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Five Principles of Risk Management
Risk management is one of the essential aspects of operating and managing a company. In the corporate world, it's well understood that the greater the risk, the greater the reward or return. As a result, business executives, particularly project managers, should establish risk levels and balance the lowest acceptable return and the highest possible return.
Successful organizations usually build and adhere to effective risk management plans. The plans enable company projects to run smoothly and support your organization's vision and mission.
What is Risk Management?
Risk management is the practice of identifying, analyzing, and mitigating risks that may cause harm to an organization. For instance, during a potential recession, risk management aims to prevent damage to the business's assets and earnings.
If you're a project manager, you probably manage risks daily. A typical project manager controls threats using tools such as contingency plans, performance measurement systems, change management processes, and more. The tools ensure that projects don't go over budget or suffer severe failures due to their numerous variables.
So, Why Is Risk Management Important?
Management of business risk can help ensure the achievement of business objectives by defining and planning strategies to deal with possible threats. Typically, this can include using risk management software to visualize, assess, and mitigate such threats.
What Are Key Factors in Developing a Risk Management Plan?
A risk management plan is simply a document a project manager prepares to identify and prioritize possible risks. The records also indicate how to manage each risk whenever it occurs.
Risk can occur at any time and be triggered by either internal or external sources. Whatever the reason, a well-prepared plan will ensure that your company's operations run smoothly.
Here are two of the key factors to consider when developing a risk management plan:
Risk
When creating a risk management plan, the initial step in the risk management process is to identify potential risks that could impact your organization. For instance, if you run an e-commerce website that accepts credit cards, it's critical that you develop a plan to minimize credit card fraud, as this could significantly impact your bottom line.
You should identify risks before moving on to prioritizing them. If you discover too many hazards to address, it is best to divide them into subcategories to make it easier to detect and control potential risks.
Change
Risk management is a continual activity that you have to update regularly. What works today may not work tomorrow, so you must develop a process to evaluate changes and update your risk management plan accordingly.
There may be changes in leadership, technology, policies, procedures, market forces, regulations, etc. Each of these changes will require updating to your risk management plan.
Steps of Risk Management
Did you know that only 6% of company directors think that their boards are effective in managing company risks? While this might sound negative, you'll find that these statistics demonstrate the importance of creating a strong risk management plan.
Here are some of the steps you can take to manage risk include:
Step 1: Identifying the Risk
It's critical to understand what types of hazards exist in each area of your organization and how they could affect the organization. Risk identification should occur at the start of a project and continue in various phases during the project.
You can identify risks through:
- Interviews: Some experts in different areas may be aware of risks that you may have little or no information about. Speaking to them allows them to shed light on risks that are unknown to you.
- Risk Checklist: Some companies usually have a list of categories and areas you can explore to identify risks. The checklist contains risks realized or identified on past projects.
- Brainstorming Sessions: Invite your team and discuss possible risks. Such sessions allow everyone to think freely and encourage open collaboration.
Organizations need to be proactive about managing identified risks and consider implementing strategies to reduce the chances of exposure. This will allow them to operate with confidence and increase their potential for success. If you are just beginning the process of identifying potential risks in your organization, here is a helpful article that helps to identify the main types of business risk.
Step 2: Analyzing the Risk
The purpose of this step is to analyze the risks that were identified in Step 1, and evaluate the likelihood of them impacting your business. During the analysis, it's crucial to link identified risks with various factors within the organization.
Some factors to consider during this stage include probability, impact, and consequences. To figure this out, here are some questions to ask yourself:
- How likely is it that this risk will occur?
- How severe will the consequences be?
- What will happen and how will be respond if the situation arises?
Step 3: Involve the Stakeholders
If you want to eliminate risk, you need to determine who has control over it. Who would have to change something for the risk to go away?
Avoiding risk means finding out what needs to change to make your business run smoothly. The right person for this is usually closest to the issue and it’s outcome.
They know best how to do things differently or improve their operations. These people may include your clients, government, trade associates, management, staff, board members, and more.
Step 4: Assign Roles and Responsibilities
Every member of your team should have a role in eliminating risk. If possible, every department should also be assigned responsibilities for specific tasks. Here's an example of how specific roles and tasks are assigned in an organization in the event of a risk playing out:
- Marketing Department: The marketing team would handle the messaging regarding the incident that would go out to stakeholders, employees, customers, and potentially the public.
- Sale Department: The sales team would use their contacts with customers and leads to ensure all parties that the necessary steps are being taken to rectify the situation and prevent a future one.
- Finance Department: The finance staff would handle any financial implications of the incident.
- The IT Department: Depending on the type of incident, the IT team would likely be tasked with taking steps to ensure security of the technology moving forward.
All of these roles must be completed by everyone involved to respond to risk.
Step 5: Create a Risk Review Cycle
One of the biggest issues businesses face is procrastination. As we mentioned earlier, eliminating risk requires the efforts of multiple tasks and departments.
With so many factors involved, something could always slip through the cracks. Therefore, creating a risk review cycle will allow you to foster accountability and facilitate change.
Step 6: Continuously improve
Having your company conduct frequent risk reviews, even when you have completed a project, allows you to look at new areas of improvement. That way, your business will continue to grow without experiencing unexpected financial hardship.
Continuous risk monitoring has the advantage of providing constant direction and motivation for improvement.
The 5 Key Principles of Risk Management
Whether it's operational risk management, business risk management, or security risk management, implementing an effective risk management system will reduce financial losses and risks in your business. Although you may not find a one-size-fits-all solution for risk management functions, there are a few principles you can use to develop an integrated approach to risk management.
Below are the 5 main principles of risk management:
1. Structure
To fully understand and analyze the risks within your business, you need to establish a standard structured process of identifying and evaluating risks. A structured approach lets you maintain a consistent way of dealing with different risks by defining what is expected from each part of the process.
With a consistent structure, decision-makers can easily and efficiently implement risk control. It ensures the delivery of consistency, quality, reliability, and fairness in the risk management process.
2. Alignment
Organizational alignment is the systematic and conscious coordination of other business activities with risk management. For instance, coordination corporate culture, organizational strategy, and infrastructure can ensure you meet your organizational objectives and goals.
As a company, you might want to educate your employees on why it's crucial to align business activities and reduce risks.
3. Prioritization
After analyzing all potential risks, you should develop a plan for eliminating or mitigating those risks. One way to implement this process is to start with high-risk areas first and work your way down to lower-risk areas. Another approach is to divide the list of risks into three categories based on their likelihood of occurrence: low, medium, and high.
Once you have identified all the possible risks in your business, prioritize them according to their level of severity. This way, you can take steps to mitigate or eliminate those risks that pose the most significant threat to the business.
4. Communication
Communication within an organization ensures that everyone knows the steps to deal with various risks. Moreover, communication between decision-makers, management, and stakeholders can be important in mitigating risk.
With effective communication, management can inform stakeholders about their perspectives while considering stakeholders' perspectives about risk. Communication also ensures that all parties involved understand the consequences of each action they take.
5. Dynamism
Finally, we recommend keeping an eye on new threats as they emerge and developing solutions for these threats as well. A successful organization needs to adapt to changes in the market quickly.
Don't wait for an opportunity to act; create one yourself. Start by learning what new threats exist in your industry and respond/act accordingly.
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