decide to adopt it is important to take into account both related costs and benefits.
Who’s risk management’s professional?
Risk Management is a process involving all levels of the company and can be managed internally or externally. In general, risk management is entrusted to a team of experts who follow the risk analysis and mitigation strategy by specific methods.
One of the most important professionals within this team of experts is the Risk Manager, who’s responsible to identify, assess and check corporate risks. The risk manager must be able to effectively communicate the outcomes of his analysis as the company management can make decisions for actions to take to reduce risks and keep business up.
Although risk management is a complex process, it is key to remember that its purpose is to protect the company from negative events that could overhang the activities. Therefore, it is essential to devote time and resources to risk management, a good investment to better address the challenges arising across the life of the firm.
