How does risk management work?

All businesses have a grey area of unexpected and unforeseeable risk. This failing to be aware of this element of the unknown can be devastating to the everyday operations of your business. The best defence is always to be prepared. That's why having solid risk management plans are a crucial element to consider in your overall business planning.

1. 3 Basic Aspects of Risk Management

There are 3 basic aspects that encompass risk management:

1. Identification of possible/probable risk factors
2. Analyzing the root of the risk and the effects it can have on your operations
3. Responding to the risks in an organized, effective and timely fashion

The main goal of risk management is to minimize risks by reviewing all potential areas of danger before an incident occurs. This process employs a proactive rather than reactive approach to potential future risks.

2. Common Risks

So, what exactly is a “risk?” Well, the list is endless. All aspects of how a business is run, what products and software are used, the geographic location of the company, critical staff positions—all of these elements and more may be vulnerable to risk. Some of the more common examples of risk include:

1. New software/applications
2. Legislation
3. Changes in regulations
4. Natural disasters
5. Social/economic climate
6. Lawsuits and legal violations
7. Vandalism
8. Cyberattacks, viruses, malware
9. Inflation
10. Too many projects taken on at once
11. Poor organization of projects/employee delegation
12. Not enough resources to meet needs
13. Misinformation/misunderstanding amongst team members
14. Lack of communication
15. Not taking into account customer feedback
16. Lack of planning/no clear plan

3. Risk Management Techniques

Once a possible risk is identified, structuring a risk management plan can best be broken down into four steps.

A. Avoidance 

Steering clear from potential risk is obviously the most effective defence. Once you know the risks associated with certain practices, activities, processes, or software, you can make a more informed decision as to whether or not the risks outweigh the benefits.

While it seems easy in theory, it isn't always the case. As we know, sometimes with risk comes reward, and total avoidance of all possible risks can definitely have a negative effect on your company's bottom line. There is definitely a level of weighing the pros and cons when it comes to applying this technique.

B. Mitigation

Because total risk avoidance is not always a sound or feasible option, mitigation is a great secondary technique of risk management. If there is a potential risk in an activity, process or software, but avoidance isn't an option, rolling it out in stages can help prevent—or at least minimize—the potential threat. Being aware of what might go wrong gives you a head start in mitigating any damage.

Steering clear from potential risk is obviously the most effective defence. Once you know the risks associated with certain practices, activities, processes, or software, you can make a more informed decision as to whether or not the risks outweigh the benefits.

C. Transfer

Outsourcing areas that present as a potential risk to professionals can eliminate a lot of the stress and headaches that come with trying to balance the threat of the unknown in-house. This is especially true when it comes to IT services. Professionals in the field have the knowledge and the know-how to take proactive measures to protect businesses from cyberattacks and online extortion schemes. Transferring the responsibility for potential risk is an especially good option if the risk is in a field or industry that isn't within your expertise.
 

D. Acceptance
 

Risk acceptance means that your business has taken into account the presence of the risk, has made financial and operational accountability for the potential risk, and deemed the probability of the rewards to outweigh the possible risk. Accepting that something could go wrong, and taking the steps to ensure your business will withstand the effects of the risk, is often the only avenue for certain elements of your business.

4. Risk Management is the Best Defence

When running a business, the possibility of risks is inevitable. Risk management is crucial in controlling the level of risk and the effect it has on your business. While eliminating any and all risk is unlikely, taking the proper measures to form a solid risk management plan is the ultimate defence—and it can make or break your business continuity and disaster recovery.

If you're concerned about risk management, CITI can help. Get in touch with us about our risk management plans.