The 5 Steps of an Effective Risk Management Process
Risks are a part of every organization’s functioning. Every new project comes with new risks, and it is important to identify and mitigate them for the smooth operation of your business. A comprehensive risk management process can help you with this.
This process involves identifying, monitoring, and controlling potential risks that might threaten your employees’ well-being or your organization’s earnings. The risks include data loss, security breaches, workplace accidents, cyberattacks, natural disasters, and more.
An effective risk management strategy, also called enterprise risk management (ERM) enables you to take a holistic look at the risks your organization faces. It is essential to have a strategy in place to anticipate and manage possible risks before they can harm your business. Plus, having a robust risk management plan in place also helps you comply with the law.
ERM offers several crucial benefits including prevention of work-related injuries, agility when challenges arise, efficient resource planning, and a proactive team ready with contingency plans in the event of accidents.
In this article, we will discuss the five steps of the risk management process. We will also outline how to effectively implement and streamline each step in the workflow for maximum success.
Table of Contents
Step 1: Identifying Risks
The first step of the risk management process is to identify all the potential risks your organization might be exposed to.
There are different types of risks such as market risks, environmental risks, and more.
They can be classified into four major categories of risks: hazard risks like accidents, fires, or natural disasters, strategic risks like new competitors or viral negative feedback, financial risks like economic recession, and operational risks such as supplier failure or employee turnover.
Try to identify as many risks as possible and categorize them based on the above four types to streamline your risk management strategy. Some good ways to identify risks include:
- Consulting with industry experts
- Performing audits using smart software
- Leveraging the experience of your team members by asking them to give input about risks they have observed or experienced
- Doing a group brainstorming session
Once you have compiled a list of all possible risks, make a record of them in a project risk log or project risk register. This will help you monitor risks throughout a project. The log serves as an ongoing database of risks in every project. So, it not only helps you control for current risks, but also serves as a historical reference for past projects, making it a valuable project management tool.
In an offline environment, this register is done by hand, but if you have a risk management solution like Pulpstream, you can insert all this information directly into the system. The risk data would then be visible to all stakeholders in the project, making it easy for the entire team to manage threats.
Keep in mind that the risk landscape is constantly evolving, so you might need to come back to this risk identification step regularly.
Step 2: Risk Assessment
After you’ve identified your risks, the next step is to assess them.
Risk assessment or risk analysis is where all the risks compiled in step 1 are analyzed and categorized based on two factors: probability of occurrence and potential impact.
There are also two types of risk assessment: qualitative assessment and quantitative assessment.
Qualitative Risk Assessment
In qualitative assessment, the question, “How critical is the risk?” is addressed by analyzing the probability and impact of the risk. You can leverage your team’s experience or speak to risk experts to determine the probability of a risk event occurring.
To assess the impact the risk might cause, you need to consider how many business functions it affects. Does it bring everything to a standstill or is it just a minor inconvenience? You can classify these high risk and low risk events using a scale to ensure that the assessment is reliable.
Quantitative Risk Assessment
The objective here is to analyze the financial impact of the risk. This helps your team estimate any additional budget that needs to be set aside for the project.
This analysis requires you to evaluate costs not anticipated in the budget by accounting for things like:
- Time loss due to the risk event
- Additional labor costs in case the event occurs
- Workers’ compensation costs
- Additional incident and claims management costs
Both these steps ultimately allow your team to prioritize your resources, focusing more time and money on critical items before getting to the non-critical risks.
If you use a risk management solution, the analysis becomes streamlined. All you have to do is map the identified risks to your organization’s policies, procedures, and processes. The system will evaluate the risks based on the information you have provided and let you know the urgency of each risk.
Step 3: Prioritizing the Risks
Now, it’s time to prioritize the identified risks based on how critical they are. This is done by looking at the likelihood of each risk happening and the impact it might create on the business, and assigning them an appropriate rank.
So, a risk that would cause a little inconvenience but not disrupt business operations much is given a low rank while one that can bring the entire business to a standstill would be ranked the highest.
This step gives you a holistic view of your organization’s risk exposure. More importantly, it helps you identify where you should focus more of your team’s time and resources. Based on this ranking information, you can also create workable solutions to manage each risk so that your operations are not significantly affected during the risk treatment phase.
Step 4: Risk Mitigation
Once you have ranked the risks, the next step is to begin treating the risks in the order of their rank. This is where you create and implement your risk management strategy.
Starting with the highest priority risk, your team can examine possible solutions to mitigate or reduce each risk and choose the solution that is both effective and affordable. While it’s not possible to anticipate and prevent every risk, the above steps should help you identify the changes you can implement to reduce most risks.
Risk Response Strategies
Depending on the nature of the risk, there are four possible response strategies you can implement:
- Risk acceptance: It is impossible to avoid all risks and sometimes, the benefits of doing a particular task outweigh the risks attached to it. So, you just accept that the risk is unavoidable and take no action to prevent it. Instead, you decide to manage the incidents that take place as best you can.
- Risk avoidance: Some tasks come with serious risks. If the task is not critical to your project, you can simply choose not to do it, thus eliminating the risk completely.
- Risk control/mitigation: If it is not possible to totally avoid or prevent the risk, you can reduce the probability that the risk will occur or its impact if it does occur.
- Risk transfer: Some risks are inevitable, like natural disasters or accidents that occur despite all the care you’ve taken. So, you can transfer the responsibility for any consequences of such risks to a third party such as an insurance company.
An effective risk mitigation plan involves treating the risks using the above strategies as efficiently as possible without taking focus away from your business operations. This can be ensured by collaborating with other leaders in your business to incorporate the risk treatment processes as naturally as possible into daily operations.
Using a risk management solution will make this integration easier. A system like Pulpstream can help automate notifications to stakeholders regarding any changes to the mitigation strategy, conduct discussions in a single platform, and provide visibility into any progress being made in implementing the plan.
Step 5: Monitoring the Results
The final step is to document the strategy to ensure that all the planned measures are implemented as intended. But the work doesn’t end there.
Risk management is a continuous process, especially since the risk landscape is constantly changing. So, you need to constantly monitor both the results of your risk control strategy and any new risks that arise, making improvements to your risk management process wherever necessary.
To make your risk monitoring effective, be proactive rather than reactive in keeping track of risks. Events such as changes in regulations or cyber fraud can remain hidden for months after they happen, even if you have a robust risk control plan.
So, you need to continuously monitor what’s going on and thoroughly investigate any incidents that do take place. This would enable you to catch issues and take action to protect your business in a timely manner.
Communication among your team and between different teams within the organization is an essential part of risk monitoring. You need to constantly document, analyze, and share the progress of your plan with all stakeholders.
If you’re doing this manually, you can regularly enter the status of each risk into a document and email the report to everyone involved. This becomes much easier if you use risk management software as it regularly monitors the entire risk framework and displays real time data on an intuitive dashboard. It could also be set up to notify team leads and stakeholders about any changes in the risks or plan.
Streamline Your Operations With a Robust Risk Strategy
In a nutshell, having a robust risk management process in place is critical for smooth business operations. An effective strategy and risk-alert business culture will make your organization resilient and agile when faced with any crisis or major change.
Each step of the risk management process must be conducted with care and attention to detail. You can make your work easier by leveraging software such as Pulpstream’s risk management platform, which can help you automate every step, integrate them all into a single solution, and generate data-driven insights for continuous improvement.
Ready to find out how you can make your risk management process frictionless and hassle-free with Pulpstream? Click here for a free demo.