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What Is Risk Management & Why Is It Important?

• 24 Oct 2023

Businesses can’t operate without risk. Economic, technological, environmental, and competitive factors introduce obstacles that companies must not only manage but overcome.

According to PwC’s Global Risk Survey , organizations that embrace strategic risk management are five times more likely to deliver stakeholder confidence and better business outcomes and two times more likely to expect faster revenue growth.

If you want to enhance your job performance and identify and mitigate risk more effectively, here’s a breakdown of what risk management is and why it’s important.

Access your free e-book today.

What Is Risk Management?

Risk management is the systematic process of identifying, assessing, and mitigating threats or uncertainties that can affect your organization. It involves analyzing risks’ likelihood and impact, developing strategies to minimize harm, and monitoring measures’ effectiveness.

“Competing successfully in any industry involves some level of risk,” says Harvard Business School Professor Robert Simons, who teaches the online course Strategy Execution . “But high-performing businesses with high-pressure cultures are especially vulnerable. As a manager, you need to know how and why these risks arise and how to avoid them.”

According to Strategy Execution , strategic risk has three main causes:

• Pressures due to growth: This is often caused by an accelerated rate of expansion that makes staffing or industry knowledge gaps more harmful to your business.
• Pressures due to culture: While entrepreneurial risk-taking can come with rewards, executive resistance and internal competition can cause problems.
• Pressures due to information management: Since information is key to effective leadership , gaps in performance measures can result in decentralized decision-making.

These pressures can lead to several types of risk that you must manage or mitigate to avoid reputational, financial, or strategic failures. However, risks aren’t always obvious.

“I think one of the challenges firms face is the ability to properly identify their risks,” says HBS Professor Eugene Soltes in Strategy Execution .

Therefore, it’s crucial to pinpoint unexpected events or conditions that could significantly impede your organization’s business strategy .

Related: Business Strategy vs. Strategy Execution: Which Course Is Right for Me?

According to Strategy Execution , strategic risk comprises:

• Operations risk: This occurs when internal operational errors interrupt your products or services’ flow. For example, shipping tainted products can negatively affect food distribution companies.
• Asset impairment risk: When your company’s assets lose a significant portion of their current value because of a decreased likelihood of receiving future cash flows . For instance, losing property assets, like a manufacturing plant, due to a natural disaster.
• Competitive risk: Changes in the competitive environment can interrupt your organization’s ability to create value and differentiate its offerings—eventually leading to a significant loss in revenue.
• Franchise risk: When your organization’s value erodes because stakeholders lose confidence in its objectives. This primarily results from failing to control any of the strategic risk sources listed above.

Understanding these risks is essential to ensuring your organization’s long-term success. Here’s a deeper dive into why risk management is important.

4 Reasons Why Risk Management Is Important

1. protects organization’s reputation.

In many cases, effective risk management proactively protects your organization from incidents that can affect its reputation.

“Franchise risk is a concern for all businesses,“ Simons says in Strategy Execution . “However, it's especially pressing for businesses whose reputations depend on the trust of key constituents.”

For example, airlines are particularly susceptible to franchise risk because of unforeseen events, such as flight delays and cancellations caused by weather or mechanical failure. While such incidents are considered operational risks, they can be incredibly damaging.

In 2016, Delta Airlines experienced a national computer outage, resulting in over 2,000 flight cancellations. Delta not only lost an estimated $150 million but took a hit to its reputation as a reliable airline that prided itself on “canceling cancellations.”

While Delta bounced back, the incident illustrates how mitigating operational errors can make or break your organization.

2. Minimizes Losses

Most businesses create risk management teams to avoid major financial losses. Yet, various risks can still impact their bottom lines.

A Vault Platform study found that dealing with workplace misconduct cost U.S. businesses over $20 billion in 2021. In addition, Soltes says in Strategy Execution that corporate fines for misconduct have risen 40-fold in the U.S. over the last 20 years.

One way to mitigate financial losses related to employee misconduct is by implementing internal controls. According to Strategy Execution , internal controls are the policies and procedures designed to ensure reliable accounting information and safeguard company assets.

“Managers use internal controls to limit the opportunities employees have to expose the business to risk,” Simons says in the course.

One company that could have benefited from implementing internal controls is Volkswagen (VW). In 2015, VW whistle-blowers revealed that the company’s engineers deliberately manipulated diesel vehicles’ emissions data to make them appear more environmentally friendly.

This led to severe consequences, including regulatory penalties, expensive vehicle recalls, and legal settlements—all of which resulted in significant financial losses. By 2018, U.S. authorities had extracted $25 billion in fines, penalties, civil damages, and restitution from the company.

Had VW maintained more rigorous internal controls to ensure transparency, compliance, and proper oversight of its engineering practices, perhaps it could have detected—or even averted—the situation.

Related: What Are Business Ethics & Why Are They Important?

3. Encourages Innovation and Growth

Risk management isn’t just about avoiding negative outcomes. It can also be the catalyst that drives your organization’s innovation and growth.

“Risks may not be pleasant to think about, but they’re inevitable if you want to push your business to innovate and remain competitive,” Simons says in Strategy Execution .

