Risk Management Strategies: the Climbing Rope Your Organization Needs

Would you ever dare to climb a rock without an appropriate rope, harness, self-locking device, and a partner to help you to make your way up and down? Probably not. Even in case you are good enough not to fall the risks are too high to overlook. Although there is such a thing as free solo climbing, only the most advanced climbers who have a great appetite towards risk take it. Operating an organization is not always smooth sailing. You have to bear in mind the dangers that you involve taking as you ascend the ladder of the market. And you need proper equipment – i.e., the right risk management strategies – to mitigate them.

An effective risk management plan can ensure that you can prevent both financial and reputational losses, avoid being out of regulatory compliance, and gain trust.

Promoting compliance of regulations

Risk management strategy is not a choice in some industries. As an example, financial institutions within the EU (European Union) must comply with DORA (Digital Operational Resilience Act) that has stringent regulatory provisions on ICT (Information and Communications Technology) risk management. Non-observance of legal requirements has turned out to be a significant threat. It is not a joke because regulators are not afraid to fine the violators. In the case of Equifax, the company was required to pay a fine of 575 million dollars because of the loss of personal and financial information of 150 million consumers because their database was vulnerable to exploitation by hackers.

Eliminating reputational losses

The operations center of Delta Airlines was struck out five hours in 2016. That cost the company 150 million dollars because the airline was forced to cancel approximately one thousand flights and release another one thousand. It is one of the examples of risk management that is not associated only with losses. Delta had been marketing itself as an airline that is always on time and one that cancels. Arguably, reputational losses are even more expensive to the airline as compared to cancellation and grounding of flights.

Securing the bottom line

When materialized when organizations are taken by a surprise, they may cost an arm and a leg. The consequences of a breach of data can result in millions of fines. Sudden failures or unavailability of the service translate to revenue loss. Consider compliance risk as an instance. Meta (Facebook) was the first company to pay a fine of 1.2 billion euros due to the violation of the EU data protection rules.

Preventing problems before they cause havoc

A good risk management approach is not limited to risk management. It equally establishes the structure of determining the actual risks realized and dealing with them before they are in a position to result in significant financial losses. As an illustration, it may include assembling a powerful automated system of anomaly detection that would allow detecting possible security breaches at an early stage.

Making customers and investors trust us

An effective risk management framework sends a clear signal to your investors; you have everything under control. Having low exposure to risks and appropriate management of inevitable risks safeguard their investment against the loss of finances and reputation. The more likely customers to trust a company that handles its risks, in particular, personal data, is provided. Securing customer information is the most important aspect that inspires confidence to a business among the consumers.

Before you dive into selecting risk management methods, you need to establish an enterprise risk management team (if you haven't yet). This group will be constantly detecting and monitoring risks, handling them, and optimising the strategy according to the emerging risks. An enterprise risk management team brings together:

• Board of directors, either as a representative or board-level committee gives corporate supervision to the team
• The team is led by the chief risk officer (CRO) who oversees on the strategy implementation and continuous improvement
• Chief operating officer (COO) offers the birds-eye perspective of the entire day-to-day operations and assists in recognizing the risk management gaps and eliminating risks
• Chief financial officer (CFO) provides input in regards to risks to revenue and profitability and insurance risks (where applicable) and risk to revenue and profitability
• Chief legal officer provides their opinion on the legal issues of the organization and the possibility of liability
• Chief compliance officer sees to the complete regulation compliance to board, worker safety through cybersecurity
• Chief information officer (CIO) manages IT risks and improves business continuity in case of their occurrence
• Chief human resources officer (CHRO) takes care of workforce risks
• Chief communications officer provides an insight into the reputational risks that may occur
• The departmental heads who are assigned as the owners of the risks give a practical idea about the risks in their respective business departments

Risk avoidance, reduction, sharing, transfer, and retention are the most widely used risk management methods.

Risk avoidance

Such a risk management strategy implies the absence of the activities with high risks and potentially harmful to the organization. What is a common indicator of the need to use it? Determine whether the risks are not exceeded by the possible benefits. Alternatively, threats can exist to cause an existential threat to the organization.

