What is risk management? Definitions, standards and processes
First, we quickly define risk management by a reputable international standard body:
"[Systematic use of policies, procedures for communication and consulting activities, background and assessment, treatment, monitoring, review, recording and reporting of risk."
- ISO 31000 (according to risk management instructions)
Therefore, risk management only acknowledges that risk is occurring, and takes steps to ensure that it is fully prepared. Basically, this is a management strategy similar to managing business processes or other management systems such as quality.
There are many ways to successfully implement Risk Management. The goals of any risk management program revolve around identifying, understanding, and preparing for the types of risks, and potential events that deviate from the expected outcome of business operations. In simpler terms, this includes anything that is not part of the standard practical method.
One of the most important goals of successful risk management systems is to focus on active risk management. Active risk management is defined by the preventive nature of the process.
Active risk management is not just about reducing known risks; Rather, it is a forward-looking process that seeks to apply a quality management framework to reduce known and unknown risks, and ensures that as much effort as possible is made to avoid any kind of risk.
Risk management is a reaction to the unknown. Businesses that do not involve active risk management will be lost in a constant battle with risks for which they are not yet sufficiently prepared. Active risk management is essential for any successful risk management program.
Organizational risk management
Organizational risk management is a type of risk management that differs in several important principles. In practice many ideas are similar; The main difference lies in the focus of ERM and how risk affects business goals and result s. This is similar to the ISO 31000 standard approach to risk management guidelines.
Traditional risk management pays less attention to high-level ideas such as business goals and outcomes, and simply prioritizes risk quantification and severity by searching for calculated numerical values to identify risk, quantity, and ranking, respectively.
This quote summarizes the main ideas of organizational risk management:
"The culture, capabilities, and practices, by setting strategies and practices, that organizations rely on to create, maintain, and achieve value for risk management."
Misconceptions about risk management
Despite the proliferation of risk management in business process management approaches, there is a tendency to view Risk Management as focusing on the negative outcome or potential of a business.
In fact, this is not the case: risk management is a practice that depends on both the ability to recognize and make the most of positive outcomes, and the opportunity created by the risk.
It is true that risk has a negative effect in a sense, but the purpose of risk management is to identify opportunities in such circumstances to invest in hidden or less obvious potential. This may mean choosing less risk, or understanding that sometimes risk is necessary to achieve better performance.
In accordance with the principles of continuous improvement and improvement, risk management is an ongoing process that does not simply stop and begins with a SWOT analysis or several board meetings. Risk management is a framework that seeks to continuously monitor, refine and optimize the business and its processes. When it comes to risk management, there is always room for improvement.
Risk management standards
There are a number of Risk Management standards designed to integrate best practices and help simplify and improve risk management implementations for businesses. Another factor that leads to the standardization of risk management frameworks is the increased scrutiny that organizations must face with respect to their risk management systems.
Risk management systems are often required to withstand rigorous internal audits and evaluations to demonstrate effectiveness in implementing and complying with company objectives. The risk management standards defined by ISO 31000 are an example of a leading international standardization approach in the risk management approach.
ISO refers to the International Organization for Standardization. Section 31000 refers to a standard set for risk management. In addition to the term umbrella being used for a set of different standards, ISO 31000 also refers to a single standard, specifically known as ISO 31000: 2018.
This standard defines a set of guidelines for risk management, designed by organizations of all sizes to work in any field to implement effective risk management systems. Unlike many other ISO standards, such as 9001 for quality management or 14001 for environmental management, ISO 31000 is a set of guidelines. This means that you can not obtain ISO 31000 certification in the same way as you would for other standards with specific requirements.
Nevertheless, ISO 31000 is a leading framework for organizations looking to start risk management. Risk management can be expressed in these steps:
1- Risk management goals
2- Identifying the risk
3- Risk assessment
4- Risk response
5- Risk monitoring
1- Setting and drawing risk management goals
Risk management begins with setting clear goals and making sure they are in line with business strategies. After all, what is risk management if it fails to help your business achieve its goals?
Focusing on risk management alone will not help you achieve your business goals. Instead, the result s of a well-implemented risk management system will be valuable in helping you understand how to achieve result s beyond your exist ing business goals.
Risk management can help businesses align their goals with a well-defined mission statement, forward-looking vision, and core company values and cultures.
2- Identifying and documenting risks
Risk is anything that can stop your business from achieving its goals. This includes larger, more high-risk concerns, and even seemingly insignificant risks at the level of individual processes or projects. In any case, all risks must be clearly and accurately identified and recorded.
3- Evaluation of documented risks
After recording the risks, they should be evaluated to determine the severity and priority. This is done to understand the impact of risk on business objectives as well as when the risks are most likely to occur.
It is difficult or impossible to predict some risks, such as natural disasters or political unrest. But that does not change the fact that risk assessment should always be done by all parts of an organization in the best possible way. Risk assessment is also important to ensure that the risks recorded are actually valid. This is a time when scrutiny can be done and qualitative analysis and forecasting methods can be used to better understand more serious risks.
For example, in the risk assessment phase, a matrix may be used to prioritize important items. The purpose of risk analysis is to help senior management understand what they need to focus on the most.