According to PwC , 83 percent of companies’ business strategies focus on growth, despite risks and mixed economic signals. In Strategy Execution , Simons notes that competitive risk is a challenge you must constantly monitor and address.

“Any firm operating in a competitive market must focus its attention on changes in the external environment that could impair its ability to create value for its customers,” Simons says.

This requires incorporating boundary systems —explicit statements that define and communicate risks to avoid—to ensure internal controls don’t extinguish innovation.

“Boundary systems are essential levers in businesses to give people freedom,” Simons says. “In such circumstances, you don’t want to stifle innovation or entrepreneurial behavior by telling people how to do their jobs. And if you want to remain competitive, you’ll need to innovate and adapt.”

Netflix is an example of how risk management can inspire innovation. In the early 2000s, the company was primarily known for its DVD-by-mail rental service. With growing competition from video rental stores, Netflix went against the grain and introduced its streaming service. This changed the market, resulting in a booming industry nearly a decade later.

Netflix’s innovation didn’t stop there. Once the steaming services market became highly competitive, the company shifted once again to gain a competitive edge. It ventured into producing original content, which ultimately helped differentiate its platform and attract additional subscribers.

By offering more freedom within internal controls, you can encourage innovation and constant growth.

4. Enhances Decision-Making

Risk management also provides a structured framework for decision-making. This can be beneficial if your business is inclined toward risks that are difficult to manage.

By pulling data from existing control systems to develop hypothetical scenarios, you can discuss and debate strategies’ efficacy before executing them.

“Interactive control systems are the formal information systems managers use to personally involve themselves in the decision activities of subordinates,” Simons says in Strategy Execution . “Decision activities that relate to and impact strategic uncertainties.”

JPMorgan Chase, one of the most prominent financial institutions in the world, is particularly susceptible to cyber risks because it compiles vast amounts of sensitive customer data . According to PwC , cybersecurity is the number one business risk on managers’ minds, with 78 percent worried about more frequent or broader cyber attacks.

Using data science techniques like machine learning algorithms enables JPMorgan Chase’s leadership not only to detect and prevent cyber attacks but address and mitigate risk.

Start Managing Your Organization's Risk

Risk management is essential to business. While some risk is inevitable, your ability to identify and mitigate it can benefit your organization.

But you can’t plan for everything. According to the Harvard Business Review , some risks are so remote that no one could have imagined them. Some result from a perfect storm of incidents, while others materialize rapidly and on enormous scales.

By taking an online strategy course , you can build the knowledge and skills to identify strategic risks and ensure they don’t undermine your business. For example, through an interactive learning experience, Strategy Execution enables you to draw insights from real-world business examples and better understand how to approach risk management.

Do you want to mitigate your organization’s risks? Explore Strategy Execution —one of our online strategy courses —and download our free strategy e-book to gain the insights to build a successful strategy.

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9 lessons learned for effective risk management.

Door Avisi / / 3 min

Risk Management is arguably one of the most important disciplines ever to master. The ability to accurately assess  risk  and effectively implement risk treatment measures is what makes or breaks any project or initiative. It is applicable to anything, whether you are building a house, treating a patient or developing software. In this blog, I will discuss our top lessons learned which you can  apply directly  in your own risk management efforts.

Our approach

At Avisi, we apply risk management to everything we do. Focusing on our   software development   projects, our aim is to develop robust software. We do this by identifying typical   software risks   - such as security, privacy and scalability risks -   early on   in the software development process. This allows us to mitigate such risks at an early stage, preferably in the software   design   stage . This  has   many benefits over uncovering and having to mitigate risks later on in a project, when   revisiting   earlier decisions can be much more complex and costly.

In our approach to risk management, we have devised our   own risk management method , adopted from and building upon the well-known   Kinney & Wiruth   method . Based on best practices and our personal experiences, we shaped our risk management method with features such as a visual risk   heat map   and a direct   tangible relation   between risks and measures.

Practice at our organization has provided ample opportunity to   proof and hone our method , given that Avisi is a typical umbrella organization with many distinct and different teams. In the first six months of this year, we have already applied our method 16 times. You will find our top lessons learned outlined below.

1. Formulate a risk management process

Understanding risks and measures are one thing, but   conducting a risk assessment   and building a risk treatment plan are in a different league. Knowing which steps to take and in which order is key in making the process   understandable   and   repeatable . This results in consistent reports and a capable organization. Write up a risk assessment and treatment process that properly explains   how   to conduct each step along the line.

2. Use a template

This one is obvious, but it's still worth mentioning. Processes and templates go hand in hand, as each process step covers a specific part of the template. Furthermore, using a template makes it easier for your teams to   understand what needs to be done   when assessing risks and devising measures. The biggest advantage, however, is   consistency . Using templates will not only make risk management reports look consistent   between teams , which will make them more readable. The reports will also be consistent   over time , which allows for easier comparison between this year's and last year's risks and measures.

