Data analysis has become integral to effective planning, promotion, and procurement. As such, organizations can no longer afford to take a reactive approach without risking their compliance and competitive edge.
Proactive risk management works well with emerging technologies in switching to a digitally-driven, holistic approach to procurement seeking to avoid, instead of enhancing, problems costing your organization resources, money, and time. How does a business become proactive in risk management? Read further to understand how to be proactive about risk management.
What is Risk Management?
Risk management is the identification, assessment, and control of legal, financial, security, and strategic risks to a company’s earnings and capital. Such risks can arise from different sources, such as legal liabilities, financial uncertainty, natural disaster, accidents, and strategic management errors.
There are four main types of risk management:
- Risk Avoidance. Risk avoidance involves an organization eliminating risks by not taking any action that would mean any risk could occur.
- Risk Reduction. Risk reduction is where risk becomes less severe via actions taken to prevent or reduce the impact.
- Risk Transfer. Risk transfer is where a business transfers a risk via contract to an external party who will resume the risk on behalf of the company.
- Risk Retention/ Acceptance. Risk acceptance is where a business accepts a risk without taking action to mitigate the risk.
Why Do Businesses Need to Be Proactive about Risk Management?
Proactive risk management is an organization’s ability to manage or avoid existing and emerging risks. It helps businesses to adapt quickly to unwanted events or crises. Below are reasons why businesses need to be proactive about risk management.
- Proactive Risk Management Saves Time, Money, and Resources
The alternative to proactive risk management is reactive risk management–which involves taking steps to reverse or stop risk after it has already happened. The result is an organization spending a lot of time and money trying to default to the status quo. Proactive risk management involves avoiding risk at all costs, thus helping you avoid spending time, money, and resources trying to reverse risk.
- Continuous Process Improvement
Proactive risk management involves analyzing historical, current, and predicted data sets. Organizations analyze each company process to determine possible risks and then implement effective strategies to prevent such risks from occurring. Consequently, businesses can detect possible flaws in organizational processes and improve on them. Therefore, proactive risk management fosters business growth.
- Improved Decision-Making
One of the key features of proactive risk management is greater awareness and the ability to mitigate risk drivers. This, in turn, improves decision-making for company executives. Decision-making can be the difference between well-managed and poorly-managed risks, which can be traumatizing.
- Agility and Flexibility in Addressing Challenges and Opportunities
Proactively managing risks exposes opportunities and challenges in equal measure. One of the best traits of a business is the ability to adapt flexibly to situations and provide immediate solutions to problems. Proactive risk management strengthens your business’ adaptability and flexibility to possible challenges and opportunities.
The Five-Step Process for Creating Risk Management Plans
With any new project pending, are risks lying in wait. On the one hand, you can’t avoid risk entirely.
On the other hand, you can anticipate and mitigate risks via an established risk management procedure. Below are the five steps to creating an effective risk management procedure.
- Identify the Risk
The first step is identifying the possible risks your business is exposed to. Common types of risks include:
- Legal risks
- Environmental risks
- Market risks
- Financial risks
- Regulatory risks.
If you have a risk management solution, this data is inserted directly into the system, allowing risks to be visible to every stakeholder in the organization.
- Analyze the Risk
Once you’ve identified the risk, you need to analyze it and determine its scope. It is also advisable to understand the link between the risks and various factors within the company. It is necessary to determine how many business functions the risk affects to determine its severity.
- Prioritize/Evaluate/Rank the Risk
It is important to rank and prioritize risks to allow for effective mitigation. Most risk management solutions have various risk categories, depending on the risk’s severity. Risks that cause minor inconveniences are rated lower than risks resulting in catastrophic losses, which are ranked the highest. Risk assessment is further categorized into quantitative and qualitative risk assessment.
- Treat the Risk
Eliminating risks by all means possible is the next step. You can do this by connecting with the industry experts to which the risks belong. Starting with the highest priority risk, task your team with mitigating or solving the risks effectively. Effective risk treatment and mitigation mean using your resources efficiently without affecting the project.
- Monitor the Risk
Unfortunately, not all risks can be fully eliminated. Some risks can be constant. Market and environmental risks are such types and often require constant monitoring. Risk monitoring also ensures business continuity.
For most companies, risk management is developing rapidly into a more forward-looking, enterprise-wide approach to avoid future unexpected events and expenses. Being proactive with risk management involves clearly defining your risks, which in turn enables you to become more strategic by connecting risk to your strategic plan. It allows you to see how risk directly affects your company’s objectives, enabling it to make better informed decisions.
Many enterprises trust Reciprocity to become more proactive with identifying, assessing, and remediating risks because we foster better business outcomes with less hassle. Discover the power of the contextual insight of proactive risk management by having Reciprocity as your IT and cyber risks partner. Contact Reciprocity to schedule a discovery call today.