Loss prevention/reduction of risk

Some of the risks cannot be eradicated. As an example, one cannot completely exclude the threat of adverse weather conditions. You can do nothing but prevent or reduce losses. As an example, risk mitigation can be achieved by placing flood vents and sump pumps to reduce the damages of flooding. Risk minimization in the healthcare sector is normally performed as preventative care.

Risk sharing

Can't avoid or reduce risk? Sharing risks can mitigate exposure, instead. In this risk management approach, in case of occurrence of the risk, the losses are shared among various parties and the impact of each party is mellowed. A good example of risk sharing is shareholding: in case the company does not make a profit, the losses are shared among the investors of the company.

Risk transfer

This is a risk shifting strategy where the risk is contracted out to a third party. It is an appropriate method of risk management where the risk is too big to an extent that organizations can manage the losses. Risk transfer usually refers to insuring against natural calamities or litigation. A service contract also allows you to delegate risk to a subcontractor.

Risk acceptance/retention

When all the other risk management strategies have been exhausted, risk acceptance is the final option on the table. To accept risk implies a) it is impossible to get rid of the risk, or b) the expenses of using alternative strategies exceed the gains. In order to apply risk retention, you have to lay aside the budget and other resources that would be needed to address the effects of this residual risk. This risk may be in form of regular customer complaints or minor operational glitches e.g.

An insurance company is also prone to various risks as compared to, say, a tech startup. Analyzing their potential impact typically involves a combination of the following risk assessment methods.

Quantitative risk assessment

Quantitative risk assessment allows you to put a number on each risk's potential cost and prioritize risks accordingly. The reason why quantitative risk analysis is enticing is because of the fact that its results are measurable and objective, are easy to understand and to compare. However, quantitative risk assessment isn't a one-size-fits-all solution. There are organizations that might not have quality information in order to get estimations on the possible losses. Some of the effects like reputational losses may not be measurable at all. Common quantitative risk analysis techniques include:

• Three-point estimate: Coming up with the best projections of best, most likely and worst cases to come up with the best projections
• Decision tree analysis: It is a technique that involves drawing a diagram that illustrates the possible effect of decision-making options
• Expected money value: Determining contingency money and time
• Sensitivity analysis: Estimating the risk, which will most significantly affect a process or a project
• Monte Carlo simulation: Coming up with the probability of various results in a process that entails random variables
• Fault tree analysis: Establishing a diagram to determine the factors that may cause system failure

Qualitative risk assessment

In this risk assessment technique, you can identify the places where there is a need to analyze further and practically manage them. It is engaging individuals within an organization in a discussion about risk and its possible effects. The qualitative methods are:

• Keep It Super Simple (KISS): Ranking the risk events on a simple scale (very high) to (very low)
• Probability/Impact: Ranking the chances of occurrence of a risk and its effect on 1 to 10 or 1 to 5 on a two-dimensional graph

Qualitative risk assessment takes into account the factors that are hard to quantify. Conversely, it is based on personal feelings and views and might be contaminated by bias.

Asset-based risk assessment

This method will recognize the risks that can impact the assets of the organization which include equipment, property, and intellectual property. It involves:

• Preparing a list of all the available assets
• Evaluating the efficiency of the current risk controls
• Seeking the assistance of asset owners to enlist potential risks against every asset
• Besides identifying risks, prioritization of risks in terms of probability and the intensity of the impact is to be done

While asset-based risk assessments produce easy-to-understand results, they do not consider certain risks inherent to the organization's policies or processes.

Vulnerability-based risk assessment

This method is concerned with exposing the weak points of every organization or system. Vulnerability-based assessments involve: instead of beginning with a list of assets of the company.

• Identifying the existing organizational/system weaknesses and inefficiencies
• Determining the way in which those weaknesses might be used
• Evaluating the possible effect each exploit is likely to have

Although the method offers a more balanced perspective of risks, there exists one drawback; it relies on known vulnerabilities. Thus, the loopholes that have still not been addressed will still be threats.

