Having a strong approach to risk management is more important now than ever in today’s dynamic risk environment. Following these ten types of risk management strategies can better prepare your business for a volatile risk landscape in 2021 and beyond.
81% of audit and risk professionals polled by AuditBoard in October 2020 believe risk will continue to be dynamic & unpredictable in 2021.
McKinsey found that when banks shut branches and corporate offices, it altered how customers interact with them, forcing changes to long-held risk-management practices in order to monitor existing risks and guard against new ones.
Regardless of industry, how quickly and effectively risks can be identified and managed will determine how well companies and institutions will recover and rebuild — and this requires rethinking risk management strategies. As organizations increase their focus on identifying, mitigating, and monitoring risks in response to an ever more volatile risk environment, you may have questions about who is responsible for developing a risk management strategy and what are the different risk management strategies? Here’s everything that you need to know to better address today’s top risk areas.
What Is a Risk Management Strategy?
A risk management strategy is a structured approach to addressing risks, and can be used in companies of all sizes and across any industry. Risk management is best understood not as a series of steps, but as a cyclical process in which new and ongoing risks are continually identified, assessed, managed, and monitored. This provides a way to update and review assessments as new developments occur and then to take steps to protect the organization, people, and assets.
Risk identification can result from passively stumbling across vulnerabilities or through implemented tools and control processes that raise red flags when there are potential identified risks. Being more proactive rather than reactive is always the best approach to reducing risk points.
Once potential risks have been identified, each risk should be assessed to determine the likelihood of it becoming a concern, its level of severity, and the probable impact — this helps audit teams prioritize each risk. Whether your audit team is conducting a risk assessment for Sarbanes Oxley (SOX) or focusing on other types of risks, your assessments should be systematic, documented, and, depending on your business, reviewed at least annually. How often risk assessments are completed will differ, depending on the size and complexity of each business.
Responding to Risks
After assessing risks, the next part of the process involves developing and implementing treatments and controls, enabling the organization to address risks appropriately and effectively deal with each risk in a timely manner.
Risk monitoring is the ongoing process of managing risk by tracking risk management execution, and continuing to identify and manage new risks. Monitoring risks enables prompt action if the likelihood, severity or, potential impact of a risk exceeds acceptable levels.
Why Is Having a Risk Management Strategy Important?
Project and operational risks are not uncommon to most businesses, but having risk management processes and strategies are essential in identifying your company’s strengths, weaknesses, opportunities, and threats (SWOT) — also known as conducting a SWOT analysis. There are many other benefits to effectively managing risks.
1. Operational Effectiveness and Business Continuity
No matter how well prepared your business is, operational risks can surface at any time — and from sources that you may not have been aware of in the past. Risks can take the form of a new cybersecurity threat, a supplier or service provider that’s no longer able to service your company, or an equipment failure. With all the moving parts both in a company and outside of it that have an impact, having an established risk management process and a strategy in place that allows you to ensure internal controls to prevent fraud are in place — or to deal with other types of risk as they arise.
2. Protection of Your Company’s Assets
Whether it’s physical equipment, supplies, or information, protecting your company’s assets is imperative. A recent report by IBM shows that over 8.5 billion records were compromised in data breaches between April 2019 and 2020 — with the average cost of a mega-sized data breach being $3.86 million US. In the one-year period ending April 2020, 80 percent of thefts were customer-related personally identifiable information (PII). This makes establishing a solid and actionable risk management strategy imperative from a business insurance perspective.
3. Customer Satisfaction and Loyalty
Your company’s logo, brand, digital presence, and reputation is also an asset — and your customers take comfort in seeing and interacting with them daily. When your business has a well-thought-out and developed risk management plan and acts on it, your customers can maintain a sense of security and confidence about your reputation and brand. Your risk strategies and processes help you protect your brand and reputation by safeguarding these assets. It also ensures that customers can maintain faith in your ability to be there and deliver the products and services to which you’ve committed. The result is a higher degree of customer satisfaction and loyalty.
4. Realizing Benefits and Achieving Goals
A significant part of finishing projects on time and achieving the intended goals relies on how effectively risks are managed. Risk management identification, assessment, and management practices expose vulnerabilities faster — and allow your company to remove projects and activities that simply don’t produce a return on investment. This increases the chance of achieving your expected project portfolio and wider business performance and reaping the anticipated benefits.
5. Increased Profitability
The bottom line for most businesses is remaining profitable. Often when something like a breach occurs, there is a substantial financial impact — and it usually involves tedious hours working with legal and insurance teams to conduct lengthy investigations. Managing market, credit, operational, reputational, and other risks is vital to keeping your company’s bottom line healthy.
What Are 4 Examples of Common Risk Responses?
Managing risks can involve applying different risk responses to deal with varying types of risk. Not every risk will warrant the same response. You’ve likely heard the adage, “Avoidance is not a strategy.” Well, believe it or not, when it comes to risk management strategies, avoidance is a common risk response — along with reducing, accepting, and transferring. Here’s what you need to know about each risk response and when they might work best.
1. Avoiding Risk
Avoidance is an option that works to remove the chance of a risk becoming a reality or posing a threat altogether. If a product isn’t working well but doesn’t present any potential risk to the health or safety of employees or the company then avoiding the risk may be the best option. One example may be avoiding the use of a piece of faulty equipment — but only if it isn’t needed and it doesn’t impact performance, productivity, or safety. Avoidance shouldn’t necessarily be used with frequency or for longer-term threats. Eventually, this response should be re-evaluated to find other sustainable risk responses that address underlying issues.
