Risk Management refers to the process to identify, analyze and protect the risk origins. It is important as it helps to strengthen the risk of business with a few of the essential gadgets and can also help to develop potential risk solutions.
Every single activity has its impact, Similarly in each sector when any new concept is developed it too has the risk. Then the question arises of why and how these risks will be fixed?
There are 3 major types of Risk Management such as:
a. Business Risk
These risks are most probably found in an organization to boost the value and profit. In an organization, these kinds of risks are treated as a priority.
b. Non-Business Risk
These risks don’t lie under an organization. The origin point is out of political and economic unbalance.
These risks include the kind of financial loss to an organization. Financial loss can happen due to increase in price, fluctuation in the share market, change in taxation.
d. Other Risk
Other risk management such as educational risk management, disaster management, cybersecurity risk management, legal and compliance risk are also popular.
Risk Management Definition & Framework
Risk management stands as an action (preventive or corrective) initiated to eliminate the risk involved in the business/organization, analyze risk and mitigate the risk to avoid losses arising from potential risk.
It is the operation of recognizing and managing threats to an organization’s finances and business growth. The root of these threats originates from uncertainty in finance, legal responsibility, strategic errors during management, natural calamities, political factors, environmental hazards and other factors.
Risk Management Plan
The risk management plan is a way of documentation used for the defining response towards risk, estimation of impacts, and how to look after the risks. Steps included in risk management plan:
a. The beginning step is to select the framework and ways used for the function like analysis of risk and assessment of risk.
b. Maintain the risk record such as identification of risk, solution of risk, etc in the form of documentation.
c. Classify the risk into its categories such as statutory and regulatory risk, partners and supplier risk or in appropriate risk category.
d. Manage your time regarding risk management activities so that you will have to face less of its impact.
Risk Management Process
The Risk Management Process is structured to take measures for risk reduction. It is necessary to understand the cycle for better risk handling:
a. Identification of risk
Before proceeding with any solution one must have prior knowledge about the factor of origin means types of risks, the origin of risk. Some of the risk types are legal risks, environmental risks, regulatory risks, market risks, etc. Risk related to interested parties/stakeholders shall be considered in the risk management plan.
b. Analysis of risk
After identifying risks it is required to be analyzed. It is dominant to determine the scope of risk and recognize the connectivity of risks and their effect. To get a better analysis of risks an organization must have a risk framework including documents, policies, procedures, and business protocols.
c. Estimation of risk
Estimation depicts that after anything risks it is needed to be prioritized and managed. Risk solutions are categorized based on their seriousness.
d. Risk Mitigation
Treatment of risk is performed during this step within the guidance of the respective experts. All the risks will be eliminated or diminished. All stakeholders will get notified about the risk and the kind of suggestion they can through email, documents or calls.
e. Risk Monitoring
It is a bit difficult to diminish risks entirely and hence it is present slightly. There are two prime risks required to be focused on market and environmental risk.
Risk Management Framework
In this section, we will discuss some of the best risk management framework as well as techniques.
a. Root Cause Analysis
This root cause analysis is a structural way to recognize the elemental risks discovered in specific projects. It can be also implemented after the identification of the risks within a specific project. It is not only responsible for better management along with this it should be protective.
Read more about root cause & data analysis tool by clicking following links
b. Risk Register
The Risk Register identifies and explains the risks. Through this tool, a project manager can rank their risks by priorities and they can also determine the responsible person for the management of risks.
c. Risk Data Quality Assessment
Risk Data Quality Assessment tool project managers get ease to work and utilize the data identified for the risk evaluation. While using this tool one can get the knowledge of precision, quality, unification, and more.
Brainstorming approximately stands as the reviews of discovered risks with the help of project documentation, visiting previously collected data, and some of the issue resolving criteria learned from past experiences.
e. SWOT Analysis (Strength, Weakness, Opportunities, Threats)
The SWOT tool works as described in its acronym. First, identify the strengths and manage its profit into your project to resist risks, now recognize the weak points that can be altered within the project to get risk-free, opportunities fixes the positivity of risk and threats claims the negative ones.
6.Risk Management Solutions
Risk Management Solutions is an automated system that permits an organization to handle the risks effectively to lessen them with appropriate measures.
