Best Practices

What Is the Risk Management Process?

by Ana-Maria Sanders   Dec 06, 2021

It’s almost impossible to ditch all workplace risks, but they are possible to mitigate. A risk management process can help you anticipate and respond to dangers threatening your workplace. It may require some time and dedication, but the results can lead to better transparency and preparedness.

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Risk management refers to recognizing potential dangers and taking appropriate measures to mitigate them. The process includes designing action plans for all off-the-track situations. In a sense, it is similar to a fire protocol in a building. You aim for the best outcome, but create contingency plans in case you confront problems.

Any company can face risks. Common ones include security breaches, data loss, cyberattacks, natural disasters, and damages caused by human error. This process can help you develop guidelines to protect against them.

There are four simple steps to follow. This blog will delve into the process and the pros and cons of managing risks in your day-to-day operations.

Risk Management Process Steps

The risk management cycle consists of four essential steps. First, it would be best to start with identifying potential threats, followed by an analysis of the risks. Once you have assessed the risks accordingly, you need to act. The last crucial step is implementing plans to control and monitor them. Below we delve into each step with more detail.

  • Identifying the Risks

Professional writing down potential risks.Risk identification is the essential first step you can take. Identify and compile a list of all potential risks that may threaten your customers, employees, management, and company.

Once you’ve collected a list of threats, you can separate them into categories.

Financial Risks

This type can include any danger that would pose a threat to your finances. Some examples of financial risk include economic recession, market volatility, and interest rate changes. Risks associated with investments and accounts receivable can also be considered financial risks.

Operational Risks

These risks usually arise from inside the company and pose threats to day-to-day operations. For example, a machine may break down during production, or a supplier may fail to deliver products on time. Human errors are also common types of operational risk.

Strategic Risks

These are any risks that are associated with competitors and new players in the market. Strategic risks pose a threat to your business’s relevance and compatibility. They may include any external and internal factors that could cause damage to your brand name and reputation.

Hazard Risks

Hazards refer to any emergencies that can hinder business operations. An employee may be injured, or a fire may break out in the office. Natural disasters that cause direct damage can also be classified as hazards.

  • Analyzing the Risks

Company meeting to analyze risks.After identifying and classifying the threats, you need to assess them. The assessment step involves assigning probabilities. Do you expect some to materialize more often than others? What could the consequences be if any occurred?

Consider creating a two-dimensional model to evaluate the risks. For example, one side of the axis could represent the likelihood, and the other axis could be the impact. Additionally, historical data and guesstimation can help you assign value to the risks. Based on this model, you can generalize four risk types in the following order:

  1. Less likely with low impact.
  2. Less likely with high impact.
  3. More likely with low impact.
  4. More likely with high impact.

By analyzing what may be dangerous to you, you can calculate the frequency and severity. If you don’t know where to start, you can begin by protecting against more likely risks with high impact.

To move on to the next step, you should ask: what is the origin of all these risks, and are they preventable?

  • Mitigating the Risks

Once you’ve identified the sources of your risks, you have to decide how to develop a plan to address them. There are multiple strategies for dealing with them. Typically, you can implement the following approaches:

Accepting the Risk

You may choose to sustain it and its consequences without implementing any preventive mechanisms. Sometimes, risks with low chances of occurrence and low impact may not be worth your effort to tackle them.

Avoiding the Risk

If your own undertakings cause some risks, you may decide not to participate in those activities. For example, if you anticipate a certain investment to be high-risk, you may choose not to invest.

Controlling the Risk

This method aims to reduce either the likelihood or the negative impact of the risk.  For instance, you can invest in security measures on your computers to prevent hackers from stealing data.

Sharing the Risk

Risk transfer refers to passing some of the responsibility to a third party. One example is to purchase insurance that can cover these threats.

  • Monitoring the Risks

Risks require constant monitoring. New risks may continuously emerge, and some mitigation methods may not work anymore. This is why it is crucial to track and evaluate the effectiveness of your response strategies.

Clear communication across all stakeholders is essential in the monitoring process. Make sure to send regular updates and receive feedback. Some strategies may prove to be ineffective and may require updates to improve them. You can also hire a risk manager who can collaborate with team members to spot bottlenecks and develop better mitigation strategies.

Ultimately, adopting a consistent risk management system can increase the productivity and resilience of your team.

Risk Avoidance vs. Risk Reduction

Security guard monitoring cameras.Sometimes, the line can be blurry between risk avoidance and risk reduction. In some cases, you may not know which response mechanism to implement in each situation.

Imagine you want to invest in a costly machine for your operations. You know that one of the risks associated with keeping the equipment at the office is the probability of it being stolen. A risk avoidance strategy would suggest not purchasing the machine at all. Conversely, risk reduction would incorporate methods that could reduce the likelihood of the item being stolen. For example, a possible risk reduction solution could be hiring a security guard.

When it comes to risk avoidance and risk reduction, you should compare the costs and benefits of each investment and choose a suitable strategy. Risk avoidance may significantly reduce risk and loss. However, it also closes doors to potentially higher income.

Don’t Be Too Risk Averse

Many companies are often afraid of risks and choose to avoid them at all costs. Studies show that we are naturally more risk-averse than tolerant. While risk aversion may significantly decrease the likelihood of negative impact to the company, it doesn’t always guarantee that it is the best course of action.

Being too risk-averse may limit opportunities for success and growth. Innovation and technology are one of the most important factors in the growth of a company. However, technology also comes with the possibility of a threat. Organizing risks can significantly improve company decision-making and solution implementation. As a result, rather than avoiding them and losing out on potential opportunities, companies can estimate the risk and develop solutions in case of a negative impact.

Why Is Risk Management Important?

Risk management can help reduce the chances of unexpected events. Risks can arise because of internal and external factors, and the ultimate goal of assessing and controlling threats is to reduce the negative impact of those unforeseen events. Additionally, having specified action plans for any possible situation can accelerate your decision-making process and save you time and energy.

Moreover, you can focus on those risks that can threaten operations most. By recognizing the most dangerous ones, you can use more resources to protect against them.

Administering risks is important because it can protect your staff’s physical and mental health, as well as your company’s viability and reputation. Employee inefficiency can slow down business processes and lead to significant losses.

Last but not least, managing risks can help stimulate confidence and boost company morale. When you come up with a script, you won’t have to panic and improvise. When a disaster hits, you can continue delivering to customers and show them your company’s reliability. As a result, this can positively impact your brand and reputation.

What Are the Benefits of a Risk Management Process?

Businesspeople attending company training.

Organizing and overseeing potential risks has many benefits. Some advantages of a detailed risk assessment system include:

  • Making previously hidden costs visible to help you plan a more effective budget.
  • Identifying faulty projects faster to help take corrective measures.
  • Helping save time, money, and resources.
  • Helping prevent damages and injuries to personnel and equipment.
  • Reducing panic and stress during unforeseen occurrences.
  • Increasing team knowledge and awareness.

Sum Up

Ignoring risks is not always the best solution. Managing them is a process that can help you act in case anything goes wrong. By planning for potential risks, you can design defense mechanisms against them.

A successful risk management process starts with listing all possible risks by likelihood of occurrence and level of impact. It is followed by risk assessment, plan development, and solution implementation. Since we live in a fast-paced environment, you should also remember to upgrade your action plans regularly.

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Ana-Maria Sanders, author at OpenLoans
Financial Analyst
Ana-Maria Sanders writes about consumer and business finance. She has been featured on Business.com, CreditCards.com, FOX News, and FOX 29.
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