Steps for risk management
What is Risk Management?
Risk management structures are adapted to do more than just indicate existing potential risks. A risk management structure measures the uncertainties and predicts their impact on a business. As a result, it’s a choice between accepting risks or denying them. Acceptance or denial of risks is dependent on the tolerance levels that a business has already determined for itself.
If a business puts risk management in place as a disciplined and continuous process with the intent of identifying and addressing risks, then the risk management structures can be used to support other mitigation systems including planning, organization, cost control, and budgeting.
While creating contingencies, a business requires to engage in an effective approach with a well-detailed plan that will enable it to handle barriers to its success by dealing with risks as soon as they arise.
How does Risk Management work?
How to Improve Risk Management
Risk management implementations and functions often fail to deliver what is expected and top management feels that its investments in risk management systems are not delivering the expected returns. There are many factors to blame from several parts of the organization and its systems. So, the following ten key practices should not be neglected as they can help increase the organization’s ability to deal with the uncertain future, improve decision-making, and enhance the reliability of periodic forecasts. Understanding the hazards and suggesting solutions to them can provide internal auditors with a solid basis for helping to improve risk management in their organization.
Be clear on respective responsibilities and tasks
Any gaps in responsibilities or tasks across your business could cause an increased opportunity for risk. So, organizations should make sure that every employee knows exactly what part of the business and what activities and tasks they are responsible for.
Identify potential risks at an early stage
The sooner you identify the risks, the easier it will be to manage the risk. So, businesses should think about risk management at the start of every project or task.
Evaluate and prioritize risk
Businesses use a risk matrix to evaluate and prioritize all existing risks. You also can estimate the severity of risk by looking at both the probability and the impact.
Take responsibility and ownership
If anyone in the organization sees any potential safety issue, suspected fraud, or security breaches, they should take responsibility rather than wait for someone else to rectify the problem. Risk management works best when everyone is empowered to make a stand and take action.
Learn from the mistakes
It would be great to use historical data and anecdotes to learn from the mistakes that happened previously, ensuring they are never repeated.
Capture all risks in a risk register
To improve your information sharing and accountability, always capture all risks across the company, so that you can see who is responsible for what and appoint a risk owner too.
Continued monitoring and reviewing
The risk level we face every day is constantly changing with the new emerging and critical risks. It is important to have a risk management process in the workplace and also training your employee on what constitutes risk so that they know what to look out for and how they can contribute towards risk management by being proactive and regularly monitoring the risk factor.
Steps in Risk Management
The risk management process is a framework for the proper actions that need to be taken to protect property, avoid accidents, and keep customers and employees from harm. There are five fundamental steps that are taken to manage risk beginning with identifying risks, analyzing risks, prioritizing them, implementing a solution, and finally, monitoring the risk.
Identifying the Risk
The initial step is to identify the risks within the business. There are various types of risks: environmental risks, market risks, legal risks, regulatory risks, etc. It is essential to identify as many of these risk factors as possible. In a manual environment, these risks are recorded manually while if the organization has a risk management solution, all this information will be embedded directly into the system. The main benefit of this approach is that every stakeholder in the organization can see all these identified risks with access to the system.
Analyzing the Risk
After identifying the risks, their severity and seriousness need to be analyzed. It is vital to understand the scope of the risk within the organization. In a manual risk management environment, this risk analysis is used to do manually. But when a risk management solution is implemented, it is important to map risks to different documents, policies, procedures, and business processes that will evaluate risks and let you know the major impact of each risk.
Prioritizing the Risk
Once the risks are identified and analyzed, they need to be evaluated and prioritized. There are different categories of risk management solutions depending on the severity of the risk. It is necessary to rank risks because it enables the organization to gain a holistic view of the risk exposure of the entire organization.
Implementing a Solution
After prioritizing the risks, the next step is to eliminate or contain the risks as much as possible by experts. In a manual environment, this is done by contacting each and every stakeholder and then setting up meetings so that everyone can talk and discuss the issues. The problem arises when the discussion is broken into many different email threads, across different documents and spreadsheets, and many different phone calls. But if a risk management solution is implemented, all the relevant stakeholders can be sent notifications and the discussion regarding the risk and its possible solution can take place from the system. Everyone can get updates directly from the risk management solution instead of everyone connecting with each other to get updates.