2. Accepting Risks
Sometimes avoidance isn’t an appropriate response, and acceptance may be the better practice. When a risk is unlikely to occur or if the impact is minimal, then accepting the risk might be the best response. Timing also plays a role — it could be that a risk doesn’t pose any imminent concern, or it won’t impact your company’s strategic outlook. One example might be a change to vendor pricing or delivery down the road. It’s important to keep re-evaluating these types of risks periodically: their impact on your company and its projects could change.
3. Mitigating Risks
Mitigating risks is the most commonly discussed risk response — however, it isn’t always practical or possible. It may be the best option if a risk poses a real threat or problem, and avoidance or acceptance won’t suffice. If a risk creates a negative impact and one that could be costly to your company, employees, vendors, or customers, then that risk should be mitigated. This means identifying the risk, assessing all possible solutions, devising a plan, taking action, and monitoring the results.
4. Transferring Risks
There will be times when challenges or issues arise and you or your team may not be able to avoid, accept, or mitigate them. One example may be a lack of expertise or training required to address the risks. In this case, it may be a good idea to outsource or transfer the risk to another party — sometimes in-house, while other times it might warrant help from an external third or fourth party.
Who is Responsible for Developing a Risk Management Strategy?
Determining who will be the best person or function to identify, assess, and develop a risk management strategy won’t necessarily be the same each time — it will depend on the scope, nature, company structure, complexity, resource availability, and team capabilities. So who is responsible for developing a risk management strategy? It might be the responsibility of a risk management committee member, an audit team member, a project manager, a risk specialist, or someone else – like an external consultant. When deciding which direction to go, other things to consider include:
- The drivers and benefits behind developing a risk management strategy.
- The end-to-end process, from initiation to completion.
- Other parties who can bring additional insight and value.
- How and where to document the risk management strategy.
- Risk management software and tools that can simplify and streamline work.
- Conducting a formal review of the findings.
- Timing for presenting the findings.
What are the 10 Types of Risk Management Strategies to Follow in 2021?
It’s important to know that there are many different risk management strategies, each with its own benefits and uses. Here are ten types to follow in 2021.
Type 1: Business Experiments
This risk management strategy is useful in running ‘what-if’ scenarios to gauge different outcomes to potential threats. From IT to marketing teams, many functional groups are well versed in conducting business experiments. Financial teams also run experiments to gauge return on investments or assess other financial metrics.
Type 2: Theory Validation
Theory validation strategies are conducted using questionnaires and surveys of groups to gain feedback based on experience. If a new product or service has been developed or there are enhancements, it makes sense to get direct, timely, and relevant feedback from end users to assist with managing potential challenges and design flaws, and thus better manage risks.
Type 3: Minimum Viable Product Development
Developing complex systems that offer nice-to-have features isn’t always the best route. A good risk management strategy considers building software using core modules and features that will be relevant and useful for the bulk of their customers — this is called a Minimum Viable Product (MVP). It helps to keep projects within scope, minimizes the financial burden, and helps companies get to market faster.
Type 4: Isolating Identified Risks
Information technology teams are used to engaging with internal or external help to isolate security gaps or flawed processes that might leave room for vulnerabilities. In doing so, they become proactive in identifying security risks ahead of an event rather than waiting for a malicious and costly breach to occur.
Type 5: Building in Buffers
Whether it’s a technology or audit project, project managers recognize the need to build in a buffer. Buffers reduce risks by ensuring initiatives stay within the intended scope. Depending on the project, buffers may be financial, resource or time-based. The goal here is making sure that there are no surprises posing unforeseen risks.
Type 6: Data Analysis
Data gathering and analysis are key elements in assessing and managing various risks. For instance, qualitative risk analysis can help identify potential project risks. Conducting a thorough qualitative risk analysis helps to isolate and prioritize risks, and to develop strategies to address, monitor, and re-evaluate them.
Type 7: Risk-Reward Analysis
Conducting an analysis of risks versus rewards is a risk strategy that helps companies and project teams unearth the benefits and drawbacks of an initiative before investing resources, time, or money. It’s not only about the risks and rewards of investing funds to take on opportunities — it’s also about providing insight into the cost of lost opportunities.
Type 8: Lessons Learned
With every initiative or project that your company does or doesn’t complete, there will inevitably be lessons that can be learned. These lessons are a valuable tool that can significantly reduce risks in future projects or undertakings — but lessons are only useful if teams take the time to document them, discuss them, and develop an action plan for improvement based on what’s been learned.
Type 9: Contingency Planning
Things seldom go as planned, and while having a plan is great, it’s seldom enough. Companies need to plan to have multiple plans or options based on various scenarios. Contingency planning is all about anticipating that things will go wrong and planning alternate solutions for the type of risks that may surface and foil your original plan.
Type 10: Leveraging Best Practices
There’s a reason best practices are mentioned under risk management strategies. Best practices are usually tried and tested ways of doing things — and while they may differ from industry to industry and project to project, best practices ensure companies don’t have to recreate the wheel. Ultimately this reduces risks.
Effectively managing risk has always been critical for success in any company and industry — but never more so than today. Being able to identify and properly assess risks reduces missteps and saves money, time, and valuable resources. It also clarifies decision-makers and their teams and helps leaders recognize opportunities and the actions they need to take. An important part of your risk strategy should also involve managing your company’s risks by using integrated risk management software that facilitates collaboration and visibility into risk to increase the effectiveness of your risk management programs. Get started with RiskOversight today!
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