Risk management is the process of declaring risk and threat factors to the organization’s income. There are various factors that are the root cause of these risks.
These factors include financial uncertainties, legal liabilities, technology issues, strategic management errors, and natural disasters.
Furthermore, using a successful management plan is very helpful for knowing about the risk factors and how they impact the growth of an organization.
In addition, enterprise risk management is an appropriate system to manage the risks across an organization. The internal risk factors are also managed with this system in a better way.
The process of risk management does not involve the complete vanishing of the risk factors but minimizing them to a greater extent.
Moreover, there are positive risks that can also provide benefits to the organization. This type of risk is an opportunity for the companies to increase the value of their service.
What is Risk Management?
Definition: Risk management is the overcoming of risks to the organization that can cause financial uncertainties. These risks are managed using ERM to avoid bigger issues.
Why is Risk Management Important?
Risk management is very important for any organization to proceed with the growth and success of its goals. This management is used to mitigate the risks in the uncertainties of investments.
Furthermore, it is the process of analysis and acceptance of the uncertainty in investments. Here are some most important benefits of risk management.
- Job Security
- Project Success
- Financial Benefits
- Minimize Unexpected Events
- Save Time and Effort
1) Job Security
Job security is the utmost priority of the employees therefore, the risk manager has to find out the problematic areas in the organization and address them.
Although the physical workplace environment should be good enough to sustain the employees, however, it is not that easy to maintain since the risk factors involved.
Furthermore, the risk management process uses the analysis of data and resolving the risks and prevents it from happening twice.
The use of risk management strategies is very important to create a safer workplace environment.
A risk manager’s responsibilities include health and safety. They systematically search out and discuss issue areas within the company. So they use data analysis to spot patterns in failure and injury and devise methods to keep them from happening again.
Especially this is beneficial to employees in physically demanding employment. Such as construction, but it can also benefit office workers and those in similar roles through ergonomics. In addition, risk management has a significant effect on making the workplace a safer environment for all.
2) Project Success
Project success is the primary goal of all organizations. Therefore, they use strong risk management solutions to overcome the risk factors.
In addition, when a company starts working on a project they make the necessary strategies for controlling the potential project risks to have a successful outcome.
The risk management process allows a firm to accomplish its goals by completing the projects. The risk manager assesses the problems and improves organizational growth.
Moreover, the strategies involve the methods for reducing the probability and seriousness of the risks earlier.
Risk managers may assist workers in completing their tasks, regardless of department. They should evaluate risks and develop strategies for individual projects. Particularly in the same way they assess risks and develop techniques for organizational performance.
Therefore employees can reduce the probability and seriousness of project threats by recognizing them early on. If something goes wrong, there will already be a plan in place to deal with the situation. Thus employees are more prepared for the unpredictable project results as a result of this.
3) Financial Benefits
The risk element in an organization can not be only thought of as financial loss. With the trend analysis, it can create value for the company.
Furthermore, with risk management, there are fewer chances of risks and their occurrence. The risk factor is also minimized which leads to the growth of an organization.
A risk management plan most importantly helps to increase the finance of a company. This benefits the organization at a maximum level.
The organization’s risk department should not be perceived as a cost center. In reality, it generates value directly. So risk managers may use pattern analysis to identify high-frequency incidents and seek to reduce repeat losses. Incidents would be less likely to happen and have a smaller effect when they do.
Moreover potentially saves the company thousands, if not millions, of dollars. Therefore risk managers are also the professionals who obtain the required levels of insurance to optimize the risk management program’s financial effect.
4) Minimize Unexpected Events
Many organizations have a risk management department that controls unexpected risk scenarios. This involves the management of the risks to prevent the working of the firm.
They can not completely prevent it but can use some measures to overcome the maximum impact on the organization.
In addition, it is not possible to figure out all the possible risk scenarios but the managers try their best to maintain the consistency of the work.
Most people dislike surprises, particularly when they affect their workplace. So the aim of a risk manager is to map out all future risks and then try to avoid or mitigate them as best as possible. Hence it’s difficult to anticipate and handle every imaginable risk situation.
However, a risk manager reduces the likelihood and severity of unexpected surprises.
5) Save Time and Effort
Employees at all levels submit the reports of any incident to the risk management department.
This reduces their burden of tedious data that enhances their performance in their roles in the organization.
Furthermore, the employee can play a part in managing the risks by giving an immediate report to the management department.
When accidents occur, employees at all levels spend time reporting data to the risk management department. Since these activities are often carried out in a disjointed and inefficient manner.
In addition, the risk department is able to relieve employees of the burden of tedious data submission by streamlining these tasks. Moreover allowing them to focus their time and energy on their true roles.
