What is risk management?
Risk management is the identification, evaluation, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability or impact of unfortunate events or to maximize the realization of opportunity.
Why is risk management important?
Risk management is important because it tells businesses about the threats in their environment and allows them to be prepared for them. In the absence of risk management, businesses would be blindsided by risks and face heavy losses.
Risk can come from both internal and external sources. The external risks are those that are not in direct control of the management. These include political issues, exchange rates, interest rates, and so on. Internal risks include non-compliance or information breaches, among several others.
Here is an example of how a manufacturing company adopted a risk management company to manage their risks and saved their 5 Million euros. Different factory units need regular maintenance. During the maintenance work the production has to be shut down, which causes a reduction fall in the company’s income and profit. Szigma Services Ltd. was handed over the risk management process. Szigma services analyzed the risks that the manufacturing company was facing and provided them with solutions accordingly. After implementing the solutions the manufacturing company saw the difference in their production units and also the reduction in losses.
What is the risk management process?
The risk management process is a portfolio of the actions that need to be taken. There are five basic steps that are taken to manage the risk. It begins with identifying risks, goes on to analyze risks, then it is prioritized, a solution is implemented and finally the risk is monitored.
Step 1: Identify the Risk
The primary first step is to identify the risk in the business environment. There are a number of risks – legal risks, environmental risks, political risk and many more. It is very important for an organization to identify as many risk as possible. Being able to identify what types of risks you have is vital for every business organization.
An organization can identify their risks through experience and internal history, consulting with industry professionals and external research. Many companies have now hired risk management professionals to identify the risks for them.
Step 2: Analyze the risk
Once the risk has been identified it needs to be analyzed. It is important to understand the link between different factors of the business and the risk itself. To determine the threat of the risk it is important to figure out how many business functions are affected by the risk. Sometimes a risk is so vital that it can bring a whole organization down, whereas some risks may not even affect the organization.
When a risk management solution is implemented the first basic step is to place the risk according to different documents and business processes. This means that the system will already have a method which will identify the risks and their impact.
Step 3: Evaluate or rank the risk
After the analysis it is important to rank and prioritize the risks. Every risk management solution has different categories of risk depending upon the damage to be caused by the risk. A risk that may cause little inconvenience is ranked as a low-level risk whereas risks that can cause tremendous loss are rated high-level. It is important to rank risks as it will help get a better view as which risk is to be handled closely. Certain low-level risks can be managed by minor changes whereas the high-level risks need good thinking and proper implementation of solutions.
Step 4: Treat the risk
The most important step after analyzing the risk is to eliminate or contain the risk. This is done by connecting with the experts of the fields in which the risk exists. In a risk management solution all the major stake holders are sent notification about the risks. The discussion regarding the risk and its possible solution must be discussed with the stakeholder and acted upon accordingly. The upper management must follow up with the stakeholder after suggesting the solution.
Step 5: Monitor and review the risk
The final step is to review the risk. All the risks cannot be eliminated, some risks are always there in the organization. Environmental and legal risks are just two examples of risks that always need to be evaluated. The risk management system evaluates every risk of the organization and any change in the risk is notified to everyone.
BSE Institute’s Executive Program in Risk Management is a course designed to give you thorough knowledge about risk management. Risk management is vital for every organization as one risk left unidentified can bring down the whole organization like a house of cards. Managers who are finding ways to jump up the ladder can stop looking as this course is just the right step for them to boost their career. Join now!