4- Response to risk
This stage, also known as risk management, focuses on responding to the highest priority risks. The main approaches to risk response are:
- avoid
- Accept (or retain)
- Reduce or reduce transfer (or sharing)
It is the manager's job to decide which risks have the highest priority and to determine an appropriate risk response strategy. According to the overall Risk Management approach, risk response strategies should be considered in terms of the impact of risk on business objectives as well as the overall costs and benefits of each proposed strategy.
5- Risk monitoring
The last step reflects the nature of the Risk Management cycle, because like continuous improvement, risk monitoring is an ongoing process that never really ends. The content of organizations and their risks is constantly changing, so it makes sense that risks need to be constantly monitored to ensure that everything is under control, and the organization can ensure that the importance of each risk is properly understood. Has been.
Avoid risk
This strategy focuses on careful planning to eliminate specific (or at least as much as possible) potential potential risks from business operations. This approach assumes that an perceived event or risk factor can be excluded from business strategies to avoid the consequences of that outcome.
Risk reduction
When a risk factor cannot be completely eliminated, the company may try to reduce the impact of that risk by tricking and modifying certain aspects of the operation. The difference between reducing risk and preventing it is that risk reduction accepts that risk cannot be completely avoided.
Risk sharing
Risk sharing involves sharing the harm of a perceived risk, whether between different parts of an organization, different participants in a project, or even external stakeholders such as business partners or investors.
Risk protection
Risk retention is a decision that is actually a risk from a business perspective, worth the damage. This means that the organization must develop adequate plans to deal with the potential for risk damage.
A simple way to analyze risk from a business perspective is to imagine a situation in which the company's expected profit is greater than the amount of risk loss. In this case, it makes sense to know why a business might accept and maintain a degree of risk. So what makes risk management so attractive? Why are so many people interested in using risk management in their businesses?
What are the benefits of Risk Management for business?
Risk management can increase productivity
No matter what industry you work in or what goods or services you sell, you can always determine your productivity to some degree. Productivity is always tied to trends. Risk Management lets you look at your process and find ways to improve the way you do things.
Not only will this help you optimize for higher productivity, it will also mean that your work environment will be safer because you have reduced risk.
Risk management reduces your costs
Risk management strategies are not just about finding a new policy. A well-run risk management system should actually save money because you will logically incur less losses. This means lower operating costs and ultimately more profit. Everyone at all levels of the organization benefits from the forward-looking and opportunistic perspectives offered by risk management systems.
Successful implementation of a risk management system will bring benefits such as the following:
- Helping everyone in the organization understand and prepare for risk
- Help advance clear goals and align with business strategy at a higher level
- Strengthen more informed decision making
- Cultivate a culture of continuous improvement
- Improve trust between the organization and its stakeholders
- Encourage innovation and positive change in the organization
- Improve the success rate in the organization
How to automate risk management
The positive effect of the Risk Management system is enhanced when combined with automation. The benefits of automation are immediately apparent when you consider that each risk management framework is essentially a series of repetitive tasks (because risk management is an iterative process).
With automation, you can save time and money by eliminating tedious manual labor. After all, you are actually reducing the risk of errors in the risk management process, because less manual labor means less room for human error.
How to create and implement a risk management program
The risk management program describes how to manage risk. Elements such as the organization's risk approach, the roles and responsibilities of risk management teams, the resources they use to manage risk, and the definition of policies and procedures.
The seven-step ISO 31000 process is a handy guide that you can follow. Here is a summary of its components:
Communication and Consulting: Because increasing risk awareness is an essential part of Risk Management, risk managers should establish a communication program to convey the organization's risk policies and procedures to employees and stakeholders. This step sets the tone for risk decisions at each level. The audience includes anyone who is interested in the organization using positive risks and minimizing negative risks.
Background: This step requires the definition of risk-taking and unique risk tolerance of the organization - that is, the amount of risk can be different from the risk-taking. Factors to consider here include business goals, company culture, regulatory rules, political environment, and more.
Risk Identification: This step defines risk scenarios that can have a positive or negative impact on the organization's ability to trade. As mentioned above, the result ing list should be kept in a register or risk report and kept up to date.
Risk Analysis: The probability and impact of each risk is analyzed to help sort out the risks. Preparing a thermal risk map can be helpful here, as it provides a visual representation of the nature and impact of company risks. For example, an employee's absence due to illness is a likely event that has little or no effect on most companies. Earthquakes, depending on the location, are an example of unlikely high-impact risk.
Risk Assessment: This is where organizations determine how to respond to the risks they face. Techniques include one or more of the following:
- Risk avoidance: The organization seeks to eliminate, withdraw or not intervene in potential risk.
- Risk reduction: The organization takes steps to limit or optimize risk.
- Risk Sharing or Transfer: The organization enters into a contract with a third party (for example, an insurer) to bear all or some of the risk costs that may occur.
- Risk acceptance: Risk is in the range of risk-taking and tolerance of the organization and is accepted without action.
Risk Management: This step involves applying agreed-upon controls and processes and verifying their performance as planned.
Monitoring: Do the controls work as intended? Can they be improved? Monitoring activities should measure key performance indicators (KPIs) and look for key risk indicators (KRIs) that may change strategy.
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