Thus it is simple for workers to buy into high-return risk management programs and encourage risk managers’ positions. As well as reap the benefits of a structured risk management program, when a solid mechanism is in place.
Types of Risk a Business Faces
Running a business involves a lot of hard work and consistency. However, it is not definite that a business will all the time succeed. There are some risk factors that can cause some damage to the organization if not managed on time.
Here are the most common yet most impacting risks a business faces.
- Strategic Risks
- Compliance Risks
- Financial Risks
- Operational Risks
1) Strategic Risks
As business is always strategic and already planned. But it is not important that everything will go the way a person plans it.
Some types of risk are also a part of it out of which strategic risk is the one. This type of risk is seen when the company’s strategy becomes less useful and less effective.
This reduces the performance and slows down the progress of the objectives. In addition, the reason for strategic risk can be the entry of an efficient competitor into the market.
Apart from that, the other causing factors may include technological issues and changing customer demands.
2) Compliance Risks
Sometimes the businesses have to Copley the changing laws for their product. This mostly happens when a firm plans to expand its business.
The expansion of a business will obviously increase the product line across the country let’s say.
In that case, the government laws for you can change the sale of your product. This also includes tax and other law compliance as well which can lead to more financial costs. Therefore, compliance risk can be effective for your business financially.
3) Financial Risks
Most organizations have financial risks. This sometimes causes serious trouble to the companies.
Furthermore, the organizations that have a proper flow of money from their clients usually face this risk.
For instance, if a client has to pay a handsome amount of money to a company and he/she delays or does not pay at all will cause a serious problem.
Moreover, this type of risk is a critical issue that can also lead to a greater loss that will have a maximum impact on their revenue.
4) Operational Risks
Reptation risk has always been a nightmare for any organization. This is caused due to product failure, negative feedback, and lawsuit.
Therefore, the high quality of the product should highly be a concern for the organizations.
Further, the management department should stay active in the online and offline feedback to improve further or address the issues.
Risk Management Model
There is a risk when there is a probability that a harmful or harmful event will occur. Moreover, have a negative effect on the performance of the business. Hence a good risk management framework ensures the optimal, balanced, and sustainable performance of the company.
Objectives of Risk Management
- Ensure the optimal, balanced, and sustainable performance of the company
- Develop a comprehensive, systematic, integrated, and flexible approach. Thus identifying, assessing, analyzing, and managing risks
- Develop better risk management practices
- Address all types of business risks
- Take responsible risks
- Make informed decisions
- Better manage change
Conditions for good Risk Management
- The risk management needs to be aligned with the company’s strategy
- It must support performance management
- Also, it should focus on the same management activities as performance management, performance conditions, performance tools, management skills, stakeholder satisfaction
- The risk assessment system should focus on the most important risks
- The risk management process must be simple and remain simple and flexible
Provenance of Risks
Risks can come from two main sources: outside the company (external risks) and inside the company (internal risks).
- External risks come from changes or threats in the business environment (political, economic, technological, sociological changes, market changes, customers, competitors, products, suppliers). In fact, that may have a negative influence on the objectives and strategies of the company.
- Internal risks can come from different sources. Such as corporate strategy, processes, resources, intangible factors, and management information.
Risks from the Strategy
- The strategy is not clear and precise nor not communicated properly
- The strategy has not been implemented properly or adequately evaluated
Risks from Processes
Process risks occur when processes are not performing well. So the following examples illustrate risks from underperforming processes:
- The process is not aligned with the company’s strategy nor not satisfying customers
- The process does not operate effectively and efficiently and the process has been modified.
Risks from Resources
- Human resources changes
- Changes in technological resources
- Changes in material and financial resources
- Resources are not aligned with the strategy
Risks from Intangible Factors
- Changes in the organizational structure
- Changes in performance conditions
- Tools management changes
- Changes in management skills
- Changes in stakeholder satisfaction
- Intangible factors are not aligned with the strategy.
Risks from Management Information
Management information can also be a risk when the information used to make decisions is incomplete, outdated, incorrect, late, irrelevant, etc.
Risk Management Process
The risk management process is a scenario (or risk management operations) that works to avoid any unwanted risks in the company. It works on five basic elements that are:
- Identify The Risk
- Evaluation of The Risk
- Treat The Risk
- Monitor The Risk
These steps are mainly used to manage the risks in an organization. The steps do not completely remove the risk but minimize its impact on the organizational goals.
1) Identify The Risk
The first thing in risk management is to identify whether it is positive (opportunity) or negative (risk). Analyzing the risk allows a company to learn its impact on the organizational goals.