The solution can be categorized in the following segments such as:
1. Always prioritize the risks to handle them.
2. Discuss or consult with experts of specific risks management.
3. Do it regularly to get more updates about the risks.
FMEA: Failure Mode Effect Analysis
FMEA helpful tool to identify, assess, mitigate and control risk (failure mode). To read more about FMEA please click the link (FMEA word)
Business continuity Plan (BCP)
Business Continuity Plan (BCP) covers an organization’s regulatory requirements, legal and compliance requirements, processes employed, organization structure and size, stakeholders (interested parties). Refer to ISO standard ISO 22301 to understand more about Security & Resilience: Business Continuity Management Systems Requirements.
PDCA approach is a straightforward and effective tool for risk management. PCDA cycle cover, Plan (define and establish), Do (implement and operate), Check (regular review & monitoring), Act (take action and improve).
Conducting internal and external audit helps to assess or identify new potential risks in the business process. Examples of audits are safety audit, Quality management system audit, occupational health, and safety audit, environmental audit. To understand more about the audit, please click on this link (what is audit)
7.Risk Management Example
There are so many examples related to risk management considering most of the industrial sectors. Let’s go through some of them:
- One of the prior industries possessing risk in the retail industry as it has some external factors such as customers. If they will not maintain the production of goods on the customer demands it may involve a huge risk.
- Suppose if a manufacturing industry wants to produce a product but is not sure how it will respond in the market and hence they need to do proper risk analysis of the product to assure the reputation, dignity, and trust among people for sustainability.
- Risk Management has huge significance in the running sector called cyber security as we are much aware that it contains valuable assets as well as the integrity of an individual. If there comes any risk, it can affect at large levels.
- There is one more risk mostly found among all the industries called market risk. It means the industries are not assured whether the product going to be launched will make a profit or loss.
8.Risk Management of Project
Risk Management of a project stands for the recognition, evaluation, and prevention of the risks that can potentially affect the project.
The Risk Management of a project allows you to get a vision of the project objectives and to figure out the threats involved in the project.
Ways to keep distance from risks are:
a. Begin with a plan means firstly discover the strategic plans to handle the risks effectively. It may take some time to finalize the fruitful planning. It should include the way of recognizing risks, risk suffering capability, way of tackling the risk, and the way it will be interpreted.
b. Always maintain your risk register that should include the whole possible way to affect your project so that you can begin to resolve it at an earlier stage.
c. Rather than being instant reactive to risks, normalize the behavior of risks without looking for solutions. Firstly find the origin or root of risks that will lead to the fastest and efficient way to handle the risk. Develop the skills related to project management for enquiring and providing the optimal case of solutions.
9.Risk Management in Finance
Risk Management in Finance is the way to protect or enhance economic status in an organization with the help of financial mechanisms. These financial mechanics ensure the management and exploration of risk. The risks can be operation, credit, market, business, legal, and much more.
Financial risk management also follows the same process and planning for risk handling.
10. Risk Management of Cyber Security
As we know that digitalization is at its peak, and no one here is unaware of it. Each of us is saving our data online and hence it can cause the risk of security issues, but when we apply protocols of risk management it can be helpful to manage the risks to some edge.
11. Risk Management Strategies
After the determination of risks, it is required to fix them to be protected from further issues. Here are some of the strategies designed to handle risks. Risk Management Strategies are the prime section of the risk management process. There are 4 types of strategies capitulated for risk management, named as:
a. Accepting Risk
Accepting the risk means for some clause of time it is left untouched, the most dominant reason behind this can be saving money. For example, it takes more money to fix the risk than to neglect it, so one should leave the risk but after checking its long-term effect.
b. Transferring Risk
In this scenario, the risk isn’t fixed while the responsibility of the risk is transferred from one organization to another. It may be any external party who will be accountable for the risk solutions.
c. Avoiding Risk
Avoiding Risk stands as denying the risk before going through it. Suppose you decided to invest but even analyzing its profit or risk you denied it just because of some perceptions you had. It’s not an option to avoid the risk as it can decrease the positive opportunities.
d. Reducing Risk
Reduction of risks simply means lowering the impact of risks. After reducing an organization can feel less pressure and will be able to focus further on protocols freely.
Overall risk management can be the successful step to enhance the value of an organization, thoughts, ideas, etc. Risk Management can lead to the production of ideal products if applied significantly.