12 Feb RISK MANAGEMENT: WHAT IS IT?
Risk management is the process of identifying, assessing and controlling threats to an organization’s capital and earnings. It allows organizations to minimize or prevent losses by taking proactive measures to address potential risks before they turn into issues. The base point of risk management is to help an organization achieve its objectives by reducing surprises and unexpected costs as much as possible.
The first step in the risk management process is to identify potential risks that could negatively impact key business areas such as operations, finances, legal compliance, strategic initiatives, environmental sustainability and reputation. Common types of risks include financial risks, cybersecurity risks, supply chain risks, regulatory risks, project risks and technology risks. For example, an organization may face risks from exchange rate fluctuations, loss of critical data, product defects, new regulations or unsuccessful technology implementations.
Once top risks are identified, the next step is to analyze them to determine their likelihood of occurrence and potential severity of impact. Organizations assess each risk’s probability and consequences through qualitative or quantitative analysis. They evaluate risks from multiple angles using techniques like risk matrices, loss forecast modeling, business impact analysis and scenario analysis. The assessment process allows organizations to prioritize the highest risks for further action.
To address the major challenges revealed in the analysis process, organizations next develop and execute targeted risk control strategies. Typical strategies include risk avoidance, risk acceptance, risk transfer to an external party or risk mitigation through preventive measures. Risk management plans outline assigned responsibilities, deadlines, resource allocation and metrics to track progress for each mitigation strategy. Ongoing monitoring then allows plans and tactics to be adjusted as conditions evolve.
Effective risk management requires establishing a governance structure that defines roles and responsibilities across departments and senior leadership. A Chief Risk Officer and risk management committee are commonly created to design frameworks, maintain oversight of the program and integrate risk protocols across the enterprise. With proper governance, the practice becomes an embedded business discipline versus a one-off practice.