3. Apply a process-oriented approach

Where should you start   when writing down risks? In our early days, we would generate a list of all information systems involved in a given project and write down any risk that we could imagine, given the content of that list. This blinded us from risks that were not directly related to an information system. This led us to change over to a   process-oriented approach . At the start of every risk analysis, we summarize all   key processes   in-scope (e.g. writing code, testing software and releasing software) and then add the information systems involved. From there on, we start thinking about possible risks that can occur   anywhere   in each process. We have found that this exercise helps teams to   adopt a holistic view   of their work, yielding increasingly more  specific   risks and measures.

4. Don't freak out over risk weights

Weighing risks can be a time-consuming aspect of the risk analysis, but it doesn't have to be. A pitfall in any risk analysis is to   be overly deterministic   about the exact weight of the likelihood, exposure, and effect of a risk. This consumes a lot of time and can lead to disagreement among team members, while the benefits are negligible. Instead, you should  estimate weights   by approximation. The goal should be to   distinguish   between low, medium and high risks. Estimation works best to do just that.

5. Visualize your risks

Risk assessment reports tend to become   cluttered   as more risks are documented. Each risk comes with a description, risk category, weight, and measures. This makes risk overviews quite  information-dense  where information can be hard to find. We overcome this by   color coding   risks by their   severity level   (low risk is green etc.). Furthermore, we plot our risks on a   heat map , which visually indicates both   absolute   risk severity and   relative   risk severity compared to other identified risks. Visualizing risks helps us to quickly   shift focus   to the risks that require the most attention.

An example of a risk heat map

6. Formulate SMART measures

The key to any effective risk assessment is to directly link an identified risk to a measure that can mitigate that risk. However, that measure is of little value if it is not formulated   SMART .   Make the measure...

• Specific   so that the risk owner knows exactly what to do.
• Measurable   so that you know if and when the measure has been implemented.
• Attainable   so that the measure is more than an idealistic never-achievable would-be solution and can actually be implemented.
• Relevant   so that the measure is an effective solution to mitigate its linked risk.
• Time-based   so that it is clear when the measure should be implemented within a realistic time frame.

7. Obtain commitment

A risk in itself is that measures - once formulated - tend to become   passive   and disappear on a team's   backlog . They are only recovered when next year's risk analysis is due, only to find those measures in the exact same state as when they were formulated:   unresolved . Formulating SMART measures is already a huge step in   activating   these measures as this provides every measure with an   owner   and a   deadline . Make your measures even more   actionable   by securing   commitment   through appointing a "risk champion" from the team where the risk analysis was conducted. Frequently   discuss   the state of the measures with that risk champion in order to keep the measures activated and to stay updated as a risk manager about the progress of your teams.

8. Organize your measures

Just like in project management,   effective organization   is indispensable for risk management. The right   tooling   can make all the difference in the organization of your risks and measures, allowing you to e.g.   dashboard  the status of measures and   collaborate   on measure implementation. At Avisi, we practice what we preach by   using Confluence   for documenting our risk assessment process, template and reports and by   using Jira   to manage and collaborate on measure implementation.

9. Support your teams

Last but not least, it is imperative to   train   and   guide   your teams in their risk management efforts. While you are best at the risk management   method , they are best at the risk management   content . By enabling your teams to conduct a proper risk assessment, you allow them to combine knowledge on method and knowledge on content, resulting in the best possible outcome.

Door Avisi / sep 2024

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Essay on Risk Management

Students are often asked to write an essay on Risk Management in their schools and colleges. And if you’re also looking for the same, we have created 100-word, 250-word, and 500-word essays on the topic.

Let’s take a look…

100 Words Essay on Risk Management

What is risk management.

Risk Management is the process of identifying, assessing, and controlling threats to an organization’s capital and earnings. These threats or risks could stem from a wide variety of sources, including financial uncertainty, legal liabilities, strategic management errors, accidents, and natural disasters.

Importance of Risk Management

Risk Management is important because it prepares an organization to face uncertainties. It helps to understand potential risks and to make plans to minimize their impact. Proper risk management can reduce not only the likelihood of an event occurring, but also the magnitude of its impact.

Steps in Risk Management

Risk Management involves several steps. The first step is identifying the risks. The next step is analyzing the risk to understand its potential impact. The third step is evaluating or ranking the risk. The final step is treating or controlling the risk.

Risk Management Techniques

There are several techniques for managing risk. One is risk avoidance, where the aim is to eliminate all risks. Another technique is risk reduction, where steps are taken to reduce the severity of the loss. Risk retention and risk transfer are other techniques used in risk management.

250 Words Essay on Risk Management

Risk Management is a process that helps identify, assess, and control threats that could harm an organization. These threats or risks could be anything from financial problems, accidents, natural disasters, or even legal issues. The main goal of Risk Management is to lessen the impact of these risks.

Risk Management follows four main steps. First, we identify the risks. This means we look at what could possibly go wrong. Next, we assess the risks. We try to figure out how likely it is that these risks will happen and how much damage they could cause. Then, we work on ways to control these risks. This could mean coming up with a plan to prevent the risk or lessen its impact. Finally, we monitor the risks. We keep an eye on them to see if they change or if new risks come up.

Risk Management is very important because it helps organizations prepare for the unexpected. It helps them make plans that can prevent or lessen damage from risks. It also helps them save money that they might lose if these risks were to happen.

