The need for risk management has increased as a result of the advent of new problems like the digital revolution, climate change, and geopolitical concerns. According to McKinsey & Company experts, businesses will need to foresee, evaluate, and keep an eye out for dangers based on a variety of internal and external data points. But first, what exactly is risk management? Why is it crucial? Let's investigate.
What is Risk Management?
Risk management is the art of identifying, analyzing, and controlling potential risks or threats to an organization. These risks can be mitigated from various sources, such as legal liabilities, financial uncertainties, data loss, cybersecurity threats, or natural disasters. Effective risk management can help identify potential organizational threats and provide guidelines to control them.
Why is Risk Management Important?
McKinsey states, “The world is facing both uncertainty and rapid change. For companies, risk levels are rising — as are the expectations of employees, customers, shareholders, governments, and society at large.” Risk management helps an organization map out potential risks and prepare strategies to deal with them in advance or even avoid them altogether.
Risk Management is Essential to:
- Define the organization’s objectives for the future
- Plan and execute projects
- Minimize chances of failures
- Protect the company’s resources
- Save time and expenses
- Reduces the chance of workplace hazards
Now that we have established what is risk management and why it is important, let’s explore the risk management process.
What is the Risk Management Process
Identifying Risks
Risk identification is the process of identifying potential risks to an organization. This process mainly involves brainstorming and identifying all possible risks that can impact the organization. These risks include financial, operational, perimeter, and strategic risks.
Risk Analysis and Assessment
In risk analysis, new threats and their impact are determined. While in risk evaluation, the magnitude of each risk is determined and then ranked in order of priority. Risk analysis and assessment help in decision-making and operational efficiency. They save the time and resources of an organization.
Risk Mitigation and Monitoring
After determining the magnitude of risks, action plans are set in place to reduce their likelihood and diminish the severity of their aftermath. As risk management is a continuous process, it is imperative to constantly monitor potential threats and update the risk management plan accordingly.
Risk Mitigation Strategies
1. Risk Avoidance
It is an approach that attempts to minimize vulnerabilities that can lead to potential risks.
2. Risk Reduction
It deals with mitigating potential losses by reducing the occurrence or impact of the risk.
3. Risk Sharing
It is a preventative step to limit the loss by transferring part of the risk to a third party.
4. Risk Transfer
It is a strategy that involves shifting potential loss from one party to another, for instance, risk transferring by purchasing insurance.
5. Risk Acceptance or Retention
It is the decision taken by an organization to take responsibility for potential risks when there is no acceptable or economically viable approach to risk avoidance or reduction.
Common Reasons Why Risk Management Fails
- Failure to take risks into account
- Mismeasurement of known risks
- Failure to manage risks
- Failure in monitoring risks
- Failure to use appropriate risk metrics
- Failure to communicate the risks to top management
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