We can define Enterprise risk management (ERM) as the process of identifying, assessing, managing and monitoring potential risks. Its overarching goal is to reduce the harm that risks might cause to the organization.
Most organizations face many risks. For example, including cyber-attacks, data breaches, operational disruptions, system failures, economic or political crises, and natural disasters. Through an effective risk management process, the company can determine which of these risks pose the greatest threats, and then implement the best measures for those risks at acceptable levels.
Risk management process consists of a series of steps or activities, and here we’ll explore these steps in detail so that you can set up an effective risk management program within your organization.
Benefits of a Risk Management Process
A reliable risk management process and a detailed risk management plan can help you understand and control risks. This in turn enables management to take better decisions and ensures that the company achieves its objectives.
Below are the main benefits of the risk management process.
Effective risk identification and response
One of the benefits of the risk management process is the identification of risks. Identifying risks early, before they harm the business, is very critical. By identifying current and potential risks, you can take appropriate steps to prevent them from occurring and protect the organization from material damage.
Optimize the enterprise risk strategy
The risk management process helps risk managers formulate an effective risk management strategy that guides the organization’s risk mitigation efforts.
Efficient use of resources
A proper risk management process allows employees to perform critical risk management tasks efficiently and consistently, without wasting resources, time or effort.
Standardized risk reporting and clear communication
A systematic risk management process can improve risk reporting and facilitate identification of risk information and communication to relevant stakeholders.
Create a risk-focused corporate culture
An effective risk management process requires a strong tone from top management, as well as continuous efforts from middle managers and regular employees. As an organization-wide effort, ERM increases awareness of risks and reinforces appropriate behaviors to avoid risks. Over time, it helps create a strong and beneficial corporate culture that avoids risks.
The 5-Step Risk Management Process
There is a five-step risk management process that is followed by The best risk management programs. These steps will prepare your company to identify, treat, and manage potential risks. They will also assist you in managing and monitoring risks, which is necessary to protect the company from adverse circumstances.
Step 1: Risk Identification
Each organization has its own “risk profile”. the variety of risks that may occur, as well as the chance and severity of each risk occurring. Hence, it is very important to identify the categories of risks that pose threats to your company. These risks include:
- Cyber risk
- Operational risk
- Geopolitical risk
- Legal risk
- Compliance/regulatory risk
- Financial risk
- Strategic risk
- Environmental risk
The extent to which these risks affect the organization will become more apparent during the second step, risk assessment and risk analysis.
Best practices for risk identification
It can be difficult to identify all the risks relevant to the organization; This is why brainstorming is very useful. Benefit from the collective knowledge of management and employees! Ask them about the risks they’ve been through or that they might have insights about. This exercise is a great way to identify as many risks as possible, improve risk communication, and promote cross-functional learning.
Create a risk register or risk log to document existing risks and track risk management activities. Finally, establish the criteria you will use to assess potential risks and prioritize them in steps 2 and 3, respectively.
Step 2: Risk Assessment and Analysis
Once you have identified the risks relevant to the organization, outline two key pieces of information:
- Probabilities of the occurrence of those potential risks (potential).
- What will happen if they occur (impact).
The goal is to better understand the company’s exposure to each risk that may affect its operations and objectives in the short, medium and long term. Analytics will also benefit the risk response and management approach, which in turn will:
- Protect the organization’s assets.
- Improve the decision-making process at the enterprise level.
- Improve operational efficiency.
- Avoid material damage.
- Save money, time and resources.
Best practices for risk assessment and analysis
Assess how many business functions are affected by each risk, and to what extent? (the range of risks). Also map the specific risks to different business processes, policies, procedures, and documents to define the effects of each risk.
Step 3: Risk Evaluation and Prioritization
After completing the risk assessment, evaluate each risk by comparing it with the risk criteria you identified in first step. Some examples of risk criteria are:
- Related costs and benefits.
- Socio-economic risk factors.
- Legal or compliance requirements.
Then analyze each risk and determine the potential for disruption or damage by asking yourself these questions to guide your analysis:
- How likely are these risks to occur?
- If they do, what would be the consequences?
These answers from previous questions will help you determine the severity of each risk. You can then rank them, prioritize them, and determine the appropriate response to risks. Risks that will lead to minor inconvenience should be a lower priority, while risks that could cause huge losses should be on top.
Best practices for risk evaluation and prioritization
As you categorize the risks, consider both the likelihood and the potential impact. Your business may be exposed to risks with a very high probability of occurrence but the impact is low. In this case, you may not want to prioritize it for instant action. On the other hand, high-impact and low-probability risks may require urgent action and even the intervention of top management.
Also prepare a company’s risk profile, which consists of its risk appetite and tolerance. Some organizations feel comfortable accepting many risks, while others want to avoid any risk exposure.
Step 4: Risk Response and Treatment
Risk management involves implementing controls, policies and procedures to avoid, reduce or mitigate identified risks.
Generally, you can choose from four responses to risk:
- Avoid risk.
- Accept risk.
- Transfer risk.
- Reduce risk.
Your response to the risks you choose will vary depending on the likelihood and impact of the risks. It is important to map these choices to specific actions for effective risk management.
For example, if a data breach could severely harm business continuity, accepting, transferring, or minimizing risks may not be the appropriate response. Instead, you should act to avoid risks with powerful cyber and information security controls.
At the same time, you may not be able to avoid all sorts of cybersecurity risks. However, you can reduce the potential financial damage of a cyber-attack by purchasing cyber security insurance. This risk response is an example of risk transfer where you transfer risk to a third party _the insurance company.
Best practices for risk treatment
Review all higher-ranked risks and plan mitigation measures. Also update your risk management plan using these risk response techniques, and make sure the plan includes details about:
- Risk Mitigation Strategies.
- Risk Prevention Methodology.
- Contingency plans to handle risks if they occur.
Step 5. Risk Monitoring
Risk management is an ongoing process that does not end with the identification or mitigation of risks. To reduce an organization’s exposure to risk, it is essential to monitor the risk landscape on an ongoing basis.
If you identify new risks, be sure to update your risk management plan, risk register, and risk responses. An updated log and plan will help manage active risks so you can mitigate risks more than is possible with traditional reactive methods.
Best practices for risk monitoring
You have to include internal and external stakeholders in all risk communications at each step of the risk management lifecycle. If a risk changes or new risks emerge, everyone must be kept informed so that they can work on a common solution to protect the organization from any harm. Also review all risk management policies regularly to keep them updated and relevant.
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