4 Stages to Building a Robust Risk Management Process
As your business grows and evolves, it is exposed to various risks that can significantly impact operations and financial stability. Therefore, it’s essential to be able to define, measure, manage, and continuously monitor these threats. That’s where risk management comes in.
Risk management is the process of identifying, assessing, and mitigating risks to an organization’s assets and resources. This article aims to dive deeper into what it takes to develop a mature risk management program.
Stage 1: Define
The first stage in the risk management process is defining risk. “Knowing the risk is out there is one thing, but identifying where that risk is located is quite another,” says Aaron Oyler, Chief Product Officer for Graphite.
Risk identification entails recognizing all possible hazards to your organization’s assets and resources, both internal and external. Inherent risk refers to the probability and impact of an adverse event without any risk management efforts. In contrast, residual risk refers to the probability and impact of an adverse event after considering existing risk management measures.
Various types of risks may pose a threat to your business. Examples of these risks include financial, such as credit and liquidity risks; operational, such as fraud and system failures; strategic, such as competitor threats and market changes; and compliance, such as regulatory and legal changes. By identifying these risks, you can better evaluate your organization’s potential exposure and develop strategies to manage or mitigate them effectively.
Here are some types of risks that businesses may be exposed to:
- Core Business Risks – These are the inherent threats to the nature of the business, such as operational, financial, and strategic risks.
- Regulatory Risks – These risks arise due to non-compliance with industry laws and regulations.
- Industry-related Risks – These risks arise due to factors such as economic conditions, market trends, and competition.
Stage 2: Measure
It is essential to have a structured approach when creating a risk register. The risk register is a document that lists all identified risks, their probability of occurring, their impact, and the measures taken to manage them. Each risk in the register needs an owner responsible for managing it.
Leveraging a risk matrix can help you rate each risk consistently. A matrix is a tool that evaluates the probability of a risk occurring and its potential consequences. Assigning a score to each risk on the matrix allows you to prioritize and determine which risks require immediate attention.
Stage 3: Manage
Once risks are identified and rated based on potential impact and likelihood, developing management strategies for each is the next step. Four risk management options exist under the TAME framework: transfer, accept, mitigate, and eliminate.
Transferring the risk involves offloading the financial consequences of the risk to a third party, such as an insurance company. When investing in a policy, the insurance company assumes all financial liabilities associated with the risk domain (legal expenses, damages awarded, and repair costs).
Accepting the risk means that your organization recognizes the potential consequences of the risk but decides to continue with the activity regardless. If this method is chosen, remember to evaluate the risk regularly and escalate if necessary. Finally, even if you select the “do nothing” strategy, the risk domain must still have an assigned risk owner who can be held accountable if things go awry.
Mitigating Residual Risk
Mitigating the risk is the most common approach and involves reducing the probability and impact of the risk. Therefore, it is essential to pick a framework for each risk factor to mitigate risks effectively. Frameworks provide a structured approach to risk management and ensure that all relevant factors are considered. There are many frameworks available, depending on the specific risk factor.
Some traditional cybersecurity frameworks include the National Institute of Standards and Technology (NIST), which provides a comprehensive cybersecurity framework for organizations, and the Low-Moderate-Advanced (LMA) framework, which helps organizations prioritize cybersecurity efforts based on their risk profiles.
Another one is the American Institute of Certified Public Accountants (AICPA) framework, which provides a structured approach to identifying and managing cybersecurity risks.
For privacy-related risks, some frameworks include the Service Organization Control 2 (SOC 2), which helps organizations manage risks related to protecting customer data, and the General Data Protection Regulation (GDPR), which provides a framework for managing risks associated with collecting, storing, and processing personal data.
Implementing risk policies based on these frameworks is critical to managing risks effectively. It helps ensure that all relevant factors are considered and that the organization addresses the most significant risks.
Furthermore, a structured approach helps ensure your organization complies with applicable laws and regulations and reduces the risk of reputational damage.
Eliminating Inherent Risk
Eliminating the risk is the most radical approach and typically involves abstaining from activities that could expose the organization to a particular risk. Elimination is only possible for risks like too-broad system access across your organization. Furthermore, risk elimination is generally the most costly strategy.
Stage 4: Monitor
Risks are constantly changing. That’s why it’s crucial to reassess them regularly to ensure that your organization’s risk management strategies remain effective.
Conduct Annual Risk Assessments
Annual risk assessments are essential to any robust risk management process.
The first step in conducting annual risk assessments is to review the list of risks identified in the risk register to ensure they’re still relevant. If any risks are no longer applicable, remove them from the list. New risks should also be identified and added to the list if necessary.
The Head of Risk and the Compliance Committee each play crucial roles in reviewing risk assessments. These groups oversee the risk management process and ensure that the organization’s risk management strategies remain effective. They report their findings to the Board of Directors or Executive Management.
The Probability and Impact Matrix (mentioned above) is one tool for assessing risk. This tool helps evaluate a risk’s probability and potential impact. Each risk is rated on a scale of 1-5 for both probability and impact, and the product of the two scores becomes the overall risk score. The higher the risk score, the more critical the risk.
The NIST Framework (also briefly mentioned above) is another tool for assessing risk. The framework provides a structured approach to identifying and evaluating risks and guidelines for implementing effective risk management strategies. The NIST framework consists of five core functions: identify, protect, detect, respond, and recover. Each portion of the framework guides managing risks effectively and ensures that all relevant factors are considered.
Annual risk assessments are crucial in maintaining a robust risk management process. It helps to ensure that your organization’s risk management strategies remain effective and that new risks are identified and managed.
Internal Assessments and Remediation
Internal assessments are essential to continuously monitoring risks since they help to identify weaknesses in your organization’s risk management processes and those areas that require remediation.
Remediation is the process of addressing the identified weaknesses and implementing measures to manage those risks effectively. This process can include implementing new policies and procedures, investing in new technologies, and providing staff training.
The remediation process should follow the risk management frameworks that have been selected. The risk owner should ensure that the remediation process occurs and the risk is managed effectively.
External inputs such as regulatory requirements, market changes, and new technologies can also expose your organization to risk and thus should be monitored. Therefore, considering external inputs when assessing risks and implementing risk management strategies is essential. As a result, organizations can minimize risk exposure and protect their assets by taking a proactive approach to risk management.
We encourage businesses to implement a comprehensive risk management process tailored to their needs. By taking a proactive approach to risk management, you can protect your assets and minimize risk exposure.
Real-time risk tracking is essential for any team striving for success. Regardless of the risk domains, Graphite Connect allows risk teams to access live data from third-party sources, enabling them to gain valuable insights into the supply chain.
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