5 critical steps to a watertight risk management process
24 May 2021
In today’s ever-evolving risk environment, having a robust risk management process in place is non-negotiable. But which key elements should risk professionals consider to ensure that they have covered all bases?
Risk management, as we know, is the practice of anticipating all eventualities that may impede an organisation from reaching its objectives. To do this effectively, actions are performed to reduce uncertainty to a tolerable level, which means assessing risks both as potential opportunities and as threats.
Bringing this activity all together is a risk management process or ‘lifecycle’. The steps of which are usually laid out clearly within a business’s risk management plan.
What is a risk management process?
Due to the dynamic nature of risk, a risk management process provides a way for organisations to capture and manage emerging risks whilst reflecting on learnings from existing risk analyses. It can be applied to any type of organisational risk, from security breaches and innovation through to data loss, regulatory compliance, and natural disasters.
Following an iterative set of steps with one leading logically to the next, the only way for risk management to become truly proactive is for these steps to be repeated on a continual basis.
This is usually supported through enterprise risk management (ERM), which is often referred to as a ‘risk-intelligent’ approach and is rapidly becoming the preferred way to tackle the many risks of the modern world.
Defining the core risk management process steps
There are many takes on the risk management lifecycle, with differing terminology and some organisations even including additional steps to ensure certain requirements do not fall through the cracks. This may encompass activities such as assigning roles and responsibilities or measuring the company’s risk threshold.
Whilst there is no harm in making adaptations depending on your unique business needs, it is critical to get the basic steps right – of which there are five:
You cannot manage your risks if you do not know what they are, or if they even exist. In which case, the first step is to identify the potential events that may influence your organisation’s ability to achieve its objectives, define them and then assign ownership. The four main categories of risk to consider at this stage are:
- Hazard risks
- Operational risks
- Financial risks
- Strategic risks
There are several ways in which to identify risks, including drawing from previous experience, consulting with industry professionals, conducting external research or holding brainstorming sessions. It is key to involve as many stakeholders as possible to help build a holistic picture of the risk landscape.
Once the risks have been identified, they need to be examined in terms of their likelihood and impact. This involves determining the frequency and severity of the risks since some could have the capacity to bring the entire business to its knees if actualised, whereas others may only pose a minor inconvenience.
Typically, risk matrices and scoring methods are used at this stage of the process as a visual aid to help assess the probability of risks and the consequences of them occurring. This is crucial to pinpointing which risks should be prioritised in terms of resources and, ultimately, how urgent your response needs to be to mitigate any negative impact.
Also referred to as your risk management strategy, this is the point at which you need to determine how to respond to each risk. There are one of four ways to do so:
- Avoid - bypass or remove the cause of the threat altogether
- Transfer - outsource all or part of the risk to another department or agency
- Mitigate - take immediate steps to try to reduce or remedy the impact of the threat
- Accept - assume the possible consequences of the risk, or budget in the cost of handling it
The depth of details in your response plan for each risk should mirror the significance of the risk. Therefore, prioritise those that have been defined as high-impact and high-probability in step two.
It is important to keep in mind that risk management is a continuous cycle rather than a linear path. Since every organisation will always face unknowns, the risks you have identified must be monitored on a regular basis.
Whoever owns the risk will be responsible for tracking it over time and ensuring that the wider business is kept appraised of any changes. What might appear as a low probability risk one month could quickly develop into a business-critical threat in the next. The trick is to ensure the lines of communication are kept open so that there are no surprises down the line.
Reporting at each of the four stages above is a core part of driving decision making in effective risk management. This exercise should help to provide rationale behind any changes or updates made, as well as clarify if existing strategies are doing the right job.
The reporting framework should be defined at an early point in the risk management process by focusing on report content, format and the frequency of production. It should also be shared across all key stakeholders to maintain an integrated approach and ensure consistency.
Bringing it all together through automation
There is nothing that will derail your risk management process quicker than siloed risk activities, which is why automation is a must.
Enterprise risk management software not only helps to streamline each stage of the risk lifecycle but it can also facilitate greater awareness and accountability for risk across your organisation.
From real-time visibility of all current business risks to tracking trends over time, the benefits of risk technology are far-reaching. By formalising the risk management process through robust infrastructure, businesses can become much more resilient and adaptable in the face of change. And as the old adage goes, change is the only constant.
Discover how Admiral Group plc is simplifying its risk management process to create a single source of truth for risk enterprise-wide using our powerful ERM solution.
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