Building a Risk Management Strategy and Effective Risk Management Techniques
Risk is one of the scariest parts of running a business. An unanticipated risk can quickly cause even the largest company turmoil, which could lead to critical ramifications.
No matter the business model, industry type, or overseeing entity, risk is an unavoidable aspect of running a business. Every business must develop techniques and strategies for anticipating and mitigating the risks faced.
Sometimes, it can be difficult to know where to start when it comes to risk mitigation. Read on to learn more about innovative and effective risk management strategies and techniques that can help any company develop their risk management plan.
How to Develop a Risk Management Strategy
Most companies work to manage their risks by utilizing a strategy aimed at reducing the likelihood and severity of potential risks. In the event something does go wrong, they are prepared to effectively execute the plan they have in place.
There are a few crucial steps when it comes to developing a risk management strategy which should generally be followed in order.
Step 1: Identify the Risks
Compile a team to work on identifying the risks of your particular business. These risks could be internal or external and strain any facet of business. Examples include lawsuits or actions against your company, supply chain issues, weather-related disasters, data breaches, and more.
This step should involve establishing a clear path of communication for all employees to identify possible risks. Identifying risks sooner rather than later is critical to prevention and cannot be achieved if an employee is unable to contact the right person when they notice a potential threat.
Sometimes it may help to bring in an outside eye to help evaluate the risks your company may be facing. Axxima is here to help with all levels of the risk evaluation process and can work closely with your team to establish a risk management strategy.
Step 2: Analyze the Risks
After the risks pertaining to your company have been identified and listed, it’s time to analyze how they could negatively impact business. This additional information will be critical to the success of the next step of the process.
Step 3: Prioritize the Risks
Not all risks are created equal and some may cause more damage or disruption to your company than others. For example, a supply chain issue could impact operations for a week, while a lawsuit could cause turmoil for months.
If a company’s list of risks is particularly long, they may find it is impossible to address them all, which is why this step is important. A company should work to mitigate the most serious risks first, deprioritizing the medium or low risks in favour of addressing those which are more likely to happen and likely to cause more damage if they do.
Step 4: Assign the Risks
While working to develop an overall risk management program, it’s important for a company to acknowledge that some teams are better equipped to handle certain risks than others, which is why it is important to engage the knowledge and experience of those directly affected by the risk, or involved in the processes that are sensitive to the risk. Axxima can help you determine which members of your team are best suited for managing the risks your company is facing.
For example, a single insurance policy may be used to transfer some of your risks, and those risks should be assigned to the member of your team who is responsible for insurance. Meanwhile, the risk of a data breach likely affects the IT department most, and these risks should be assigned to a manager in this department.
Step 5: Respond to the Risk
Each risk you are facing will require a different method of response. For example, some risks are best mitigated through insurance policies, while others may be best mitigated by having backups in place if the primary system were to fail.
There are four main risk management strategies: acceptance, transference, avoidance, and reduction. Axxima has the expertise to work with your company to determine the best treatment options for the risks affecting your business.
Step 6: Monitor the Risk
Risk management is an ongoing process. Once a risk management plan is in place, it requires monitoring and updates on a regular basis as the world and your business changes.
It is best to schedule frequent reviews of your risk management strategy with a company like Axxima that can help keep you informed of new or developing risks in the industry that could negatively impact your company in the future.
Risk Management Techniques in Data Analysis
While planning for risks is critical, there are times when unanticipated risks may arise. In either case, there are several strategies a company can use to approach and manage the risk.
Decision Tree Diagram
A decision tree diagram is best used when there are multiple possible courses of action. This type of diagram is a visualization of the different decisions drawn side by side, as well as the outcomes of each decision.
Decision tree diagrams can help a risk management team to take an in-depth look at the possible consequences of decisions before having to make them.
Additionally, monetary amounts, such as expected monetary value (EVM) can be calculated for each branch of the tree, letting a business know which option is most costly.
SWOT analysis is a 4 squared diagram which is a risk management technique best used early in the process of designing a risk management strategy.
SWOT stands for Strengths, Weakness, Threats, and Opportunities, and these are the titles which should go above each box in your chart. This chart should be filled in based on your company’s independent attributes and used to identify risks.
