Master Risk Management
Risk Management Techniques

What is Risk Management?: The Fundamentals

Introduction

Do you want to feel confident that your organisational decisions are ethical, sustainable and can help your business grow?

Do you use risk management to help guide your organisation with this?

Sometimes Risk Management can seem complex and only focused on compliance….

But risk management is a critical skill all contemporary executives and leaders must display – and it also contributes to business growth and resilience.

What is Risk Management

So, what is managing risk really about and what is risk management really?

Risk management is a discipline that all business professionals need to understand and embrace. 

Risk is defined in the international standard ISO 31000 Risk Management Guidelines as “the effect of uncertainty on objectives” with this standard to be “used by people who create and protect value in organizations by managing risks, making decisions, setting and achieving objectives and improving performance. Managing risk is iterative and assists organizations in setting strategy, achieving objectives and making informed decisions.”

If you think of objectives as your business objectives, then you manage risks to ensure you achieve your business objectives despite the presence of uncertainty. Having a risk management plan can support the achievement of your business objectives. 

This same ISO standard defines risk management as “coordinated activities to direct and control an organisation with regard to risk”. These coordinated activities are the “things” you are doing to manage the risk. These activities are usually documented in a risk framework and risk register. 

The Importance of Risk Management

So now that we have answered the question, “What is Risk Management”, let’s consider why risk management is important.

Not only is risk management a great input into business decision making and strategy, but it also helps us to navigate through ongoing volatility and disruption, when traditional approaches may fail to keep pace and do not always recognise emerging risks. 

Businesses should understand the risks they face in the pursuit of their objectives. There are many categories of risk and businesses should examine each one and then be clear about the level of risk they are prepared to take for each category of risk.

Example – businesses may be prepared to take more risk when designing a new product or do not have protocols in place for Quality Risk Management but may not want to take any risk when it comes to the safety of their people.

What is most important is that we understand that all businesses face risk in achieving their business objectives, and that we take informed and calculated risk in pursuit of these objectives. 

Key Categories of Business Risk

Our current business landscape needs to consider all the traditional risks on our registers such as:

  • Financial risk
  • Reputational risk
  • Regulatory risk
  • Safety risk
  • People risk
  • Competitor / industry risk
  • Legal risk and,
  • Insurance risk

It is also vitally important to now incorporate emerging risks such as:

  • Cyber risk
  • Climate change risk
  • ESG risk and, 
  • Supply chain risk

Just to name a few – new risks are emerging regularly in our dynamic and often volatile business landscape.

All organisations benefit when consideration of risk is included in business decision making. Documenting how this was done allows organisations to make informed, considered and defensible decisions.

From the identification of risks at both a strategic and operational level, and by considering how the identified risks could impact your business, allows you to establish risk mitigation strategies to ensure your business objectives are met.

Risk Management in Practice

When your business risks are being proactively identified and managed according to a risk management standard, it will impact your business positively and act as a “value creator”, and not just act as a down-side protection.  Robust risk reduction measures allow you to identify risks and opportunities, meaning you can get ahead of the curve and your competitors!

By scanning the business landscape and being informed on events impacting our business, whether these are domestic or global, gathering this information ensures you are able to identify the impacts on your business that could result in risk. You can review and examine what is happening to others in your industry and learn from this. You can also review your own internal data to examine trends.

These actions and examinations then allow you to conduct risk analysis activities and implement risk mitigation and reduction strategies and measures. By following this risk management process and implementing strategies to mitigate risk, your business can prevent impacts such as loss of market share, financial loss, and legal action as well as increase customer satisfaction and ensure you are on the right side of regulation and compliance requirements.  

Look at this example:

There is a change in regulations in your industry. You are not informed on these changes and as a result, you are placed in a non-compliant position as the deadline for implementing changes has passed. This situation compounds itself as you are hit with regulatory enforcement action resulting in legal risk, reputational risk and subsequent financial risk as a result.

Being informed on industry changes would have allowed your organisation to be prepared to make the required changes and therefore avoiding the impacts as well as time and energy associated with being in a non-compliant position.

Let’s consider another scenario:

A new competitor has emerged in your industry and as a result other organisations, including yours, are losing market share. This is also impacting your profitably and share price. By completing a SWOT analysis (an internationally recognised risk assessment technique), you have been able to gain greater insight into the strengths and weaknesses in your business offering. 

From there, you can develop a strategy to promote the unique strengths of your organisation to recover market share. In addition, by understanding your organisational weaknesses you can work to close the gap and further improve performance against your competition. 

Using this risk assessment technique will allow you to create value for your business and manage your competitor & market share risks. 

Challenges in Risk Management

At times effective risk management can seem more like art than science! But by understanding the risks your business and your industry face, and by establishing proactive risk mitigation strategies, you can not only prevent negative business impacts but you can also identify new opportunities to grow your business. 

However, sometimes risk management is viewed as something that is a “nice to have” rather than a “must do” – something best left to the risk management team and maybe the teams in insurance and legal. However, nothing could be further from the truth!

But it all relies on leadership and commitment, and sometimes this can present a challenge – convincing others that risk management is a value creator and something that can support business growth and productivity. “It hasn’t been like that in the past, so why should I change my view now” you might hear.

Let’s examine the Principles of Risk Management detailed in the international standard, ISO 31000.  These principles of risk management from ISO 31000 are that risk management:

  • Is integrated – this means ensuring it is part of your business decision making – not having risk management as a late add on or completed after the fact
  • Is structured and comprehensive – this means having an established process
  • Is customised – this means your risk processes are customised and appropriate for your business – both in size and industry
  • Is inclusive – this means that your approach to risk management has timely and appropriate consultation and input from your stakeholders
  • Is dynamic – this means it is not “set in stone” risks emerge and change – and good risk management anticipates, detects and responds to these changes
  • Is based on best available information – the inputs to risk management are historical and also current information. It also includes future expectations. You need to make decisions based on the best information available at any given time
  • Considers human and cultural factors as both of these influence risk management
  • Is based on continual improvement – that risk management will continually improve through learning and experience
  • All built on the premise that risk management enables value creation and protection for a business

Ensuring that your business adopts and uses these principles relies on leadership and commitment to the process!

But as stated by Gary Cohn, global businessman and philanthropist, “if you don’t invest in risk management, it doesn’t matter what business you are in, it’s a risky business”

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The program has downloadable assets for you to take away and use in your business following your course completion.

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