In conclusion, Risk Management is a necessary practice for all organizations. It helps them identify, assess, control, and monitor risks. By doing this, organizations can prevent or lessen the impact of these risks, saving them from potential damage and loss.

500 Words Essay on Risk Management

Risk Management is a process that helps you identify and control possible problems that might happen in the future. It’s like a safety net that prepares you for any unexpected events.

Why is Risk Management Important?

Risk Management includes four main steps:

1. Identifying the Risks: The first step is to find out what could go wrong. This could be anything from a machine breaking down to a sudden change in market trends. 2. Analyzing the Risks: Next, you need to understand how big the problem could be. This helps to decide which risks need the most attention. 3. Planning the Response: Once you know the risks, you can make plans to handle them. This could mean avoiding the risk, reducing its impact, or accepting it and making a plan to recover from it. 4. Monitoring the Risks: Finally, you need to keep an eye on the risks and how well your plans are working. This means you can make changes if needed.

Benefits of Risk Management

Risk management in everyday life.

So, Risk Management is a very helpful tool. It prepares us for the future and helps to avoid or reduce problems. It is used in businesses, but also in our everyday lives. By understanding and using Risk Management, we can make better decisions and be ready for whatever comes our way.

Apart from these, you can look at all the essays by clicking here .

Happy studying!

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Risk Management 101: Process, Examples, Strategies

Emily Villanueva

August 16, 2023

Effective risk management takes a proactive and preventative stance to risk, aiming to identify and then determine the appropriate response to the business and facilitate better decision-making. Many approaches to risk management focus on risk reduction, but it’s important to remember that risk management practices can also be applied to opportunities, assisting the organization with determining if that possibility is right for it.

Risk management as a discipline has evolved to the point that there are now common subsets and branches of risk management programs, from enterprise risk management (ERM) , to cybersecurity risk management, to operational risk management (ORM) , to  supply chain risk management (SCRM) . With this evolution, standards organizations around the world, like the US’s National Institute of Standards and Technology (NIST) and the International Standards Organization (ISO) have developed and released their own best practice frameworks and guidance for businesses to apply to their risk management plan.

Companies that adopt and continuously improve their risk management programs can reap the benefits of improved decision-making, a higher probability of reaching goals and business objectives, and an augmented security posture. But, with risks proliferating and the many types of risks that face businesses today, how can an organization establish and optimize its risk management processes? This article will walk you through the fundamentals of risk management and offer some thoughts on how you can apply it to your organization.

What Are Risks?

We’ve been talking about risk management and how it has evolved, but it’s important to clearly define the concept of risk. Simply put, risks are the things that could go wrong with a given initiative, function, process, project, and so on. There are potential risks everywhere — when you get out of bed, there’s a risk that you’ll stub your toe and fall over, potentially injuring yourself (and your pride). Traveling often involves taking on some risks, like the chance that your plane will be delayed or your car runs out of gas and leave you stranded. Nevertheless, we choose to take on those risks, and may benefit from doing so. 

Companies should think about risk in a similar way, not seeking simply to avoid risks, but to integrate risk considerations into day-to-day decision-making.

• What are the opportunities available to us?
• What could be gained from those opportunities?
• What is the business’s risk tolerance or risk appetite – that is, how much risk is the company willing to take on?
• How will this relate to or affect the organization’s goals and objectives?
• Are these opportunities aligned with business goals and objectives?

With that in mind, conversations about risks can progress by asking, “What could go wrong?” or “What if?” Within the business environment, identifying risks starts with key stakeholders and management, who first define the organization’s objectives. Then, with a risk management program in place, those objectives can be scrutinized for the risks associated with achieving them. Although many organizations focus their risk analysis around financial risks and risks that can affect a business’s bottom line, there are many types of risks that can affect an organization’s operations, reputation, or other areas.

Remember that risks are hypotheticals — they haven’t occurred or been “realized” yet. When we talk about the impact of risks, we’re always discussing the potential impact. Once a risk has been realized, it usually turns into an incident, problem, or issue that the company must address through their contingency plans and policies. Therefore, many risk management activities focus on risk avoidance, risk mitigation, or risk prevention.

What Different Types of Risks Are There?

There’s a vast landscape of potential risks that face modern organizations. Targeted risk management practices like ORM and SCRM have risen to address emerging areas of risk, with those disciplines focused on mitigating risks associated with operations and the supply chain. Specific risk management strategies designed to address new risks and existing risks have emerged from these facets of risk management, providing organizations and risk professionals with action plans and contingency plans tailored to unique problems and issues.

Common types of risks include: strategic, compliance, financial, operational, reputational, security, and quality risks.

Strategic Risk

Strategic risks are those risks that could have a potential impact on a company’s strategic objectives, business plan, and/or strategy. Adjustments to business objectives and strategy have a trickle-down effect to almost every function in the organization. Some events that could cause strategic risks to be realized are: major technological changes in the company, like switching to a new tech stack; large layoffs or reductions-in-force (RIFs); changes in leadership; competitive pressure; and legal changes.

