4 Critical Components To Risk Management Success

I spoke with a senior business leader about how the idea of ‚Äč‚Äčnavigating the risks associated with some of the business processes he currently operates keeps him awake. He heads his company’s division that coordinates customer operations, mobile transactions and e-commerce payments. Some of the reasons why he is worried are:

  • Potential for a hacker to compromise customer data for spam or identity theft
  • Fear of reputational damage from a breach of customer data
  • The concern is that someone could use a stolen card to make an online purchase
  • Thoughts on an employee accidentally sending confidential data to the wrong email

    Addressing all these concerns requires a risk management strategy. An effective risk management strategy is important to minimize the potential risks that prevent the achievement of business objectives. A survey from EY found that 84% of board members do not believe their organizations have an effective risk management strategy. A risk management strategy is a key part of the risk management process, which includes the following steps:

    Asset Identification & Priority

    The concept of property

    The first step in the risk management process is to identify the organization’s assets, including physical assets, employees, information and intellectual property. After identification, assets are prioritized based on complexity. Assets can be classified as high, low or medium based on their criticality to business operations.

    Assessment of risk

    The man looks at the documents and makes an assessment

    It helps to identify, prioritize and decide how the risk is treated. It consists of three (3) steps:

    • Hazard identification – This includes identifying threats and vulnerabilities that put business assets at risk that impact the achievement of business objectives. Example: What are the threats to the data in the data warehouse? What harmful event can cause damage to physical assets? What are the harmful events that pose a risk to the company’s employees at work? What can damage business assets? Is our software vulnerable to a malicious cyberattack?
    • Risk analysis – Based on information obtained from the risk identification process, risks are analyzed and prioritized based on the likelihood and impact of the threat.
    • Risk assessment – This examination of the results of the risk analysis and comparison with the established risk evaluation criteria to determine whether the risk is acceptable or whether additional controls are required to manage or reduce the risk.

    Risk Management Strategy

    Concept of risk management

    This is the third step of the risk management strategy. This is also known as risk therapy. It is the approach an organization follows to address risk. It leverages information and results from the risk assessment process, which includes identifying threats, determining their likelihood of an impact occurring. It varies based on the company’s risk appetite.

    • Transfer of risk – This strategy transfers the risk to an outside party. It is often adopted when a company cannot mitigate the risk associated with business operations due to lack of expertise or other complexities. Risk transfer does not ignore the risk but transfers the risk treatment responsibility to another party. An example is hedging exchange rate risk through derivative hedging or outsourcing a software development project to an IT company.
    • Acceptance of risk – This is also known as risk retention. It applies when a company knows that a risk associated with a business activity is known and accepted as unlikely to occur, or because the company has a risk appetite. An example would be when a company decides to limit the resources allocated to performing review checks for transactions below a set threshold because the probability of fraud is low.
    • Risk reduction – This is also known as risk mitigation. Strategy seeks to prevent risk from occurring by implementing control to reduce risk. An example is implementing a customer feedback mechanism to address customer concerns and prevent customer attrition. Also, human resources can implement an exit interview process to reduce employee turnover.
    • Accident prevention – This strategy eliminates the risk of costly consequences. This applies where an entity does not engage in a business activity because its associated risk exceeds its risk appetite. An example is where a company considers the possibility of expanding its product line, but decides not to proceed after analyzing the business plan and realizing that it is too risky and will significantly affect the organization.

    Risk Monitoring

    A sign/feeling before danger

    The risk management process is an ongoing exercise. After identifying and analyzing the risk and determining the appropriate risk treatment strategy, there is a need to continuously monitor the risk by tracking changes in the environment, its effects on business objectives and existing risk management strategies. This process helps adjust strategies as needed to ensure they are still relevant and effective.

    There is no business without risk. Developing and implementing a risk management strategy that allows business executives to identify, address and monitor risk management is critical to success. Effective risk management creates a healthy environment for achieving business goals and helps business leaders identify opportunities and actions they need to take.

    If you are interested in learning more about how risk management can help you achieve your business goals, or have any questions, Please feel free to follow/connect with me on LinkedIn.

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