Since the beginning, companies have wanted to ensure stability as they grow, and managing the risks that affect the business is a critical part of achieving this stability. Not knowing the risks that can affect the business can result in losses for the organization. Ignorance of a competitive risk can result in loss of market share; ignorance of financial risk can result in financial losses; ignorance of a safety risk can result in an accident and the list could go on.
Many companies have resources dedicated to risk management, from just one risk manager, a small team, to an entire department. And these are the ones who are responsible for monitoring the organization and its environment, by observing the business processes that are followed within the company and the external factors that can affect it one way or another.
A company that can predict a risk will always have an advantage. Risk management enables organizations to act proactively to mitigate vulnerabilities before major damage occurs.
That is why, when starting any project planning process, one of the first questions to think about is: what can go wrong?
It sounds a bit negative, but pragmatic project managers know that this kind of thinking is mostly preventative. Problems will inevitably arise at the time of implementation and a mitigation strategy will be needed to know to manage risks when planning the project.
But how do you work to solve the unknown? It sounds like a philosophical paradox, but today there are practical steps that can be applied.
5 steps in the risk management process
The risk management process is a framework of 5 basic steps apply to all those actions related to the management of these risks.
- Identify the risk
- Analyze the risk
- Assess or classify the risk
- Treat the risk
- Monitor and review risk
Step 1: Identify the risk
The initial step in the risk management process is to identify the risks to which the company is exposed in its operating environment.
There are several types of risks:
- Legal risks
- Environmental risks
- Market risks
- Regulatory risks
- Among others
It is important to identify as many risk factors as possible, allowing for reach and visibility for all stakeholders in the organization.
Step 2: Analyze the risk
Once the risk has been identified, it needs to be analyzed. You must determine the scope, and understand the link between the risk and the different factors within the organization. To determine the severity and seriousness it is necessary to see how many business functions it affects. Some risks can paralyze the entire business if they occur, while there are risks that will only be minor inconveniences in the analysis.
Step 3: Assess the risk or risks assessment
Risks must be classified and prioritized. Most risk management solutions have different risk categories depending on the severity of the risk. A risk that can cause some inconvenience is rated as low, while those that can result in catastrophic losses are rated as the highest. It is important to classify them because it allows the organization to gain a holistic view of the risk exposure the organization is in. The business may be vulnerable to various low-level risks and not require the intervention of senior management. On the other hand, only a highly rated risk is enough to require immediate intervention.
There are two types of risk assessments: Qualitative risk assessment and Quantitative risk assessment.
Qualitative risk assessment
Risk assessments are inherently qualitative: while we can derive metrics from risks, most are not quantifiable. For example, the climate change risk that many companies are focusing on now cannot be fully quantified, only different aspects can be quantified.
Quantitative risks assessment
Finance-related risks are best assessed through quantitative risk assessments. Such assessments are so common in the financial sector because the sector deals primarily with numbers, whether it’s money, metrics, interest rates, or any other data point that is critical to assessments. Quantitative risk assessments are easier to automate than qualitative risk assessments and are generally considered more objective.
Step 4: Treat the risk
Every risk needs to be removed or contained as much as possible. This is done by connecting with experts in the field to which the risk belongs. In a manual environment, this involves contacting every stakeholder and then scheduling meetings so that everyone can talk and discuss the issues. The problem is that the discussion is divided into many different email threads, different documents and spreadsheets, and many different phone calls. In a risk management solution, all relevant stakeholders can receive notifications from within the system. Discussion about risk and its possible solution can take place from within the system. Senior management can also closely monitor suggested solutions and progress being made within the system. Instead of everyone communicating with each other to get updates, everyone can get updates directly from the risk management solution.
Step 5: Monitor and review risk
Not all risks can be eliminated; some are always present. Market risks and environmental risks are just two examples of risks that should always be monitored. If any factor or risk changes, it should be visible to everyone. Monitoring risks also allows the business to ensure continuity.
Any company that wants to maximize the efficiency of its risk management should focus on assessments. These assessments help to understand your capabilities, strengths, and vulnerabilities. Some assessments result in more information about where the company needs to improve its risk management framework. It is important to assess before making major changes to the risk management framework.
Industries can easily manage their risks if they are willing to accept changes. While the nature of risk may change, companies that successfully adapt and become flexible will see growth. That is why the smart thing to do is to focus on improving operational efficiency and staying competitive. Interfaz knowledge, along with other technologies, gives companies the ability to identify, automate, and minimize the risks presented in their organization. Contact us.
- The Risk Management Process in Project Management, Steph Ray, Feb, 2021
- Risk Management Process, Chris Thomas, Jan, 2022
- Value-at-Risk: Theory and Practice, Glyn Holton, Jan 2002