Compliance Risk

Compliance risks materialize from regulatory and compliance requirements that businesses are subject to, like Sarbanes-Oxley for publicly-traded US companies, or GDPR for companies that handle personal information from the EU. The consequence or impact of noncompliance is generally a fine from the governing body of that regulation. These types of risks are realized when the organization does not maintain compliance with regulatory requirements, whether those requirements are environmental, financial, security-specific, or related to labor and civil laws.

Financial Risk

Financial risks are fairly self-explanatory — they have the possibility of affecting an organization’s profits. These types of risks often receive significant attention due to the potential impact on a company’s bottom line. Financial risks can be realized in many circumstances, like performing a financial transaction, compiling financial statements, developing new partnerships, or making new deals.

Operational Risk

Risks to operations, or operational risks, have the potential to disrupt daily operations involved with running a business. Needless to say, this can be a problematic scenario for organizations with employees unable to do their jobs, and with product delivery possibly delayed. Operational risks can materialize from internal or external sources — employee conduct, retention, technology failures, natural disasters, supply chain breakdowns — and many more.

Reputational Risk

Reputational risks are an interesting category. These risks look at a company’s standing in the public and in the media and identify what could impact its reputation. The advent of social media changed the reputation game quite a bit, giving consumers direct access to brands and businesses. Consumers and investors too are becoming more conscious about the companies they do business with and their impact on the environment, society, and civil rights. Reputational risks are realized when a company receives bad press or experiences a successful cyber attack or security breach; or any situation that causes the public to lose trust in an organization.

Security Risk

Security risks have to do with possible threats to your organization’s physical premises, as well as information systems security. Security breaches, data leaks, and other successful types of cyber attacks threaten the majority of businesses operating today. Security risks have become an area of risk that companies can’t ignore, and must safeguard against.

Quality Risk

Quality risks are specifically associated with the products or services that a company provides. Producing low-quality goods or services can cause an organization to lose customers, ultimately affecting revenue. These risks are realized when product quality drops for any reason — whether that’s technology changes, outages, employee errors, or supply chain disruptions.

Steps in the Risk Management Process

The six risk management process steps that we’ve outlined below will give you and your organization a starting point to implement or improve your risk management practices. In order, the risk management steps are: 

• Risk identification
• Risk analysis or assessment
• Controls implementation
• Resource and budget allocation
• Risk mitigation
• Risk monitoring, reviewing, and reporting

If this is your organization’s first time setting up a risk management program, consider having a formal risk assessment completed by an experienced third party, with the goal of producing a risk register and prioritized recommendations on what activities to focus on first. Annual (or more frequent) risk assessments are usually required when pursuing compliance and security certifications, making them a valuable investment.

Step 1: Risk Identification

The first step in the risk management process is risk identification. This step takes into account the organization’s overarching goals and objectives, ideally through conversations with management and leadership. Identifying risks to company goals involves asking, “What could go wrong?” with the plans and activities aimed at meeting those goals. As an organization moves from macro-level risks to more specific function and process-related risks, risk teams should collaborate with critical stakeholders and process owners, gaining their insight into the risks that they foresee.

As risks are identified, they should be captured in formal documentation — most organizations do this through a risk register, which is a database of risks, risk owners, mitigation plans, and risk scores.

Step 2: Risk Analysis or Assessment

Analyzing risks, or assessing risks, involves looking at the likelihood that a risk will be realized, and the potential impact that risk would have on the organization if that risk were realized. By quantifying these on a three- or five-point scale, risk prioritization becomes simpler. Multiplying the risk’s likelihood score with the risk’s impact score generates the risk’s overall risk score. This value can then be compared to other risks for prioritization purposes.

The likelihood that a risk will be realized asks the risk assessor to consider how probable it would be for a risk to actually occur. Lower scores indicate less chances that the risk will materialize. Higher scores indicate more chances that the risk will occur.

Likelihood, on a 5×5 risk matrix, is broken out into:

• Highly Unlikely
• Highly Likely

The potential impact of a risk, should it be realized, asks the risk assessor to consider how the business would be affected if that risk occurred. Lower scores signal less impact to the organization, while higher scores indicate more significant impacts to the company.

Impact, on a 5×5 risk matrix, is broken out into:

• Negligible Impact
• Moderate Impact
• High Impact
• Catastrophic Impact

Risk assessment matrices help visualize the relationship between likelihood and impact, serving as a valuable tool in risk professionals’ arsenals.

Organizations can choose whether to employ a 5×5 risk matrix, as shown above, or a 3×3 risk matrix, which breaks likelihood, impact, and aggregate risk scores into low, moderate, and high categories.

Step 3: Controls Assessment and Implementation

Once risks have been identified and analyzed, controls that address or partially address those risks should be mapped. Any risks that don’t have associated controls, or that have controls that are inadequate to mitigate the risk, should have controls designed and implemented to do so.

Step 4: Resource and Budget Allocation

This step, the resource and budget allocation step, doesn’t get included in a lot of content about risk management. However, many businesses find themselves in a position where they have limited resources and funds to dedicate to risk management and remediation. Developing and implementing new controls and control processes is timely and costly; there’s usually a learning curve for employees to get used to changes in their workflow.

Using the risk register and corresponding risk scores, management can more easily allocate resources and budget to priority areas, with cost-effectiveness in mind. Each year, leadership should re-evaluate their resource allocation as part of annual risk lifecycle practices.

