The reality is that every business operates within a risk-filled environment. How such risks are managed is what will determine whether your company will remain effective. Risk management is the primary approach you can use to identify, evaluate, assess, and mitigate risks daily. By leveraging a risk management approach, you’ll have a better understanding of your environment and take active steps towards avoiding business disruption.
However, a risk management strategy does much more than just helping you avoid risk. It is also a guiding principle, an approach that you can use to align your business goals and set long-term objectives. Risk management also helps you involve multiple stakeholders to ensure that your systems and policies reflect the nature of your entire organization.
So how can you begin to leverage risk management as part of your business’s daily operations and goals? Read on to find out.
Any risk management plan is ineffective if it doesn’t address the actual risks that your company might face. This is why understanding your risk environment is the first step towards leveraging risk management. Begin by identifying and evaluating the risks that you’re vulnerable to, with the ultimate aim of preventing such threats from occurring. Risks arise from many different sources. Some may occur due to acts of nature (such as fire and storms), while others arise from cyberspace and internal data handling processes.
The challenge that you’ll face during this step is identifying and cost-effectively hedging various risks. For example, some risks present more significant consequences than others. In addition to identifying the threats your company faces, you also need to categorize and quantify these risks accordingly.
Modern data analysis techniques make it possible for you to assess the impact of many different threats, including the impact of poor weather or the potential losses that a data breach might cause. Therefore, you may use a combination of processes to hedge potential risks and understand the overall risk environment.
Your risk management plan will be guided by the goals and objectives of your business. For example, if you’re looking to save as much as possible during the risk management process, you may decide to spend less on insurance premiums.
Take the example of Evolution Markets LLC. This Risk Management Firm in NY wanted to hedge the level of risk that poor weather would cause. In particular, they wanted to protect $1 million in revenue that could potentially be lost if cool weather prevailed during the summer. However, they had to pay $175,000 in weather-based derivatives contracts to protect this revenue. If the weather were to turn out normal, the money paid would be lost.
You’ll have to determine the objectives of your business during risk management. These goals will serve as a guiding principle when you begin implementing risk management plans.
Insurance is one of the most common ways of protecting your business against risk. Each policy you consider should cover you against potential risks that may disrupt critical operations. For example, cybersecurity insurance can cover you against data breaches that may occur online.
As you develop a portfolio of insurance coverage options, you should also consider how much the hedging would cost (premium cost vs. potential losses when making a claim). Achieving a proper balance between the two will help you cost-effectively manage risk.
Risk management is an enterprise-wide process that involves multiple stakeholders. From management to employees and third-party vendors, everyone should be aware of the policies you’ve put in place to address company risk. Even more importantly, you should train your employees to understand and implement risk management strategies.
Such training may involve assessing risk, establishing controls, and monitoring the current risk environment. Each worker should be aware of their role and the importance of staying up to date with all risk-related policies. This is the best way of mitigating risks and responding to new threats in real-time.
Common mistakes companies make is approaching risk management in distinct portions rather than a holistic manner. This “silo thinking” strategy will limit your view of enterprise-level risk and prevent you from developing a complete management strategy. Your risk environment should be approached holistically so you can develop actionable steps for leveraging risk management.