Every organization must face the challenges of risk. Although the scale of some risks can be negligible, the importance of having a risk management strategy cannot be overstated—regardless of the type or size of an organization. From projects and operations to finance and security, a risk management strategy helps organizations reduce all types of risk by identifying root causes and providing a framework for mitigation.
Read on to learn more about:
- What is a risk management strategy?
- Why a risk management strategy is important
- Risk management strategy roles
- Types of risk management strategies
- Implementing a risk management strategy
What is a risk management strategy?
A risk management strategy is a framework for addressing how an organization plans to:
- assess risks
- respond to identified risks
- continually watch for new risks
- monitor known risks
All types and sizes of organizations use risk management strategy plans across all functions, from sales and finance to operations and IT security.
A risk management strategy encompasses actions and activities that reduce the impact of risk by helping organizations reduce or control the likelihood of risk turning into an issue and mitigating the severity to minimize any negative consequences. A risk management strategy commonly follows five core principles:
- Identify risks and their root causes to gain complete visibility.
- Assess each risk and assign a measurement of probability, severity, and potential impact to help prioritize responses.
- Determine the best approach for managing each identified risk to ensure that risks are assigned the optimal response.
- Track progress against plans to ensure that teams stay on track and risk management strategy tactics are effectively executed.
- Monitor, review, and revise continually to derive and implement lessons learned.
Beyond these core principles, a risk management strategy integrates additional considerations into the research, development, and execution of a plan. Considerations for a successful risk management strategy include:
- Define business strategy and objectives
Organizations use a number of frameworks to plan and establish goals for a risk management strategy, such as a SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis, qualitative research focused on interviews with managers and end users, and quantitative research using scorecards. Spending time on this phase ensures a full understanding of internal and external risk, which is essential for the risk management strategy to be able to effectively identify, eliminate and minimize it.
- Establish key performance indicators (KPIs)
KPIs are crucial for accurately measuring efficacy and identifying gaps that could create vulnerabilities. As part of a risk management strategy plan, the KPIs should be tied to actions that can be used to address weak areas.
- Tie reporting to all monitoring
Create dashboards and reports to surface data that can be used to optimize the results of a risk management strategy, including what is working, areas with poor performance, and areas that lack transparency.
Well-executed risk management strategy is implemented not as a series of discrete steps but as a continual cycle that considers the assumptions made, risk constraints, priorities, tolerance, and acceptance criteria. It also provides an up-to-date outlook on developing risks and changes to threat levels.
Using a risk management strategy plan as a guideline, organizations are able to stay ahead of a changing threat landscape and the inevitable risk found in day-to-day operations. The information gathered in organizations with a risk management strategy helps teams prioritize risks and determine the best approach to adopt to address them.
Examples of the types of risks organizations must address are:
- Board and shareholder pressure
- Changes in IT infrastructure and applications
- Competitive pressure
- Employee turnover at all levels
- Integrations related to mergers
- Legal and regulatory changes
- Security vulnerabilities in both physical and digital systems
- Staffing shortages
- Supply chain challenges
Why a risk management strategy is important
A risk management strategy helps organizations remove barriers to performance and productivity and strengthen overall operations. Among the many reasons a risk management strategy is important are the benefits that it can deliver. By empowering the enterprise to take proactive measures to eliminate or mitigate pitfalls, a risk management strategy can result in the following.
Achieving and exceeding goals
Reducing the impact of risk plays an important role in the timely completion of projects and smooth operations. By constricting the potentially negative effects of the unexpected, a risk management strategy can help expose potential issues and allow teams to remove obstacles before they become problems. With these out of the way, organizations can focus on achieving their objectives and potentially realize better-than-expected results.
A risk management strategy helps organizations assure business continuity in the face of ambiguity with the most effective tool—preparedness. By surfacing and quantifying risks, organizations can take measures to ensure they are in a position to react quickly and effectively if a risk turns into an issue. It can also be used to prevent this altogether by identifying and remediating root causes.
Implementing a risk management strategy plays a critical role in protecting organizations’ assets—from people and property to systems and data. It shines a light on vulnerabilities to help direct efforts to shore up weaknesses and increase vigilance in at-risk, high-value areas.
Satisfaction and loyalty
Risk not only jeopardizes operations, but can have a significant impact on people. Relationships with customers, partners, employees, and vendors alike can be positively affected by having a risk management strategy because it instills confidence and security.
Everyone understands that risk is inevitable, but having clear, well-thought-out plans for addressing it goes a long way to driving satisfaction and loyalty.
