What is risk management and why is it important?

What is risk management and why is it important?
14 min read

Management of risk is the method that involves identifying and evaluating, and controlling risks for an organisation's capital as well as earnings. The risks are derived from many sources, such as financial uncertainty as well as legal and technological problems, errors in strategic management as well as natural disasters and accidents.

A risk management program that is successful aids an organization in assessing the entire range of risks that it's facing. Risk Management Software also analyzes the relationships between risks and the potential effects they may affect the company's strategic objectives.

This approach that is holistic to managing risk is often called enterprise risk management because of its focus on anticipating and analyzing the risks across an organization. In addition to focusing on threats from both sides, enterprise risk management (ERM) stresses the importance of tackling positively risk. Positive risks are those that can increase the value of business or even harm the business if they are not managed. In reality, the goal for any risk-management strategy is not to completely eliminate risk, but to maintain and increase the value of an enterprise by taking smart risk-taking choices.

"We do not manage risks, which means we're not at risk. We manage risks to can determine what risks are worth taking and which ones can get us there and which ones will pay enough of a chance enough to warrant taking risks," said Forrester Research senior analyst Alla Valente, who is a expert in compliance, governance and risk.

Therefore, a risk management program must be integrated with the company's overall strategy. In order to link the two, risk management managers must first determine the company's tolerance to risk -which is i.e. the risk that it is willing to take to accomplish its goals.

The most difficult thing is to decide "which risks fall within the risk appetite of the company and which ones require additional control and actions prior to being considered acceptable" stated Mike Chapple, Notre Dame University professor of IT analytics, operations and telecommunications, in his essay about risk appetite and. risks tolerance. Certain risks will be accepted without need for further action. Other risks will be reduced or shared with, transferred to a different party or omitted entirely.

What is the importance of risk management?

Risk management has probably never been more vital than it is today. The risks that modern companies are faced with have become more complex due to the fast growth of globalization. There are always new risks to be aware of which are usually related to and triggered by the omnipresent use of technology that is digital. Climate change is referred to as"a "threat multiplication" by risk specialists.

A recent external threat that was spotted as an issue with the supply chain at several businesses -the coronavirus pandemicrapidly morphed into a major threat impacting the safety and health of their employees, their ways of doing business, and the ability to engage with customers as well as the reputation of their companies.

Companies made quick adjustments to protect themselves from the dangers that the pandemic posed. However, as they move forward they're facing new risks, such as how to or if they should bring employees back to work What should they do to ensure that their supply chains are less vulnerable, the possibility of a recession, and the conflict in Ukraine.

As the world continues to grapple with these crises, businesses and their board members are taking a new look into their risk-management strategies. They are looking at how they manage their potential risk-taking and looking at risk management procedures. They are considering who should be a part of risk management. Companies that take an approach of reactive risk management -defending against risks from the past and adjusting methods after a new risk is a threat They are now evaluating the advantages of adopting a proactive approach. There is an increasing interest in promoting resilience, sustainability as well as business agility. Businesses are also looking into how artificial intelligence technology and advanced governance Risk and Compliance ( GRC) platforms can help improve the management of risk.

Finance vs. financial sectors. In discussions of Legal compliance, a lot of experts have noted that in organizations which are highly regulated and whose primary business is the management of risk, it is a mandatory task.

Insurance companies and banks such as those mentioned above have for years had huge risk departments, typically led by an chief risk officer (CRO) which is a designation that is not widely used in the financial sector. Furthermore, the risks financial institutions face are likely to be quantifiable and thus can be quantified and easily analyzed using established technologies and established methods. The risk scenarios faced by finance companies are modeled with a certain degree of precision.

In other sectors, risk tends to be more complex and, as a result, more difficult to manage, resulting in the necessity for a systematic comprehensive and consistent approach in risk-management, according to Gartner analyst Matt Shinkman, who leads Gartner's audit and risk management for enterprises methods. "Enterprise risk management programs are designed to assist these businesses in becoming as efficient as they can in taking care of risk."

Traditional risk management vs. enterprise risk management

Traditional risk management is prone to be criticized nowadays, in comparison against the enterprise-wide risk management. Both strategies aim to reduce the risk that can harm businesses. Both purchase insurance to guard against a wide range of risks, from fire-related losses or theft to cyber-related liability. Both are governed by the guidance issued by the main standards bodies. Traditional risk management, according to experts is not based on the understanding and the tools needed to comprehend risk as an integral component of the overall strategies and overall performance.

For many businesses, "risk is a dirty four-letter word, which is a shame," said Forrester's Valente. "In ERM, risk is considered as an facilitator versus the expense of business."

"Siloed" in contrast to. holistic is among the main differences between the two methods in the words of Gartner's Shinkman. When it comes to traditional risk-management systems such as risk management, it is usually the responsibility of business executives who are who are in charge of the departments in which the risk is. For instance that for example, the CIO (or CTO is accountable to manage IT risk, while the CFO is accountable to manage financial risk and and the COO is accountable for operating risk and so on. Business units may have sophisticated processes in place to manage the various risks, Shinkman explained, but companies can still get into problems if it fails to recognize the connections between risks, or the cumulative effect on the operations. Risk management in the traditional sense is often reactive instead of proactive.