Selecting the right combination of risk management strategies requires a crystal-clear understanding of the organization's risks and their potential impact. That is why, there is no way to supply universal risk management advice concerning this or that strategy. With that said, in some instances organizations prefer to adopt some specific strategies:

• The risk avoidance strategy should be adopted in cases where the potential effect of the risk is greater than the gains of the activity
• Risk reduction is an appropriate option when there is no option of not doing it, but still, there can be risk control measures
• The sharing of risk is associated with projects that are too big or too complicated to be managed by one party
• Risk retention is common in risks with low impacts that are normal in day to day operations
• Shifting risk is usually used when dealing with high impact, large-scale risks, which would be prohibitively expensive in an organization to handle

The level of risk, risk appetite of key stakeholders and resources will determine the strategy choice you adopt, however.

The process of risk management has five steps, namely, identification of risk, risk assessment, risk treatment plan, implementation, monitoring and refinement.

1. Risk identification

The first thing you must do is to have an overview of all the possible risks that your organization is exposed to. Document all the identified risks in a document such as a risk register – a database of risks, their likelihood and potential impact, risk owners, and selected risk treatment strategy. In order to determine all possible risks:

• Communicate them with the frontline workers as well as top management through surveys, brainstorming and interviews
• Research on historical occurrences of risks and find their causes
• Extract risk insights with help of historical data in the form of data analysis

In these seven categories of risk, take into account internal and external risks:

2. Risk analysis

It is time now to determine the level of severity of each of the identified risks. For each risk, determine:

• Risk event in the event that it happens will have a negative impact on the organization
• Internal and external factors that can cause the event of a risk
• Probability of occurrence of the risk event
• Impact of the risk event
• Timeframe, or the speed with which the risk occurrence can take place

You can aggregate your findings in a risk matrix with the risk likelihood on one axis and impact severity on the other. When you have done the assessment, then you are able to categorize the risks as most severe to the least severe.

3. Risk treatment plan

In dealing with risk, you must decide on your strategy first, avoidance, reduction, sharing, transfer, or retention. You can combine multiple types of risk management strategies when addressing the same risk. Subsequently, give a risk management plan on each risk, the risk management activities, policies and administrative controls to reduce the risk. Choose the right risk measurements to follow, as well.

4. Risk management implementation

Having the plan set, it is high time to implement the plan. Ensure to also communicate risks to your key stakeholders so that they know about it and adequately participate in risk management processes. Besides this, introduce a system that will monitor the risk metrics that you determined in the previous step. You also can compute a data analytics solution to extract insights out of such information.

5. Monitoring and refinement

Risk management is not a project; it is a process that should be carried out continuously. To manage risks efficiently:

• Monitor risk measures continuously, e.g. the liquidity ratio or the equipment downtime
• Regularly review the risk register, reassess risks, and keep an eye out for emerging risks
• Keep a constant watch and implement risk mitigation
• Test and revise your mitigation plans and controls
• Get advice on your risk management practices with key stakeholders
• Conduct regular internal audits

Analytical and strategic thinking, interpersonal and leadership skills, as well as regulatory and financial knowledge are the most valuable skills in risk management.

Analytical thinking

The risk management involves the analysis of different data. An effective risk manager is able to take wise decisions basing on the gathered information and taking the quantitative and qualitative factors into account.

Strategic thinking

Risk managers must have a comprehensive view of the strategy of a company and the role that the risk management plays. They cannot perform optimally without having the big picture and identifying opportunities that their counterparts might have overlooked.

People and communication skills

Risk management needs very much cross-functional collaboration to be successful. The role of the risk manager is to ensure this cooperation of the major stakeholders and the acquisition of feedback.

Individual management and leadership competencies

At one time or another, risk managers are forced to implement risk management practices within the organization. This involves having a sense of how to encourage the people to stick with mitigation efforts and create an honest discussion on risks.

Regulatory knowledge

Any risk management method will most probably be controlled by various regulations. Thus, risk managers must understand the legal risk management requirements and ways of making them practical.

Financial knowledge

Risk managers are expected to measure risks nearly on a daily basis. It cannot do so without having extensive financial expertise as to the cost of network outages as well as the loss of money due to equipment failure.

In conclusion, just as a climber relies on ropes and harnesses for safety, a company must employ robust risk management strategies to navigate potential pitfalls. Be it avoiding, reducing, sharing, transferring or retaining risk, either approach is critical to mitigating against financial, operational, and reputational losses. This holistic strategy will guarantee that companies will have the ability to address vulnerabilities in advance and be resilient, which will guarantee long-term success and sustainability.