Step 5: Risk Mitigation

The risk mitigation step of risk management involves both coming up with the action plan for handling open risks, and then executing on that action plan. Mitigating risks successfully takes buy-in from various stakeholders. Due to the various types of risks that exist, each action plan may look vastly different between risks. 

For example, vulnerabilities present in information systems pose a risk to data security and could result in a data breach. The action plan for mitigating this risk might involve automatically installing security patches for IT systems as soon as they are released and approved by the IT infrastructure manager. Another identified risk could be the possibility of cyber attacks resulting in data exfiltration or a security breach. The organization might decide that establishing security controls is not enough to mitigate that threat, and thus contract with an insurance company to cover off on cyber incidents. Two related security risks; two very different mitigation strategies. 

One more note on risk mitigation — there are four generally accepted “treatment” strategies for risks. These four treatments are:

• Risk Acceptance: Risk thresholds are within acceptable tolerance, and the organization chooses to accept this risk.
• Risk Transfer : The organization chooses to transfer the risk or part of the risk to a third party provider or insurance company.
• Risk Avoidance : The organization chooses not to move forward with that risk and avoids incurring it.
• Risk Mitigation : The organization establishes an action plan for reducing or limiting risk to acceptable levels.

If an organization is not opting to mitigate a risk, and instead chooses to accept, transfer, or avoid the risk, these details should still be captured in the risk register, as they may need to be revisited in future risk management cycles.

Step 6: Risk Monitoring, Reviewing, and Reporting

The last step in the risk management lifecycle is monitoring risks, reviewing the organization’s risk posture, and reporting on risk management activities. Risks should be monitored on a regular basis to detect any changes to risk scoring, mitigation plans, or owners. Regular risk assessments can help organizations continue to monitor their risk posture. Having a risk committee or similar committee meet on a regular basis, such as quarterly, integrates risk management activities into scheduled operations, and ensures that risks undergo continuous monitoring. These committee meetings also provide a mechanism for reporting risk management matters to senior management and the board, as well as affected stakeholders.

As an organization reviews and monitors its risks and mitigation efforts, it should apply any lessons learned and use past experiences to improve future risk management plans.

Examples of Risk Management Strategies

Depending on your company’s industry, the types of risks it faces, and its objectives, you may need to employ many different risk management strategies to adequately handle the possibilities that your organization encounters. 

Some examples of risk management strategies include leveraging existing frameworks and best practices, minimum viable product (MVP) development, contingency planning, root cause analysis and lessons learned, built-in buffers, risk-reward analysis, and third-party risk assessments.

Leverage Existing Frameworks and Best Practices

Risk management professionals need not go it alone. There are several standards organizations and committees that have developed risk management frameworks, guidance, and approaches that business teams can leverage and adapt for their own company. 

Some of the more popular risk management frameworks out there include:

• ISO 31000 Family : The International Standards Organization’s guidance on risk management.
• NIST Risk Management Framework (RMF) : The National Institute of Standards and Technology has released risk management guidance compatible with their Cybersecurity Framework (CSF).
• COSO Enterprise Risk Management (ERM) : The Committee of Sponsoring Organizations’ enterprise risk management guidance.

Minimum Viable Product (MVP) Development

This approach to product development involves developing core features and delivering those to the customer, then assessing response and adjusting development accordingly. Taking an MVP path reduces the likelihood of financial and project risks, like excessive spend or project delays by simplifying the product and decreasing development time.

Contingency Planning

Developing contingency plans for significant incidents and disaster events are a great way for businesses to prepare for worst-case scenarios. These plans should account for response and recovery. Contingency plans specific to physical sites or systems help mitigate the risk of employee injury and outages.

Root Cause Analysis and Lessons Learned

Sometimes, experience is the best teacher. When an incident occurs or a risk is realized, risk management processes should include some kind of root cause analysis that provides insights into what can be done better next time. These lessons learned, integrated with risk management practices, can streamline and optimize response to similar risks or incidents.

Built-In Buffers

Applicable to discrete projects, building in buffers in the form of time, resources, and funds can be another viable strategy to mitigate risks. As you may know, projects can get derailed very easily, going out of scope, over budget, or past the timeline. Whether a project team can successfully navigate project risks spells the success or failure of the project. By building in some buffers, project teams can set expectations appropriately and account for the possibility that project risks may come to fruition.

Risk-Reward Analysis

In a risk-reward analysis, companies and project teams weigh the possibility of something going wrong with the potential benefits of an opportunity or initiative. This analysis can be done by looking at historical data, doing research about the opportunity, and drawing on lessons learned. Sometimes the risk of an initiative outweighs the reward; sometimes the potential reward outweighs the risk. At other times, it’s unclear whether the risk is worth the potential reward or not. Still, a simple risk-reward analysis can keep organizations from bad investments and bad deals.

Third-Party Risk Assessments

Another strategy teams can employ as part of their risk management plan is to conduct periodic third-party risk assessments. In this method, a company would contract with a third party experienced in conducting risk assessments, and have them perform one (or more) for the organization. Third-party risk assessments can be immensely helpful for the new risk management team or for a mature risk management team that wants a new perspective on their program. 