This can go both ways as an opportunity to produce more profit or negatively in several ways such as financially.
Furthermore, risk or opportunity is defined by its short description and a precise title that is self-explanatory.
During the analysis process of risk, the whole team plays its part to manage it in a better way. So, the report is shared with the risk management department.
Risk can be identified by asking the following questions:
- What are the changes and potential problems?
- What are the risks that can occur?
- Identify the level of risks:
- Importance: High or Low
- Probability: High or Low
2) Evaluation of The Risk
The evaluation of the risk refers to the estimated impact on the organization and how people perceive it.
Furthermore, the evaluation includes the checking of risk or opportunity from each aspect since the performance of the company can not be compromised in any circumstances.
Additionally, it is a necessary step that a company should take to learn how beneficial or disadvantageous environment it can create. This way the management can take important measures to ensure the prevention of harm.
Risk evaluation means finding the answers to the following questions:
- Where do the risks come from?
- What are the causes and consequences of the risks?
- What are the uncontrollable risks?
- And what is the acceptable level of risk?
- Can we control unacceptable risks?
- Can we control acceptable risks at their current level?
3) Treat The Risk
The treatment plan for risk management is organized according to the nature of the risk or opportunity. The company makes strategies to manage the impact (if it is negative) of risk or increase its advantages of it.
In addition, the beneficial risks are helpful for the progress of a company therefore a company uses the strategies that cause the frequent occurrence of such risks.
Risk can be reduced or eliminated by taking corrective or preventive actions.
Possible actions are:
- Correct at the source risks whose importance and probability are high.
- Check for risks that are of high importance and low probability.
- Analyze risks of low significance and high probability.
- Temporarily ignore risks of low significance and probability.
4) Monitor The Risk
Implementing strategies to manage the risk is not enough. The real job is to monitor the risk. The monitoring also depends on how critical is it.
This will ensure appropriate management of risk so that it won’t influence the overall functioning of a company.
How To Manage Risk?
To manage risk, a company has to use strategic ways to make it helpful for them to have a beneficial scenario. These strategies do not cause any loss or it might be the least.
Following are the strategies to manage risk:
- Accept it
- Enhance / Mitigate
- Transfer it
- Reduce it
- Eliminate it
- Use the right Insurance Protection
1) Accept it
It is not always that a company reduces or manages risk. Sometimes, the companies see if it is a positive risk. This requires proper monitoring that can lead to many benefits. Therefore, they have to accept some risks for the sake of growth.
2) Enhance / Mitigate
Reduce the risk using effective strategies and decrease it if it can cause any harm to the organization. Additionally, when a company sees an opportunity they try to increase its occurrence of it to have maximum benefit.
3) Transfer it
At times, the companies share or transfer risk to the third party. It makes the other company face the consequences of this problem. Moreover, the transferring company does this while knowing the advantageous opportunity.
4) Reduce it
Reducing the risk can be done by making the management processes. This is done where a risk can cause loss to a company.
Therefore, the risk manager makes some necessary measures to ensure that they rescue its impact if can’t remove it completely.
5) Eliminate it
When a risk arises, the company completely eliminates the risk factor and takes advantage of the opportunity. The companies have to do so to stand out and compete with other companies.
6) Use the Right Insurance Protection
Another way to manage company risk is to assess legal regulations or laws. These include insurances that will be compensation for a company’s loss.
- Life Insurance
- Disability Insurance
- Professional Insurance
- Completed Operation Insurance
Risk Response Strategies
Risk response is a strategic plan that an organization uses to react to risk. The strategy for risk management includes the methods of tackling such a scenario. Therefore, there are several kinds of responses to risks that a company can take.
However, before you implement a strategy it is necessary to identify and analyze the risk. This enables them to know which strategy is well suited for a certain situation.
- Take Risks
1) Avoid Risk
The name itself tells that in some cases the organizations avoid risk and disregard it. It can be a response option to risks.
Furthermore, when a company chooses to avoid a risk it means that they are cutting the risk factor completely from the business.
For instance, the COVID 19 situation is a clear example of when the companies shifted the work to home. This was necessary to ensure their health. Here, the organizations avoid risks.
The ERM is responsible to rescue the impact of the risk if it can’t be completely removed. If there are more chances of damage then this strategy is very well for managing risk.
Furthermore, risk management has to take this strategy to make sure that the company is less likely to have any negative effects.
This risk overcoming strategy is very common since we can find its example in our daily life.
When a person sits in a car he fastens the seatbelt. This measure is taken to avoid any accidental risks. Therefore, reducing the impact of risk can be beneficial.
Sometimes the companies transfer the risk to a third party. This does not eliminate the risk however it does provide financial benefit and security to businesses.
