Understanding risk management and learning to control threats and liabilities is crucial to the success of any business. If this is something you’ve previously struggled with, or you’re unfamiliar with risk management in general, then this guide is for you. We’ll touch on the definitions, principles and approaches to improve your mitigation and management of risk and threats.
What is risk management?
Whether you know it or not, you’ll have carried out some form of risk management before. Think about any decision you’ve made; you weighed up and assessed the pros and cons before taking action. No matter how banal or basic the decision was, you carried out a risk assessment to get there.
In business, however, the challenge of assessing risk is to make it a more conscious part of your operations. In this context, risk management is the process of making decisions to minimise risk effects on a company.
These risks can be quantitative, measurable threats, such as premiums and claims costs. They can also be more subjective, qualitative issues such as damage to reputation or a decrease in productivity. Businesses with the right resources to control and mitigate risk can protect themselves from uncertainty, reduce their costs, and increase business continuity.
The principles of risk management
The International Organisation for Standardisation’s Risk Management – Guidelines lists the following eight principles, recommended for any risk management programme:
1. Integration – an organisation should integrate its risk management efforts into all parts and activities of the organisation.
2. Structured and comprehensive – create and follow a comprehensive, structured risk management approach to get the consistent and ideal outcomes.
3. Customised – an organisation’s risk management approach should be customised to their own needs, including its objectives and the external and internal context in which it operates.
4. Inclusive – risk management should involve all stakeholders appropriately, to allow each stakeholder’s knowledge, views and perceptions to be considered and implemented into risk management efforts.
5. Dynamic – as the organisation changes, its risk management programme should change accordingly. The most successful organisations are those that can adapt to change. Therefore, a risk management programme should help the organisation anticipate, identify, acknowledge and respond to changes in an appropriate and timely manner.
6. Uses best available information – proper risk management is done when you consider information from the past and present, while taking the future into account. Information from the past and present must be as reliable as possible, but managers should also consider its limitations.
7. Considers human and cultural factors – risk management is a human activity, so risk managers must be aware of the human and cultural factors that risk management operates within, and how these factors will influence the programme of management.
8. Practices continual improvement – through experience and learning, risk managers must seek to continue to improve an organisation’s risk management efforts.
Mitigating and managing threats: A step-by-step guide
Step 1: Create a risk register
A risk register is a list of potential risks that can create challenges in your day-to-day operations. It’s typically a spreadsheet with a list of risks, the impact of the risk, how likely the risk is to happen, the contingency cost and the response plan.
Step 2: Identify any relevant risks
When identifying risks, the following methods can be effective:
• Brainstorm – bring your team together to discuss potential risks. No matter how insignificant it may seem, note every potential risk that’s identified and avoid criticising suggestions.
• Interview your team and stakeholders – if your team doesn’t favour the groupthink approach, then try having individual conversations with team members so they’re more at ease suggesting issues.
• Evaluate past incidents – Think back to previous instances when things went wrong and consider what happened in the lead up to and aftermath of these past risks.
Step 3: Conduct a risk analysis
Here, you’ll need to weigh up which risks require the most effort and attention through risk analysis.
Risk analyses are score-based, usually measured on a scale of 1 to 10, and measure any type of value. They’re done through estimations made during the step above, with the value of the risk calculated using the following formula:
Risk Value = Probability of risk occurrence x Cost of risk
The risk value is the amount of buffer you’ll add to your risk management plan to account for this potential issue; such values are crucial to help you prioritise focus in your risk register.
Step 4: Develop a response plan
Next, you’ll be able to prepare responses for each risk.
When something becomes an unavoidable issue, what do you do? There are four ways to respond to risks in this case:
1. Share the risk – also known as risk transfer, sharing the risk involves moving some or all of the impact of a risk to a third party, such as an insurer.
2. Control the risk – also known as risk mitigation. Here, you’ll use your risk values to identify a solution, for instance, adding additional budgets or scheduled time to deliver a project before the deadline.
3. Avoid the risk – if the project or task isn’t worth the cost of the risk, it may always be worth it to eliminate the threat or make adjustments to scope, alter objectives or make certain requirements clearer.
4. Accept the risk – sometimes risks are unavoidable. However, this step is only advisable if the other response methods aren’t possible and the risk’s occurrence won’t affect things too adversely.
Step 5: Assign owners for each risk
Essentially, who is going to help you mitigate or respond to these risks? Here, you’ll want to consider:
• Clarification of responsibilities – make sure that the individual is clear on what their responsibilities are. Clear expectations are essential when risks escalate, so make sure they’re up to speed, and are aware of the communication strategies you’ll use to ensure risks are always accounted for.
• Proper training – your assigned owners should be trained up on the exact requirements of the risk response.
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