Risk Management Best Practices
What is Risk Management?
Organizations are constantly evaluating risks as part of their day-to-day operations.
Should we expand the product line? Should we hire this quarter? Should we buy the XYZ tool? Should we move to a cloud hosting solution? Should we expand to an international market?
These are typical questions that organizations face and answer every day. Risk management is the evaluation of the potential risks that could arise in making any given decision.
Formally, Risk management is the process of identifying, analyzing, and responding to risks.
Risk management is an attempt to control future outcomes by acting proactively rather than reactively. The potential losses that are experienced by failing to act proactively include, but are not limited to:
- Financial losses such as fines, liability suits
- Operational losses such as strikes or mass resignation
- Reputational damages such as bad press
Why is risk management important?
Effective risk management offers the potential to reduce both the possibility of a risk occurring and its potential impact. Its importance lies in the fact that it empowers the organization to proceed cautiously and make sound decision-making.
Risk management is the best way to prepare for future casualties that may come up as part of the progress and growth. Wouldn’t you want to be prepared for your journey rather than unprepared?
Best practice for an effective risk management program
There is a lot of guidance on what an effective risk management program looks like. All these guidance have a common point of focus that is absolutely necessary when implementing a risk management program.
You must first know what risks you are facing before moving forward. Risk identification involves brainstorming. Brainstorming can involve key personnel or all personnel. My favorite question to ask during these brainstorming sessions are:
- What keeps you up at night? You would be surprised by the answers and discussions that get started with this question. It is a good way to identify the various sources of risks.
Develop a process to compile all the risks identified before proceeding to the next section.
Each risk on your list must be analyzed for resolution. To effectively do the analysis, each risk must be analyzed for its potential impact on the organization. There are many strategies for making this analysis, such as using a probability of occurrence and calculating the risk impact based on the probability.
Now that your list is analyzed and prioritized, the resolution activities can start.
Risk Response or Remediation
Depending on the impact of each risk, the organization may decide whether remediation activities are worth it, possible, or required. The organization must document the remediation plan for each risk on the list. Risk responses are usually classified as follows:
- Avoidance: (remove the risk) – This is always the best strategy, but not easy to achieve. Often, the only way to remove the risk is to remove the risky activity, and that’s not always feasible
- Mitigation: (reduce the impact and/or likelihood). If you cannot remove the risk, you can decrease it by lowering the possibility of its occurrence
- Transfer: You can transfer the responsibility for a risk to someone else. This usually occurs through a contract agreement. For example, insurance contracts are used to transfer risks ownership
- Acceptance: In some cases, the risk and impact are low enough that an organization chooses to accept a risk
Each risk remediation plan must have an assigned owner to oversee that the response activity is carried out. Risk management is a continuous activity. Make it a recurring activity to ask your personnel what keeps them up at night and monitor the remediation activities.
And there you have it! Best practices when it comes to risk management!
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