Risk management methodologies are essential to identifying, analyzing, and managing business growth risks.
Risk management is defined as the process of identifying, analyzing, and addressing financial, operational, technological, and legal risks that can impact business growth. This article explains in detail what risk management is, the typical process, and the tools used.
Risk management identifies, analyzes, and addresses financial, operational, technological, and legal risks that can impact business growth.
A risk is a situation involving exposure to harm or loss. The concept of risk has been part of human life since the beginning of time. The term ‘risk’ has been in our lexicon since 1621.
In the beginning, businesses analyzed risk at an individual or transactional level. Risk management officially began to be studied as a separate subject after World War II. It is now an essential component of organizations, brands, and governments.
In an organizational context, risks are not as simple as threats that lead to losses. Any business must take a certain amount of risk to expand or enter a new market. Risk management is about an organization being aware of all possible scenarios’ possible outcomes. It allows the business to evaluate how much risk it can afford and which risks must be eliminated.
Risk management teams analyze and predict possible events that may lead to risk. They assess the magnitude of impact and the likelihood of the risk occurring.
There are several risks to be considered in every risk management activity:
Risk management aims to develop an ongoing process for assessing and addressing risks. These risks are documented with the intended plan for monitoring and managing them.
It’s a volatile time to grow a business right now. Technological advancements come fast and hard. Smart, dynamic adaptation of this technology is one of the most significant factors that sets a business ahead of the competition. An essential part of this strategy is risk management. Sometimes, it just doesn’t make sense for a business to bring in new hardware when it only makes a negligible difference in the customer experience and the profit margins.
Businesses today are also more vulnerable to the effects of climate change. Flash floods and wildfires now occur in regions that they never before had to comprehend at this scale. The COVID pandemic shuttered some companies, while others had to pivot their operation modes completely. Disaster recovery plans (DRPs) are a direct result of risk management.
Compliance regulations are fast catching up with the demands of more innovative and cheaper technology in all industries. Standards like HIPAA in the medical industry require that hospitals and laboratories gauge privacy and security risks and address them. The cost of HIPAA violations can go up to $1.5 million annually.
A robust risk management process reduces costs. It informs decisions at multiple levels and strengthens the incident response. Most importantly, it gives companies the confidence to pivot as necessary.
The risk management team is built with stakeholders across all levels and departments. Senior leadership must be involved in tweaking the business strategy, including the CEO, CFO, and CIO. Programmers, architects, and DevOps teams provide insight into existing technology and how additions or modifications can disrupt this system. Accounting and finance team members give financial risk specifics. Risk management teams will also need to involve public relations personnel to evaluate the impact on the company’s brand.
The chief risk officer (CRO) leads the risk management team. The CRO works directly with the organization’s leaders and business unit leads. Most general staff, like programmers, are not permanent team members but are on-call when necessary.
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Many frameworks and standards dictate today’s risk management processes. Some well-known frameworks include the ISO 31000, the risk and insurance management society’s risk maturity model (RMM), and COSO’s enterprise risk management (ERM) framework.
Risk Management Process
This article looks into ISO 31000’s recommended risk management process. The steps involved in this process are:
The first inputs to a risk management process are the applications, processes, assets, and policies within the organization.
For example, when performing a technology risk assessment, the first step is to create a list of applications, hardware, software, and services used by the organization. This list contains complete details, including technology stacks, software versions, and access details. The importance and impact of compromise of each piece of technology are put under the microscope.
The relevant stakeholders provide this information in each vertical.
Successful risk management revolves around the timely and accurate exchange of information. Communication is not just about creating a list of assets. It is the dialogue around the risk and impact of each asset. The stakeholders act as consultants who provide feedback for the existing risk management system and bring forward any new information.
This step aims to bridge various areas of expertise and create a holistic risk profile.
At this stage, a communication plan is put in place. This plan specifies personnel with relevant expertise, tone of communication, the flow of information, and escalation protocols.
Creating and maintaining a risk management process is resource-intensive. It is essential to document the scope of this process at the outset. The types of risks that this will cover are decided.
The risk assessment scope document typically covers the objective of the process, expected outcomes, risk assessment tools and techniques to be used, inclusions and exclusions, and points of contact for each area of expertise.
When assessing risk, the external and internal environments in which the business operates must be taken apart and documented. This is known as setting context. This step is crucial to understanding the various factors that influence the business.
At this stage, the company’s risk appetite is evaluated. Risk appetite is the amount of risk the company is willing to face to achieve an end goal. To measure the risk appetite, companies look into the tangible and abstract outcomes of different potential risks, individual risk levels, and combinations of various risks that need to be considered. A measurement protocol is decided upon.
The company’s risk tolerance is also determined. Risk tolerance is how much the company is willing to deviate from its decided risk appetite.
This step aims to have a documented risk profile that specifies which scenarios are acceptable and which types of risks cannot be ignored.
Now that there’s a risk framework in place, the next step is to identify and analyze risks within the company and fit them into the framework.