Generally, third-party risk assessments result in a report of risks, findings, and recommendations. In some cases, a third-party provider may also be able to help draft or provide input into your risk register. As external resources, third-party risk assessors can bring their experience and opinions to your organization, leading to insights and discoveries that may not have been found without an independent set of eyes.

Components of an Effective Risk Management Plan

An effective risk management plan has buy-in from leadership and key stakeholders; applies the risk management steps; has good documentation; and is actionable. Buy-in from management often determines whether a risk management function is successful or not, since risk management requires resources to conduct risk assessments, risk identification, risk mitigation, and so on. Without leadership buy-in, risk management teams may end up just going through the motions without the ability to make an impact. Risk management plans should be integrated into organizational strategy, and without stakeholder buy-in, that typically does not happen. 

Applying the risk management methodology is another key component of an effective plan. That means following the six steps outlined above should be incorporated into a company’s risk management lifecycle. Identifying and analyzing risks, establishing controls, allocating resources, conducting mitigation, and monitoring and reporting on findings form the foundations of good risk management. 

Good documentation is another cornerstone of effective risk management. Without a risk register recording all of a company’s identified risks and accompanying scores and mitigation strategies, there would be little for a risk team to act on. Maintaining and updating the risk register should be a priority for the risk team — risk management software can help here, providing users with a dashboard and collaboration mechanism.

Last but not least, an effective risk management plan needs to be actionable. Any activities that need to be completed for mitigating risks or establishing controls, should be feasible for the organization and allocated resources. An organization can come up with the best possible, best practice risk management plan, but find it completely unactionable because they don’t have the capabilities, technology, funds, and/or personnel to do so. It’s all well and good to recommend that cybersecurity risks be mitigated by setting up a 24/7 continuous monitoring Security Operations Center (SOC), but if your company only has one IT person on staff, that may not be a feasible action plan.

Executing on an effective risk management plan necessitates having the right people, processes, and technology in place. Sometimes the challenges involved with running a good risk management program are mundane — such as disconnects in communication, poor version control, and multiple risk registers floating around. Risk management software can provide your organization with a unified view of the company’s risks, a repository for storing and updating key documentation like a risk register, and a space to collaborate virtually with colleagues to check on risk mitigation efforts or coordinate on risk assessments. Get started building your ideal risk management plan today!

Emily Villanueva, MBA, is a Senior Manager of Product Solutions at AuditBoard. Emily joined AuditBoard from Grant Thornton, where she provided consulting services specializing in SOX compliance, internal audit, and risk management. She also spent 5 years in the insurance industry specializing in SOX/ICFR, internal audits, and operational compliance. Connect with Emily on LinkedIn .

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The Importance of Risk Management

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4 Reasons To Study Risk Management

✏️   table of contents.

What is risk management exactly? Why study risk management? Why is risk management important? Studying risk management online

If you think about it, risk touches almost every part of our daily lives and businesses. Every time we drive a car, we accept the risk of damage and injury. If we start a business, we accept risks associated with property, reputation, and finances. Learning how to manage risk in your daily life, and having the right insurance measures in place, will certainly make it easier when things go wrong. In fact, if you study risk management, you could even find yourself being able to identify and explore potential risks in organisations or even on an international scale.

Understanding and studying risk management means no more rolling the dice on what to do when posed with potential risk threats.

From insurance agents, risk managers, underwriters, claims, marketing, IT, human resources and even customer service representatives, this skill unlocks a lot of exciting career choices. Let’s take a deep dive into the career of risk management.

What is risk management exactly?

Risk management is the process of identifying and assessing risks to a business. These risks are usually a mix of financial, legal, technology, management and even natural disaster liabilities. As someone working in the risk management team of a company, or to another organisation, you’ll help to identify all potential risks they could be facing.

Here are the four reasons you should study risk management:

1. enjoy an exciting career.

If you choose to take on a position in the risk or insurance fields, your daily work life will be far from boring. This kind of work is extremely varied and you’ll be required to create innovative approaches to control, prevent and reduce losses that can result from risk. This is required across a wide range of industries and activities.

2. Secure your future opportunities

Studying risk management and learning how to lessen financial losses will also expose you to the role of business strategies in general. This means that the course material is relevant to different management roles in many industries across the world. This qualification will give your CV a distinct edge wherever your career may take you.

3. Legislative understanding

Learning how to identify and manage risks also means being able to eventually prepare for these challenges at every turn. This often requires having an insight into how the legislature governs this process of reducing risk. In fact, many regulations are still being introduced in the wake of the recent global recession. This has led to a spike in demand for specialists in risk governance, particularly in the retail banking and insurance sectors.

4. Become An Entrepreneur

You’ll learn all about what risks businesses face on a day-to-day basis, as well as what triggers each one. You will also learn how to draft formal documentation, like issue and risk logs, as well as risk management plans, which is important for securing funding and investment for business plans. This essentially positions you in the perfect zone to start your own enterprise on a national or even international scale.

Why is risk management important?

