Steps in a Risk Management Process (with Definition)
By Indeed Editorial Team
Published 6 November 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Predicting and managing risk is an essential part of operating a business. Organisations with an excellent risk management process are more adaptable to unforeseeable challenges and maintain business operations when these challenges arise. It's beneficial to understand the methods and strategies you can use to implement a risk management operation to protect a business. In this article, we outline what risk management is, explain the risks involved and identify the steps you can choose to implement this process successfully.
What is a risk management process?
A risk management process is an ongoing process to identify, analyse and manage the risk of a business. It involves understanding what risks are present, how they can potentially affect a project or organisation and how to respond to them. The ultimate goal of risk management is for a business to maintain operational efficiency when unexpected complications arrive. By using this process, risk management professionals can help avoid or mitigate these challenges when they happen.
Types of risks involved
Many businesses categorise their risks into the following groups:
Legal and compliance risk: Legal risks are a type of compliance risk that happens when an organisation neglects to follow government regulations, which can lead to expensive lawsuits and adversely affect a company's reputation. Some types of legal risks include contract risk, dispute risk and regulatory risk.
Reputational risk: Reputational risk relates to any negative factors that may affect a company's reputation. It can result in a loss of confidence among a company's shareholders, potentially decreasing revenue and profit.
Operational risk: Operational risk is when the daily operations of a business threaten to decrease its profits. Employee error, damage to assets and even external frauds are some examples of risks caused internally or externally.
Security risk: This type of risk relates to data breaches or a failure to protect corporate information from unauthorised access. Minimising security risks can help businesses keep sensitive information, such as their client's personal information, safe.
Personnel risk: Personnel risks typically relate to a company's workforce, such as not having the human resources to do a specific job or task. It can also arise from unforeseen employee circumstances, such as health issues or intentional actions, like fraud or theft.
Financial risk: Also known as monetary or fiscal risk, financial risk is when a business stands to lose money on an investment or business venture. It can occur when a company doesn't perform financial planning or debt management tasks, including currency risk, default risk and liquidity risk.
Competition risk: Competition risk can occur when a competitor takes a commanding share of the market for any product or service, potentially preventing a business from growing or achieving its goals. It's often linked with declining revenues or margins due to a competitor's actions.
Brand risk: Brand risk is the potential that a brand can lose value or fail in the market. It can affect customer loyalty, awareness or perceptions about the brand, ultimately leading to decreased profits.
5 steps of risk management
Here are five essential steps in the risk management process:
1. Identify and quantify risk
Identifying and quantifying risks is a common technique used to highlight their effect on the business or project. You can choose to identify potential risks by grouping them into risk categories, such as operational and financial. You can list these manually or input them into a risk management program. Some tips for identifying risks in your organisation include:
Analyse the company. Begin with a high-level analysis to observe the most obvious things that can go wrong in the company or industry.
Conduct internal research. Identify risks across the organisation to recognise areas most susceptible to failure. When you've conducted a data and trend analysis, you can identify any root causes of any issues.
Conduct external research. Each industry experiences risk, so it can be beneficial to identify these risks by doing some research. You can also be wary of any industry-related news releases, risk management successes or even legal issues, which can relate back to the same type of risks you can experience.
Analyse customer complaints. Customers are an essential source of information that can help you identify and mitigate against reputational risk. If there are numerous complaints about the same issue, it's likely connected to an associated risk.
Use computer software or models. Technological strategies such as strength, weakness, opportunity and threat (SWOT) analysis, simulations, scenario role-playing and risk mapping can assist in analysing risks quickly and efficiently.
Related: How to Use a Risk Assessment Matrix
2. Analyse the risk
Once you've identified any potential risks, it can be beneficial to analyse them based on how likely they are to occur and the potential harm they can bring to the organisation. It is also necessary to see how many business functions the risk affects. Investigate what internal liabilities the risk affects, such as financial, marketing, operational or personnel management. Because internal and external factors can vary depending on the industry, there's no one correct way to assess risk, but some general guidelines you can use include:
Weighing cost to benefit: Measuring the cost-to-benefit ratio of each identified risk can help you understand any potential dangers. You can do this by estimating the probability of an unpleasant event happening and multiplying this by the cost it'll take to fix it.
Bow tie analysis: Bow tie analysis is splitting an observed risk into contributing factors and potential consequences. Doing this can help you improve operational practices by addressing each potential cause and effect.
Delphi method: The Delphi technique uses experts' opinions to evaluate, identify and analyse individual risks. Each expert reviews the risks to create a risk register, which can include prospective risks and consequences.
Decision tree analysis: This method assists risk professionals by analysing proposed decisions and listing out the potential outcomes of the decision. When you understand the possible outcomes and the chance of occurrence, you can decide on the best course of action.
3. Prioritise the risk
This is the process of identifying potential risks of an organisation and deciding which ones are the most critical so a business can address them first. Prioritising is typically based on the chances that a risk may occur and the potential harm it poses to the business. After analysing the business's risks, utilise a risk matrix and establish a risk level for each. Typical risk levels include:
There are two types of risk assessments, qualitative risk assessment and quantitative risk assessment.
4. Treat the risk
After prioritising your risks, a company can adjust them based on their priority. In this step, companies may involve all related parties to ensure everyone knows their role to proactively solve any risks in maintaining business operations. This can involve one of four options:
Avoidance: Avoiding the risk means a business chooses to abstain from the business procedure to avoid activating the risk altogether.
Acceptance: Accepting the risk typically means the organisation acknowledges that the potential loss from a specific risk isn't enough to warrant spending resources to avoid it. Risk acceptance is the rationale that minor risks which don't have catastrophic consequences are worth accepting.
Control: Controlling risk means that a business may likely mitigate the risk's effects or origins.
Transfer: When a business discovers risks, it can benefit them to transfer the risk and related consequences to another party.
5, Monitor the risk
Monitoring risks can include tracking any identified risks and evaluating the performance of your risk management operation. Systematically monitoring risks allows a business to improve other risk management activities like identification, analysis and risk mitigation, which can enhance operational performance. You can monitor an organisation's risks by:
Monitoring risk response plans: Monitoring planned responses offer insight into how they work. Each incident may require careful review to decide if the original method works or if the organisation needs to implement a new contingency plan.
Identifying triggers for risks: It can benefit risk owners to be wary about risk triggers, which are circumstances that a situation has or may arise. Monitoring triggers can allow a risk professional to be proactive and avoid costly incidents.
Evaluating effectiveness: Scheduling regular evaluations of your risk management operation can help you make any necessary improvements in the project. Risk professionals can benefit by periodically consulting with all affected parties to determine the outcome of incidents and if they implement changes.
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