After the potential risks have been identified, the project team then evaluates the risk based on the probability that the risk event will occur and the potential loss associated with the event. Not all risks are equal. Some risk events are more likely to happen than others, and the cost of a risk event can vary greatly. Evaluating the risk for probability of occurrence and the severity or the potential loss to the project is the next step in the risk management process.
The Construction Industry Institute conducted a study of large construction project risk evaluation and categorized risk according to the potential impact of project costs. High-impact risk consisted of risks that could increase the project costs by 5 percent of the conceptual budget or 2 percent of the detailed budget. Only thirty potential risk events met these criteria. These were the critical few potential risk events that the project management team focused on when developing a project risk mitigation or management plan. Risk evaluation is about developing an understanding of which potential risks have the greatest possibility of occurring and can have the greatest negative impact on the project. These become the critical few.
There is a positive correlation Two variables that respond in the same way to change in their environment. —both increase or decrease together—between project risk and project complexity. A project with new and emerging technology will have a high-complexity rating and a correspondingly high risk. The project management team will assign the appropriate resources to the technology managers to assure the accomplishment of project goals. The more complex the technology, the more resources the technology manager typically needs to meet project goals, and each of those resources could face unexpected problems.
Risk evaluation often occurs in a workshop setting. Building on the identification of the risks, each risk event is analyzed to determine the likelihood of occurring and the potential cost if it did occur. The likelihood and impact are both rated as high, medium, or low. A risk mitigation plan addresses the items that have high ratings on both factors—likelihood and impact.
Risk Analysis of Equipment Delivery
For example, a project team analyzed the risk of some important equipment not arriving to the project on time. The team identified three pieces of equipment that were critical to the project and would significantly increase the costs of the project if they were late in arriving. One of the vendors, who was selected to deliver an important piece of equipment, had a history of being late on other projects. The vendor was good and often took on more work than it could deliver on time. This risk event (the identified equipment arriving late) was rated as high likelihood with a high impact. The other two pieces of equipment were potentially a high impact on the project but with a low probably of occurring.
Not all project mangers conduct a formal risk assessment on the project. There are barriers to identifying risks. David Parker and Alison Mobey David Parker and Alison Mobey, “Action Research to Explore Perceptions of Risk in Project Management,” International Journal of Productivity and Performance Management 53, no. 1 (2004): 18–32. found in a phenomenological study of project managers that there was a low understanding of the tools and benefits of a structured analysis of project risks. The lack of formal risk management tools was seen as a barrier to implementing a risk management program. The level of investment in formal risk management was also associated with managerial psychological dimensions.
Some project managers are more proactive Making decisions and taking action to anticipate an expected difficulty. and will develop elaborate risk management programs for their projects. Other managers are reactive Making decisions and taking action in response to events. and are more confident in their ability to handle unexpected events without prior planning, while some managers are risk averse A project manager or decision maker who avoids taking risks. and prefer to be optimistic and not consider risks or to avoid taking risks whenever possible.
On projects with a low complexity profile, the project manager may informally track items that may be considered risk items. On more complex projects, the project management team may develop a list of items perceived to be higher risk and track them during project reviews. On projects with greater complexity, the process for evaluating risk is more formal with a risk assessment meeting or series of meetings during the life of the project to assess risks at different phases of the project. On highly complex projects, an outside expert may be included in the risk assessment process, and the risk assessment plan may take a more prominent place in the project execution plan.
Step 5: Risk reporting
You need to document, analyze, and share the progress of your risk management plan. Reporting on risks serves two key purposes: It helps you analyze and evaluate your risk management plan and helps keep stakeholders engaged in mitigating risks by sharing the progress made.
When you first start out, reporting can be done by manually entering the status of each risk into your mitigation plan on a regular basis. Then email the report, or at least the highlights, to the other department leads.
Risk reporting is where risk management software really shines as it can gather all the data points and create an easy-to-read dashboard. If reporting on risk is an important facet of managing your risk, we strongly recommend considering investing in software.
Risk reporting dashboard in Essential ERM (Source)
Tip: To garner support for and foster a risk management-focused culture, try to build a narrative for how the company is managing risks. Think about how to blend risk reporting with other functions of the business to tell one cohesive story. Throwing a bunch of stats and colored boxes at stakeholders can be overwhelming and intimidating. But everyone loves a story, especially one that they’re a part of.