If a company is already facing a risk which has arisen, they should fill out the squares for the individual event and possible courses of action they are considering.
Fault Tree Analysis
A fault tree analysis is a specific type of chart which can help a risk management team identify the probability of specific outcomes of a risk. This information can then be applied to the prioritizing or risk in the risk management strategy development section above.
Fault tree analysis is particularly helpful in planning for risks involved with using technology. If something in particular isn’t working, a fault tree analysis can be used to discover the possible sources of the failure.
Risk-Reward analysis is used to identify whether or not a risk mitigation strategy your company is considering is worth the possible payoff. On this chart, the risks and rewards are compared against one another based on each option the company faces.
Risk-Reward analysis is generally the same across the industry, meaning any company that wishes to employ this risk management technique will find it helpful to evaluate the risks other businesses in the sector are taking.
Hire Risk Management Consultant
Risk management is a significant aspect of any company, and tapping into the expertise of a risk management consulting can go a long way towards protecting a company from future loss. With this strategy, a company can save time and resources as much of the above work is done by an outside firm.
The risk management consultants at Axxima are highly trained individuals who are ready to help with risk management solutions as customized and unique as your business.
Contingency planning is a risk management technique where a company has not one, but multiple risk management plans in place. When one plan goes wrong, they may scrap it completely and move on to a different risk management strategy.
For example, a company may have a risk management strategy of avoidance, but when they find that they cannot avoid the risk as originally desired, they may switch to a plan of risk transference where they purchase insurance policies to lower risk exposure.
Post Risk Evaluation
If your company is faced with an unanticipated risk, once it has been resolved, take the time to discuss with the risk management team what happened. This is also the time to develop future plans based on what has been learned.
Remember that step 6 of developing a risk management strategy includes updating it, and a company facing a major risk and overcoming said risk is the perfect time to revisit this document and update it to avoid risk recurrence.
Risk Management Techniques in Practice
For some business models, sitting around a table and discussing risk management techniques can only go so far. Below are some practical techniques that can be used to evaluate and manage risks within a company.
Surveying employees can be an important risk management technique, as it can help expose weaknesses in the workplace that management may not be aware of. Surveys can be general in nature, or can be specific to a certain aspect of a job.
Conducting surveys is a technique that is best drafted in step 1 of a business’s risk management strategy as it is a direct line of communication that can help management identify risks that may only be visible to those at different levels of an organization.
In the same way that a company may send out surveys to look for potential risks, or to help them anticipate risks, theory validation is when a company uses a survey to test their ideas prior to development.
For example, rather than making a new product and releasing it to market only to find there is no buyer for it, theory validation would require sending out a survey in advance to find out if there is a market for the product the company would like to invent.
Building buffers is a risk management technique which is adopted in order to protect a company from issues that could arise during a project. Buffers can be anything from extra money in a financial project, extra time for a project, or extra insurance on a particular asset.
To know how much of a buffer to allow, it can be helpful to look towards others in the same industry. It is also beneficial to estimate on the higher end, giving your company as large of a buffer as possible.
Establishing Risk Isolation
Used frequently in technology projects, risk isolation is planning how a risk will be isolated when it arrives. An example of this would be an ability to lock down customer data if a specific system is hacked or breached.
Risk isolation in tech can also refer to certain restrictions which are put in place. A popular security blog estimates that 51% of data breaches are caused by third-party service providers. Thus, a risk management isolation solution for your company may involve limiting the third-party vendors used.
Risk transference is a process in which a company works to transfer all or a part of their risk to another company in order to minimize possible losses. Risk transference is usually accomplished through methods like insurance and contractual agreements with other companies.
It’s important to note that risk transference is a delicate balance, however, and it can be helpful to speak with a consultant before engaging in this practice to know just how much risk you should transfer and at what cost. The professionals at Axxima have extensive experience helping clients find the right balance between risk retention and transfer.
Ready to Manage Your Risk?
Risk management is an essential aspect of any business, and every company will need to work to develop an effective risk management strategy for their specific needs.
Not every risk management technique or strategy is right for every company. All companies face different risks and need to create a risk management plan which is unique for them.
Axxima is here to help build the best risk management solution for your company by analyzing available data and adding their expertise of the risks unique to your industry. Contact Axxima today to get started on your customized risk management solution.