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Have you ever noticed the number of double-checks we do every day? We ensure that we have our keys, wallet and phone before leaving the house. Many of us also check whether all electrical appliances are switched off before stepping out. We even make sure that we’re carrying enough cash. By double-checking these things, we try our best to avoid unforeseen and unfortunate circumstances.
Similarly, businesses run double-checks through a risk management process to prepare against unexpected future events. So what is the risk management process? Let’s find out.
What Is The Risk Management Process?
However safe or challenging our situations may be, we take risks every day. They’re inevitable in businesses and organizations must stay prepared and avoid negative outcomes. A risk management framework helps identify and analyze the risk and prepare a response to it. Effective risk management enables you to control future outcomes by acting proactively, not reactively.
The process of risk management refers to a framework that helps determine the actions to be taken in identifying and managing risk factors. All project managers and team members must know how to implement the necessary systematic risk management processes. It further enables the entire organization to run their projects efficiently. Businesses need to adopt an efficient process of risk management because:
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It predicts future costs, encouraging better resource planning
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It guides decision-making
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Allows flexibility when responding to future challenges
Steps Of The Risk Management Process
There are five essential steps to effective risk management.
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Risk Identification:
There are several types of risks involved in businesses at any given moment. Labeling makes it easier to tackle or avoid them. Risk identification in organizations involves brainstorming to review the various sources of risks and arranging them in order of priority. Start asking questions like, ‘what can possibly go wrong?’ to gauge potential threats. The different types of risks are:
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Strategic risk
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Compliance risk
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Market risk
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Regulatory risk
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Operational risk
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Risk Analysis:
Once the risks are identified, they need to be assessed. It’s important to map different risks to the underlying factors. Your risk analysis should answer the following questions:
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What is the likelihood of these risks occurring?
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How will the risks impact the organization?
Risk analysis helps create appropriate risk responses depending on their severity and available resources.
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Risk Evaluation:
Many organizations use risk maps or visual representations of risk factors that detail which risks are severe or frequent. When you rank risks in order of their severity and urgency, you prioritize and solve them based on urgency. For example, risks causing minor inconvenience don’t necessarily need the top management’s intervention.
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Treating The Risk:
Risks need to be either eliminated or managed. Here are a few strategies of risk management that’ll help you prepare for different types of potential threats.
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Accept:
You decide to take the risk. For example, you decide to invest in a startup business.
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Avoid:
You eliminate a particular risk by getting rid of its source. For example, anti-discrimination policies make it mandatory to protect employees.
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Mitigate:
You take action to reduce the risk. For example, purchasing superior quality tools to reduce workplace safety risks.
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Transfer:
You transfer the risk to a third party. For example, you get car insurance in case of unforeseen accidents or damages.
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Retain:
You decide to retain or keep a risk because you think it’s beneficial for your current situation.
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Monitoring And Reviewing The Risk:
Risk management isn’t an end in itself but a process of continuous improvement. New risks can keep emerging. Therefore, your process of risk management should be consistent and standardized. By doing this, organizations develop a risk culture, becoming more resilient and adaptable in the face of change. There’s better clarity on the operating environment and everyone’s prepared for future challenges.
Importance Of Risk Management
There are many benefits to implementing a powerful risk management strategy.
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Prepares For Surprises:
Unexpected events aren’t good for businesses. Good risk management practices enable you to identify trouble spots and communicate them with relevant people. When you map out all potential threats, you’re controlling the likelihood and severity of unpleasant future scenarios.
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Improves Decision-Making:
Decision-making is a challenging process because your choices impact future events. Risk management helps make smaller strategic decisions that benefit larger objectives. You can determine the strengths and weaknesses of a decision and determine what risks you should pursue or avoid.
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Develops A Risk Culture:
The purpose of risk management isn’t eliminating risks altogether. In reality, it’s impossible to eliminate every risk because they’re unpredictable. The system actually helps you develop a risk culture that minimizes potential negative consequences. You make smart decisions to better manage the consequences for a favorable outcome.
To successfully implement risk management strategies, everybody in the organization should be on the same page. They should be trained in the process to use the system efficiently. Harappa Education’s Navigating Workplaces course will teach you how to identify your workplace culture by tactfully managing differences and identifying power holders. The Thomas Kilmann Model will guide you through navigating conflicts. Get skilled at effective collaboration and create a powerful risk management plan.
Explore topics such as Risk Management, Risk Management Planning, How to Manage Crisis & Contingency Planning from our Harappa Diaries section and create an effective risk management plan.
