Risk management process: five steps to ensure success
Follow the 5 Steps of the Risk Management Process to Build a Plan for Your Business
FEMA reports that 40 to 60% of small businesses never reopen their doors after a natural disaster. AppRiver’s Cyberthreat Index of Business Survey reports that 48% of small to midsize businesses say a major data breach would likely shut down their business permanently.
And you don’t need to be stressed about creating this plan. The risk management process doesn’t necessarily need to be conducted by a risk manager or an expensive risk management consultant. You can create an informed and strong plan by following the steps we’ll outline below.
In this article, we’ll go over the five steps of the risk management process and explain the purpose of each, offer questions to ask yourself to get started, and share tips. This is a high-level overview, intended to help you create a simple risk management plan for your small business.
Note: Risk management can get extremely complex with exercises such as advanced impact calculations and in-depth root-cause analysis. If you have a larger businesses, are in a high-risk industry such as finance, or are a publicly-held company, you may need an enterprise risk management software solution to manage a mature risk management strategy.
What is risk management?
Before we dive into the process, let’s take a step back and define risk management: Risk management is the act of identifying, evaluating, planning for, and then ultimately responding to threats to your business. The goal is to be prepared for what may happen and have a plan in place to react appropriately.
If you’re new to risk management practices or feel like you need a refresher, we recommend checking out “Why Risk Management Is Important and How Software Can Help.” In it, we explain exactly what a risk management plan is and take you through an example of a business owner developing a risk register and plan.
Step 2: Risk assessment
Now that you have a list of potential or existing threats and risks, it’s time to assess the likelihood of the event happening and the level of impact. Doing this risk analysis helps determine the priority levels of each risk so you don’t over- or under-allocate resources for mitigation in the next step.
Your assessment can be performed using a matrix like the one below. For each identified risk, determine both the likelihood of it happening and the level of negative impact it would have on your business. Write each risk in the corresponding box. This exercise is also best done in collaboration with leaders of each department.
Tip: Your first matrix should be a working document—use a format that makes it easy to move risks around. A virtual whiteboard or a shared document works well. Risk events may need to move around the matrix as you learn more about their impact or likelihood based on feedback from other department leads.
Risk management process: five steps to ensure success
Organizations are constantly striving to be better, safer, and more productive, but today no company is immune to a risk that could directly or indirectly affect its organization. At a time when uncertainty has plagued any organization, security has never been more important in all its aspects and seems to be a pillar of successful business models.
According to records compiled by the Occupational Safety and Health Administration (OSHA) , amputations occur on average twice a week in the meat industry in the United States. This type of incident drastically alters the image of a company. Imagine a multinational food processing company having its name associated with such negative publicity, which will likely earn a citation from OSHA and cause significant financial loss. And what if such a thing is published on social networks, it will cause irreparable damage to the company’s brand and public opinion.
This is the scope of risk management that a company must prepare for in the world we live in today, the following article will guide you through the steps to effectively perform a risk management of this caliber.
The 5 steps of the risk management process
Several institutions have documented how to perform risk management, but possibly the best recognized one is that of the International Organization for Standardization , or ISO. Specifically, the ISO 31000 standard, which is the risk management guideline that provides risk management principles, framework, and process.
1 – Risk identification
The very first assignment in this step is to review the goals and objectives of the organization and all of the resources or assets that enable them. There are two approaches for that:
It is also important for this step to create probable and measurable scenarios for each risk. Using scenarios to describe risk helps to communicate risk conditions and to analyze its likelihood and impact.
Here are the basic elements that help develop risk scenarios: first, identify which valuable assets or resources would be affected; then define the source of threatening actions that would act against that asset; after that, recognize the vulnerability or pre-existing conditions that allow that source of threat to operating; and finally, describe the detrimental impacts that occur from the
2 – Risk categorization
This step consists of categorizing the risk according to various factors. The previous step will certainly generate a subsequent number of risks. However, by definition, a risk is any uncertainty that affects the objectives.
Categorization also makes it possible to assign the analysis of each category of risk to the processes that are familiar with it. For instance, risks related to the impact of waste on the environment should be assigned to the environment processes/department.
The final part of this step is to record the results in a risk register platform. There are dedicated digital tools such as Integrated Risk Management (IRM) that facilitate this step through an intuitive risk detail template and prioritization. The more impact a risk has, the higher its priority.
3 – Risk likelihood and impact Analysis
As stated above, a risk is only a risk if it has a probable impact on the business. This step involves analyzing the likelihood of a risk occurring and having a measurable impact.
This step is essentially a calculation of the probability of a risky event occurring and an estimation of the impact of the consequences should it occur. It is important to consider the timing of impact in this step, as there are risks that have an immediate impact and others that have later consequences.
Quantitative risk analysis provides more objective information and more accurate data than qualitative analysis because it is based on realistic and measurable data used to calculate the impact values that the risk will create with the probability of occurrence.
Time factors are an important variable in risk analysis and calculation, as well as the frequency of risk events, which is another temporal factor to consider.
Another approach for risk analysis is Risk Value, an estimation of the cost of the risk that is obtained by multiplying the risk probability and the risk impact.
The results of the risk analysis make it possible to sort and classify the risks according to their degree. Terms such as “high risk” or “high probability” are the reference used by most organizations to communicate degrees of risk. .
4 – Risks treatment
- Avoidance: this option consists in choosing not to pursue the activity likely to generate the risk, when possible. Alternatively, you can think of another way to achieve the objective or task.
- Reduction: this involves reducing the likelihood of the risk occurrence, through various measures such as quality control processes, auditing, compliance with legislation, staff training, etc. Or, to reduce the impact if the risk occurs through emergency procedures.
- Transfer: if possible, transfer all or part of the risk to a third party through insurance, outsourcing, joint ventures or partnerships.
- Acceptance/Retention: this option refers to facing a risk if it cannot be avoided, reduced or transferred. Nevertheless, organizations must have plans to manage and fund the consequences of the risk should it occur.
5 – Monitor & Review
Monitoring and review should be an integral part of the risk management process and involve regular checking or monitoring to ensure that risks remain within the limits established by the organization’s board.