An incident is declared a risk if a vital asset is impacted or a threat source that would affect this asset negatively is identified.
Identified risks are added to a risk register that is constantly updated through different risk management cycles.
Risk analysis is a detailed look into each of the identified risks. It documents risk sources, the likelihood of occurrence, consequences, the chain of events that may lead to it, and the controls that are currently in place to mitigate them.
This crucial step requires input from multiple stakeholders for a 360-view.
Risk analysis directly feeds into risk evaluation. Risk evaluation involves placing the analyzed risks within the established risk framework and deciding if additional action is required.
Five common responses are associated with each risk being evaluated:
Risk treatment is the implementation of the chosen responses at the risk evaluation step. For instance, companies can share a particular risk by establishing a third-party contract.
Appropriate controls are put in place. This may be in the form of policy changes or security barriers. These are done with inputs based on the communication protocol established before.
The treatment plan associated with each risk is documented, along with its effectiveness. The plan details the team members required, proposed actions, the resources needed, additional controls, configuration changes, contingencies, and constraints.
The effectiveness of each treatment plan is constantly monitored and tweaked in the direction of the chosen risk response. Ongoing monitoring is done using an alerting system. Scheduled reviews are also conducted based on the type of treatment plan.
The review process involves gathering and analyzing information, recording the results, and reaching out for feedback. The flow is established as part of the communication plan.
This step is necessary to ensure an evolving and up-to-date risk management system. A dynamic system prepares businesses for the dynamic market.
Every step in the process is documented and available for relevant people within the company and to stakeholders associated with the company.
These reports are directly used for decision-making. They are tailored based on the intended audience.
The audience, the frequency of report generation, and the cost and resources needed for the reporting aspect of risk management are decided along with the scope.
The risk management process is not a stand-alone series of steps. They’re cyclic and require scheduled re-evaluations. The reports may bring to light variations in the existing risk register, kickstarting the process from step one.
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Much of risk management can be streamlined and automated using specific tools. Some of these tools include:
Risk dashboards provide a visualization of the risk register and associated details. Companies can create the most rudimentary and least expensive risk dashboards from office automation tools like Microsoft Excel.
Risk dashboards are generally a part of larger software like threat modeling tools. Companies such as LogicManager and Drata provide risk dashboards as risk management tools.
The amount of open data available in the risk sector is huge. Reuters, Bloomberg, and Dow Jones provide continuous data feed that enterprise risk management systems can use to automate the risk identification step to an extent.
Many services provide databases of risk data points too. Integrating these databases allows companies to spot risks beyond their imagination. For example, big data analytics for market risk analysis allows fraud management and improved credit management. It allows organizations to spot operational risks sooner and even provides a bird’s eye view across different industries.
Solutions such as ZenGRC provide big data analytics, risk management, and compliance tools.
Risk assessment tools collate everything from risk identification to reporting. Some risk assessment tools in the market include Isometrix, Analytica, Enablon, LogicManager, and RM Studio.
Risk assessment tools are chosen by the risk management team based on who uses them and how well it integrates with existing monitoring and security systems. The cost of the tool must also fall within the scope of the process. All training required to use the tools is added to the risk management process plan.
Risk registers are a database of identified risks that one can filter. There are many open-source basic registers available. There are also risk register templates available as low-cost options.
Risk registers are usually a part of risk assessment tools and also a part of other threat modeling tools.
Cybersecurity tools maintain their database of threats and vulnerabilities, which comes in handy for risk management. Most risk treatment consists of putting in a cybersecurity tool. For example, phishing emails can be intercepted by content filtering software. Content filtering software is a subset of cybersecurity tools.
Most SIEM solutions have a risk and vulnerability dashboard connected to an alerting system.
Besides these tools, risk management teams use several techniques to get through the different steps.
Root cause analysis is an algorithm approach to identifying an incident’s when, how, and why. This is a reactive aspect of risk management, and findings from this are applied proactively to find similar risks.
SWOT analyses are a time-tested approach to analyzing each asset within the system. If an asset has more weaknesses and threats than strengths, it’s time to reconsider it.
The probability and impact matrix helps risk managers to relate severity to likelihood within a risk matrix. This visualization of risks gives an accurate picture of the overall risk vulnerability in the system.
Even with the tools and methodologies in place, the success of a risk management program depends on how the risk data is gathered, analyzed, and interpreted. This data needs to be accurate and reliable. The integrity of these findings directly impacts the business bottom line. Hence, tools and techniques are employed for data quality assessment, and appropriate controls are implemented where necessary.
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Risk management needs to be an integral part of every organization’s operations. One example of how a lackadaisical risk management process cost an organization is America’s Internal revenue service (IRS).
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The risk management process is entwined with the organization’s overall vision. Creating a risk management process from scratch may seem expensive, but the returns increase with time. With every iteration, the process is fine-tuned. This means that the risk management process is never-ending, mutating along with the changes in the company and its surroundings.
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