Risk management is a process that allows for identifying risks aggressively and early. It should be a continuous, forward-looking process. Risk management is a process that requires strong leadership across all stakeholders. The best risk management programs are proactive rather than reactive. Risks can endanger an organization’s progress toward achieving critical objectives. Risk management is a process that allows for identifying risks aggressively and early, and working to eliminate or reduce any negative impacts they might cause. Having a risk management plan is easier and more cost-effective than to address a sudden crisis or situation that’s gotten out of control.
What Is the Goal of Risk Management?
Essentially, the goal of risk management is to identify potential problems before they occur and have a plan for addressing them.
Risk management looks at internal and external risks that could negatively impact an organization. Typically, risk management teams break their risk management plans down into four parts. These parts include defining a risk management strategy, identifying and analyzing risks, managing risks through implementing a strategy and forming a contingency plan.
What Is the Risk Analysis Process?
The initial step in the risk management process is the risk analysis process. Risk management teams tend to think of the risk analysis process as a type of problem-solving exercise. The team uses tools to identify risks and prioritize them to set the stage for assessing and resolving them.
The following processes form the risk management plan.
Identifying risks is an expansive task and one that should be ongoing. For this reason, it’s helpful to have a group of people who can effectively brainstorm the many possible sources of risks. A risk management team combines their knowledge and experience to scan the full scope of possible risks.
At the end of the identification process, it becomes clear that it’s impossible to form a plan to address each and every risk that’s been noted. Risk management teams then use some type of assessment tool to categorize and prioritize risks. The process for prioritization helps risk management teams to categorize risks according to the level of impact and the probability of them occurring. Their judgment is often based on past experience regarding the likelihood of occurrence, gut feel, past failures and successes, historical data, and any other information they have.
During the course of problem-solving, risk management teams often discuss possible solutions. Before teams can decide on how to best manage risks, they need to identify the causes of the risk they found.
At this juncture, it’s also appropriate for the team to discuss how each risk will impact the company.
Develop Risk Responses
In learning about the causes, impact, and probability of risks, the team can start focusing on brainstorming possible remedies for managing risks or totally preventing them from occurring. This part of the process entails trying to figure out what things would reduce the likelihood of a risk occurring and what the team can do to manage the risk. Risk responses should be written into a risk management plan to prepare for the next part of the process, which is implementation.
Develop a Contingency Plan or Preventative Measures for the Risk
Working from the top priorities down, the risk management will then breakdown the risk responses for each risk into action steps. The action steps become part of the risk management plan. The team should implement whatever action steps they can right away to proactively prevent risks from occurring. If a risk occurs, the risk management team can retrieve the plan and put the appropriate steps into action.
In the best-case scenario, solid risk management planning will prevent any serious impending crises.
Developing a Risk Tolerance Profile
Some risks will be too much for companies to entertain, despite any opportunities they might also bring. In assessing risks and trying to determine possible negative impacts, risk management teams need to work with management teams to decide whether certain risks are acceptable or unacceptable. While the teams may understand up front that a certain project will carry certain risks, they may decide to go ahead with it if the outcome of the project is worth taking those risks. This is referred to as a risk tolerance or a risk profile. When a company agrees to accept various risks, the risk management team still needs to come up with a plan for mitigating those risks.
Part of the goal of a risk management plan is for it to be set up as a continuous, disciplined process where the team is regularly identifying, resolving, and planning for risks. This is necessary so that the risk management process dovetails with other systems such as organizing, planning, budgeting, and cost control.
Ways of Addressing Risk Response
There are four generally accepted ways to respond to risks—avoidance, mitigation, acceptance, and transfer.
Risk avoidance is the process of avoiding or eliminating a specific threat at the cause. This is why it’s important to identify the cause of risks during the risk analysis process.
Risk mitigation is the process of reducing the risk by reducing the impact of the risk if it should occur or reducing the probability of it occurring.
Risk acceptance is simply agreeing to accept the consequence that a risk brings if it occurs. When risk acceptance is part of the response plan, it’s usually accompanied by a contingency plan that tells the company what to do if it occurs.
The fourth and final way to manage risks is risk transfer. In most cases, this refers to insuring the risk. In this way, if the risk occurs, the company has already paid a premium to an insurance company that will incur the financial consequences of the risk.
The benefit of continuous risk management is that it ensures that the most serious risks are being assertively managed and that the company can manage any ensuing costs. Also, risk management plans provide management at all levels with the necessary information to make informed decisions about critical issues that affect the company’s success and sustainability.
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