Furthermore, examples of transferring risk to the other party include insurance. The insurance company can compensate for the loss but can not eliminate it.
Some companies face certain types of risks that can’t be handled and at last, they have to do nothing else but accept it. In such cases, the severity of risk is maximum therefore, they have to accept it because they are unable to do anything going out of their bounds.
5) Take Risks
The risk can’t only have a negative impact on an organization. There are some risks that are considered as an opportunity and produce positive circumstances for them. Therefore, when any case like that comes into sight the companies do take risks to generate profitable results.
Risk Management Evaluation / How to Evaluate Risk?
Risk evaluation defines how the risk will affect the company and the people who are related to it. This is a better way to know the scenario of a risk.
Furthermore, risk evaluation is the method and process where an organization identifies hazards that can cause a negative impression on the company.
A risk assessment refers to the method of evaluating the severity of the risk and determining appropriate ways to handle it.
The companies have to make strategies that suit best to the circumstances so that they at least minimize its effect.
Risks vs. Opportunities
A risk is something that might happen at any point in time and may have a negative effect on business. This can cause a specific level of harm to the company.
In contrast, an opportunity is something that might occur suddenly but has a positive effect on the business.
Therefore, the organizations have to analyze and evaluate risks so that they make wise decisions accordingly.
In addition, the opportunities sometimes bring a lot of good to the companies. However, missing such positive circumstances is indeed a loss.
Therefore, it depends on the strategies that a company makes to identify each one of these. That way, a company can enjoy opportunities and grow further.
Principles of Risk Management
The core principles of risk management are five in number. These elements drive a company to make the best possible strategies for mitigating and prioritizing the management.
- Structured and Comprehensive
- Uses Best Available Information
- Considers human and Cultural factors
- Practices Continual Improvement
Passive(beta) vs Active(alpha) Risk Management
Alpha is a term in risk management that defines the financial or investment strategy ability of a company to beat the competitors.
It is a term that is used in finance as a parameter for measuring the performance of an organization or a manager or a portfolio that has beat the market over time.
Furthermore, it also considers the capital asset pricing model (CAPM) and adds the risk calculation component. also
On the other hand, beta measures volatility relative to a benchmark index. Knowing about beta values allow a company to understand the portfolio’s asset.
Additionally, it measures the systematic or market risks and performance of an organization.
Risk Management Best Practices
Every business faces risks that can be sometimes negative and that have a strong influence either way. Therefore, it is better to learn some of the best practices to manage such scenarios.
1) Involve Stakeholders
When a company faces a risk, it is a good approach to reach out to the stakeholder during the management process.
This can enhance the working since the stakeholders will add up to the employees, managers, and shareholders.
Each one of them has its responsibilities to the organization. Therefore, during the process, they can play their part to speed up things by sharing the reports regarding the risk.
Furthermore, this way the company can manage the risk factor in the best way possible to be successful.
2) Tone From The Top
This is another risk management practice that involves the company and the managing directors knowing about the company culture, beliefs, and values of its people.
Furthermore, it is a way of allowing the workers to know about the risk and its impact that a company is currently facing. This term is often referred to as risk culture.
Communicating with all of the departments of an organization about certain risks can help to manage them more quickly. Making discussions is very important when it comes to running a business.
Furthermore, the risks are monitored by all the departments and they also assess them and may also take part in making some strategies as suggestions.
4) Clear Risk Management Policies
There must be appropriate policies for an organization to manage risks. This will also help to overcome the unseen or unexpected risks or hazards that might cause harm to the business.
Furthermore, having clear policies will help you identify which risks can damage the business immensely.
5) Continuous Risk Monitoring
An organization should establish monitoring of the risk assessment since one never knows when they can have damage. Therefore, just by implementing the strategies, you can’t be sure of the consistency in the business now.
Here are the best practices of enterprise risk management as a summary below:
- Enhance risk management across the enterprise.
- Develop an ongoing business risk assessment process and a continuous process of risk control.
- Integrate the process of risk control into processes.
- Assess the risks against the strategic objectives of the company.
- Overcome the financial aspect to extend risk management to all aspects and levels of the business.
- Evaluate performance factors, processes, development projects, and departments. As well as strategic, operational and financial decisions taking into account possible risks.
- Evaluate the risks and reassess them continually according to their importance and probability.
- Develop risk reduction strategies based on assessed risk levels.
- Review and regularly improve methods and tools for identification, evaluation, analysis, and risk reduction.
- Perform extreme situation simulations to measure the effectiveness of risk reduction methods and tools.
- Involve managers in the process of identification, evaluation, analysis, and risk reduction.