"The pandemic is an excellent example of a problem which is easy to ignore if don't have a broad and long-term view of the types of dangers that could impact your business," Shinkman said. "A majority of companies be able to look at themselves and think"I know, we ought to have been aware of the risk, or at the very least contemplated the financial implications of something similar to this prior to it occurred.'"

 Here's a primer on risk exposure and how it is calculated.

In the field of enterprise risk management the management of risk involves a joint large-scale, cross-functional initiative. A ERM staff, which can be just five or less collaborates with the business unit managers and staff to brief them, aid them to use the appropriate tools to analyze the risks, then compile this information and then provide it to the company's board of directors and executive leadership. Being able to build trust with the executives of all levels is essential for risk managers of this kind, Shinkman said.

They tend to have a background in consulting or possess an "consulting approach," he said, and have a thorough knowledge of the workings of business. In contrast to the traditional approach to risk management in which heads of risk usually reports to the CFO the leaders of risk management teams in enterprises regardless of whether they have the title chief risk officer or another titlereport to their CEOs, a recognition that risk is an integral part of the business strategy.

When it comes to the definition of the chief risk officers function, Forrester Research makes a distinction between "transactional CROs" that are typically employed within traditional risk management systems as well as"transformational CROs "transformational CROs" who adopt an approach to ERM. The former are employed in organizations that view risk as a source of cost while risk management is a form of insurance as per Forrester. CROs who are transformational, according to the Forrester vocabulary they have the tagline of "customer-obsessed," Valente said. They concentrate on their organizations' reputation for brand, comprehend the nature of risk as horizontal while defining ERM as "proper quantity of risk required for growth."

Risk-averse is a different characteristic in traditional risk-management firms. However, as Valente observed, businesses who claim to be risk-averse and have a low risk appetite can be not on the right track when it comes to risk evaluation.

"A many organizations believe they've got a good risk tolerance However, does their strategy to expand? Are they developing new products? Are they focusing on innovation? These are all strategies to grow and are with risk." Valente said.

To find out more about the ways that these two approaches differ Check out the tech journalist Lisa Morgan's " Traditional risk management in contrast to. Enterprise risk management What are the differences?" In addition her article regarding the risk management team offers a comprehensive overview of the roles and duties.

Risk management process

The discipline of risk management has released a number of documents that explain what companies must do to control risk. One of the most widely-known resources can be found in that of the ISO 31000 Standard Risk managementGuidelines, which was developed in collaboration with ISO, the International Organization for Standardization, an organization that is commonly referred to as ISO.

ISO's five-step risk-management process includes the following steps and is applicable to any kind of organization:

  1. Find out the risk.
  2. Examine the potential and effect of each.
  3. Prioritize risks in line with the business goals.
  4. Take care to treat (or react to) the risk factors.
  5. Check results and make adjustments when necessary.

The steps are easy The steps are easy, however committees for risk management should not overestimate the amount of work needed to finish the procedure. It starts with a thorough understanding of what makes an organisation work. The ultimate objective is to create a process of determining the risks that the company faces, the potential and the impact of these risks, their relationship to the highest risk the company is willing to take, and the steps are needed to protect and increase the value of the company.

"To look at what could go wrong one must first consider the things that must be taken care of," said risk expert Greg Witte, a senior security engineer at Huntington Ingalls Industries and an designer for the National Institute of Standards and Technology (NIST) frameworks for cybersecurity, privacy and workplace risk, among others.

When it comes to identifying risk, it's important to realize that in essence the term "risk" means risk if it impacts, Witte said. For instance, these four elements must be in place in a negative risk scenario as per the guidance of the NIST Interagency Report ( NISTIR 8286A) for identifying cybersecurity risks in ERM:

  1. A valuable resource or asset that may be affected;
  2. an action source that could affect the asset
  3. an existing condition or vulnerability that allows the threat source to be able to act in a certain way; and
  4. the negative impact that results because of the source of threat using the vulnerability.

While the NIST criteria are for negative risks, similar procedures are applicable to managing positive risk.

 Experts weigh in on how enterprise risk management is evolving.

Bottom-up, top-down. In identifying risk situations that may hinder or advance the objectives of an organization Risk committees often are able to benefit from the top-down approach and then go to the bottom, Witte said. When conducting a top-down exercise management identifies the company's critical processes that are essential to its mission and collaborates with external and internal stakeholders to identify the factors that might hinder them. The bottom-up view begins with the source of threats like earthquakes, economic downturns cyber attacks as well as cyber attacks. Then, it examines the potential impact they could have on crucial assets.

Categories of risk. Organizing risks by categories can be useful in determining the risk. The advice provided in the work of Witte in COSO. Committee of Sponsoring Organizations of the Treadway Commission (COSO) uses the following four categories:

  • Strategic risk (e.g. reputation and customer relations, technological advancements);
  • Financial and reporting risk (e.g. credit, tax, market);
  • Governance risk and compliance (e.g. ethics regulation international trade, privacy) as well as
  • Operational risk (e.g., IT security and privacy supply chain problems, labor issues natural disasters).

Another method for businesses to classify the risks, according to Paul Kirvan, a compliance expert Paul Kirvan, is to group them under one of the following four risk categories for companies including people risks, facilities risks, processes risk, and technology risks.

The last step of the risk identification phase is to have organizations record their findings in an inventory of risks. It assists in tracking the risks in the following four stages of the risk management procedure. A sample of risk registers is located in the NISTIR 8286A report mentioned earlier.


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Waseem Azad 2
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