Risk management strategy roles
Risk management strategy crosses nearly every role in an organization—from board members and executives to managers and staff. At the heart of activities related to a risk management strategy is the risk manager. This function is often split amongst multiple people serving in various capacities at different levels within the enterprise, but the overall roles and responsibilities are the same. These include:
- Assure controls are operating effectively
- Build risk awareness and response capabilities with training
- Calculate potential financial impact related to risk
- Communicate risk policies and processes for an organization
- Conduct risk policy and compliance audits
- Create business continuity plans to limit risks
- Develop methodologies to identify and analyze risk and its impact
- Establish levels of acceptable risk
- Evaluate how past risk was handled
- Explain risk factors and potential impacts to stakeholders
- Maintain records of risk management strategy and results
- Performing assessments of current and potential risks
- Prepare risk management budgets
- Provide research, risk models, and analytical support
Types of risk management strategies
There are five basic types of risk management strategies. Each has its merits and is a fit for certain organizations. These, combined with more nuanced approaches, should be considered when developing a risk management strategy.
Taking an avoidance approach to risk is a fairly extreme tactic. With an avoidance approach, any activity that brings risk is changed or avoided altogether. It is important to note that even in cases where this makes sense, a risk-reward analysis is encouraged, as avoidance is only advisable if the reward materially outweighs the risk.
- Loss prevention and reduction
A loss prevention or reduction approach is used to minimize risks; it does not eliminate risks. In the event that risk cannot be avoided, a loss prevention or reduction approach can mitigate it and reduce its frequency. Often small changes can go a long way to reducing the impact of risk.
With a retention model, the presence of risk is accepted, and the organization agrees to deal with any repercussions rather than take actions to eliminate that risk. These are cases where the potential cost of risk is less than what it would take to mitigate it. With a retention risk management strategy, any negative impacts caused by risks are absorbed.
- Sharing or spreading
Sharing risk, also referred to as spreading, is a risk strategy management model that involves redistributing risk. This can be to another party or multiple parties.
Risk management strategy can also include transferring risk. Again, this can be passed on to another party or multiple parties. With a transfer risk management strategy, contracts are usually used.
Implementing a risk management strategy
A risk management strategy is generally executed by a hierarchy of participants within an organization, with individuals handling specific functions. In terms of implementing a risk management strategy, there are four key steps.
- Identify existing risks
Effective risk management strategy starts with identifying risks. Taking a proactive approach to risk identification rather than addressing the known risks helps organizations develop an effective strategy. The following are techniques and tools that can be used for risk identification.
- Documentation reviews (e.g., organizational processes, assets, vulnerability reports)
- Brainstorming with groups from across the organization who have visibility into risk factors (e.g., IT security teams, project managers, facilities managers)
- Root cause analysis of known risks, which can uncover additional risks
- SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis
- Checklist of risk categories
- Assumption analysis, including an assessment of the validity
- Risk register that is regularly updated to add, remove, or modify issues
- Assess the risks
After creating an inventory of risks, they should be assessed to determine the likelihood of becoming an issue, the potential severity, and the expected impact. For most organizations, there are more risks than resources. Prioritizing risks helps organizations allocate limited resources most effectively to assure success with a risk management strategy. Tools and techniques that can help assess risks are as follows.
- Probability and impact matrix
- Risk data quality assessment
- Analysis of risks
- Respond to risks
Once risk priorities have been established, organizations need to create plans and tactics to respond to the risks. This includes developing and implementing solutions to eliminate or mitigate the risks in a timely manner. The following tools and techniques help with the risk response phase of a risk management strategy:
- Prioritized list of quantified risks
- Decision trees
- Risk register updates
- Calculations for time required to address specific risks
- Monitor risks
The final phase of a risk management strategy is monitoring. This entails creating and deploying preventive mechanisms for getting new risks into the flow noted above—identify, assess, and respond. Risk monitoring should be a continual process as risks never cease to develop and change.
Supporting tactics and tools for risk management strategy implementation
The broad risk management strategy approaches noted above can be complemented with the following tactics.
Proactive vulnerability detection
Actively searching for risks (e.g., penetration testing for IT security) helps teams identify vulnerabilities, assess the risks, and make decisions about the next steps before risks become issues.
Review of lessons learned
Despite final outcomes, all risk-related decisions have lessons to impart. Teams should take time to evaluate decisions that went well and those that were not successful. The findings should be documented so they can be leveraged in the future.
In some cases, the potential impact of a risk is overridden by the associated benefit. To make defensible decisions about this, organizations are encouraged to conduct a risk-reward analysis to provide data to back these up. This is a valuable tool when developing a risk management strategy as it helps clearly identify what is behind the benefits and drawbacks, helping teams secure consensus for decisions.
Qualitative data analysis
Conducting qualitative risk analysis helps to identify and prioritize risks, then to develop strategies to respond to them.
Questionnaires and surveys
Using questionnaires and surveys is an effective way to validate a theory, identify areas for optimization, and uncover flaws in a plan.
When reviewing a risk management strategy with teams across the enterprise, running through what-if scenarios helps to identify gaps and unintended consequences.
Use a risk management strategy to optimize resiliency
Not every risk can be prevented from becoming an issue. However, having a risk management strategy in place expedites recovery, mitigates the impact, and can eliminate many risk factors. Making the investment of time and resources to create and implement a comprehensive risk management strategy can benefit the enterprise as it optimizes resiliency when risks inevitably become viable threats.
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