- Organize training courses to master risk management concepts and tools.
- Form a risk management committee to approve the risk management policy and tools. Moreover to regularly assess the risks.
- Develop information systems to provide all the information needed for risk management.
- Regularly evaluate the performance of the risk management process.
- Communicate the results to the managers.
Risk Management Limitations
There can be failures in the risk management assessment. Since there are three basic steps that all it takes to handle it.
There could possibly be a mistake that can be seen as risk management limitations. The three elements include identifying, assessing, and controlling.
Now, at any point, a company may mislead the risk. Following are the reasons for such limitations.
- Not collecting enough information
- Inaccuracy in analyzing risk
- Not able to decide which information is important to have
Benefits of Risk Management
Here are the benefits of risk management:
- See risks that are not apparent
- Provide insight and support to the Board of Directors
- Get credit for cooperation
- Reduce business liability
- Frame regulatory issues
See Risks that are not Apparent
It is important for the risk management department to look thoroughly at each risk. The manager must have deep knowledge about all types of risks so that he can identify them instantly. Moreover, the company will be able to know its impact and can take action on time.
Provide Insight and Support to the Board of Directors
It is better if each department of an organization gives reports to the managing department. This will provide the insight and support to manage efficiently. This is done because the board of directors does not know about things other than their working niche.
Get Credit for Cooperation
Many companies provide credit to the managing department for minimizing the hazardous effect of risk to their business. Although completely eliminating the risk factor is not possible but they reduce its influence on potential projects hence the company is not affected by it.
Reduce Business Liability
Many companies have to follow the legal laws and that shows their liability. However, reducing the litigation risk makes a company stand out in the market and more attractive.
Frame Regulatory Issues
The risk management programs of an organization give a better insight into insurance, indemnity, and liability issues. Due to this, a company can focus on business and its structure.
Every organization faces risks in business but that can’t stop it from accomplishments. There are many better ways that prove to be an excellent source of avoiding harm and its negative effects on it.
Therefore, by making the right use of risk management a company can never go down. In fact, it will lift up if the risk comes up as an opportunity to bring successful benefits.
Frequently Asked Questions
Q) What are risk management services?
Risk management services are a type of consulting service that helps companies manage the risk associated with their project, product, or business. It includes assessing the impact of risks on resources, identifying risks, and creating a risk management plan.
Q) What is integrated risk management?
Integrated risk management is a process where every individual, group, and company within an organization needs to be aware of the risks they are being exposed to. This includes identifying potential threats and opportunities, assessing risk, and defining business strategies to mitigate or improve that exposure.
Q) What is risk management?
Risk management is the process of managing financial, operational, and reputational risks. Risk management includes risk assessment, risk mitigation (mitigation strategies), and monitoring for potential new or changing risks.
Q) What is a risk management framework?
A risk management framework is a process for assessing, controlling, and mitigating risks in order to ensure that expected outcomes are achieved. It includes analyzing the likely impact of potential hazards as well as the likelihood of their occurrence and then designing a risk management plan to reduce these risks.
Q) What is operational risk management?
Operational risk management is the process of managing and mitigating potential risks to an organization. This includes both financial and non-financial risks. There are many types of operational risks, including fraud, business interruption, and reputation.
Q) What is supply chain risk management?
It is a set of processes and procedures designed to manage the risks associated with products along their lifecycle. Supply chain risk management aims to reduce the probability that a product will be rejected for any reason, and reduce the impact of rejection on an organization’s reputation.
Q) What is vendor risk management?
Vendor risk management is the process of managing and mitigating risks associated with vendors. When companies are able to mitigate vendor risk, they not only make sure that their products will be delivered on time at the quality that they need but also that there is a safety net in place for any potential problems.
Q) What is construction risk management?
Construction risk management is the process of managing risks and uncertainties in construction. This can be done through planning, measuring, monitoring, and controlling the possible consequences of a project or site failure.
Q) What is the future of risk management?
The future of risk management is that it will continue to be at the forefront as organizations are increasingly recognizing how they can manage risks more effectively. In order to mitigate their losses, companies will need to do a thorough analysis of their risk management process and identify where further improvement is needed.
Q) What are the challenges of implementing risk management?
There are a number of challenges with implementing risk management, such as the fact that there is no best way to manage risks and changing policies. There are many variables and every organization must find its own way to manage these risks and find what works best for them.
Hello everyone! This is Richard Daniels, a full-time passionate researcher & blogger. He holds a Ph.D. degree in Economics. He loves to write about economics, e-commerce, and business-related topics for students to assist them in their studies. That's the sole purpose of Business Study Notes.
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