By understanding what risk management is, you’re more likely to understand its importance in any business environment. Think of it this way, risk management is effectively the process of attempting to control future outcomes by being proactive rather than reactive. By outlining all the potential risks or liabilities involved in any organisation, you’re empowering that business to have the necessary tools should anything go wrong. Risk management allows business owners to make informed decisions to ensure the smooth operations of the company, and of course, their profit.

Effective risk management will be able to reduce the company’s liability with procedures that ensure both the company and staff are at all times adhering to lawful practices and practising health and safety protocols.

Risk management should have the ability to foresee future possible risks involved and have contingency plans available to be able to act on them before the liability occurs. Whether the risks involve a new factory layout or a new company venture, risk management weighs up all the options and prepares for it with company procedures and policies to curb the possible liabilities involved.

When starting out on a new project, risk management starts to play an important role in evaluating the potential risks involved and foreseeing risks that are not always apparent. What this does is help aid in the reduction of any liabilities the project might face, and should an incident occur there is already a plan in place to reduce or resolve the liability. Ultimately Risk management becomes a vital role in the company’s decision-making process.

One of the tasks for risk management is to eliminate any risks involved to staff and create a safe working environment whether it be in the warehouse, office and externally. This will in turn help drive employee success and work culture in the workplace increasing worker production.

Studying risk management online

Our Risk Management course, with a specific focus on operational risk management, will provide a general introduction to risk management in organisations and will equip you to identify and manage risk in internal and external environments.

Module 1: Introduction to Business Principles and Statistics

Module 2: Risk Management Processes

Module 3: Employee Legislation and Compliance

Module 4: Business Legislation and Compliance

Module 5: People-related Risk Management

Our course curricula are developed by leading academics and experts in the field. All courses are internally quality assured and approved by iQ Academy’s Academic Board. iQ Academy is registered with the Department of Higher Education and Training as a Private Higher Education Institution. Our Short Courses are institutional learning programmes and are non-credit bearing.

Certificates are issued in the student’s legal name. Students must meet the qualifying criteria to receive this certificate (obtain minimum pass mark, fully paid-up student account and submission of required documentation).

If you are ready to get started, view the risk management course here to see when the next intake starts. Alternatively, feel free to contact us whenever you’re ready. Our knowledgeable, friendly team is standing by to ensure that all of your course-related queries are answered.

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Reflection on the Concept of Risk Reflective Essay

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According to the internationally accepted definition, risk can be described as “the effect of uncertainty on objectives” (Australian Government 2010, p. 1). It is important to examine the peculiarities of this interpretation and its implications for the work of various practitioners.

Overall, one can argue that this definition can throw light on various factors that can influence the work of organisations. Therefore, this framework can set higher standards for the work of risk managers and business administrators.

Previously, risk could be regarded as the probability of loss; nevertheless, this interpretation does not fully reflect the complexity of this notion. At first, one should mention that the new definition highlights the idea that risks should not be associated only with negative consequences.

According to this approach, one should also explore the opportunities which are available to individuals and organisations. Overall, this change can have significant implications for risk managers who need to know how to derive benefits from uncertainty which does not necessarily lead to financial losses or other adverse effects.

This is one of the details that should be distinguished.

Furthermore, the focus on the objectives is important because in this way, one can better understand the complexity of problems encountered by organisations and separate individuals. It should be noted that companies may pursue a variety of goals that can be related to product development, HR policy, profitability, market positioning, and so forth.

Therefore, business administrators and risk managers should consider a wider range of problems or opportunities to which an organisation can be exposed (Lundqvist 2014, p. 393). This approach is beneficial because it sets higher standards for risk managers.

In particular, they should understand different aspects of organisational performance and the influence of external environment (Goldin 2014, p. 325). In this way, they can get better insight into the uncertainties that can influence enterprises.

This is one of the benefits that should be considered. Additionally, one should remember that objectives can be short-term and long-term. Therefore, one should be able to classify risks in terms of their time horizon. This activity can be important for developing the strategies of a company.

Admittedly, this approach can create several difficulties for risk managers. These problems can manifest themselves at the time when the objectives are not clearly formulated. However, it is vital to identify risks in a specific way (Treasury Board of Canada Secretariat 2012).

Thus, this definition can be criticised due to the lack of precision. Furthermore, in some cases, it may be difficult to measure the impact of risks. This task can be very challenging at the time when the objectives are not quantifiable. These are some of the difficulties that should be identified.

Nevertheless, despite these limitations, this definition should not be dismissed because it is useful for identifying and averting different problems that businesses can face.

On the whole, this discussion shows that the new definition of risk prompts managers to look at this concept from various perspectives. In particular, they should not focus only on the possibility of financial losses. More likely, they need to investigate a variety of uncertainties that influence the objectives of companies or separate individuals.

Certainly, it may be difficult to measure the impact of uncertainty on some objectives. This is one of the limitations that should be taken into account. However, this framework encourages risk managers to get a better idea about internal and external factors influencing the work of companies. This is why this definition should be adopted.

Australian Government 2010, Risk Management Principles and Guidelines . Web.

Goldin, I 2014, ‘The Butterfly Defect: Why globalization creates systemic risks and what to do about it’, Journal Of Risk Management In Financial Institutions , vol. 7, no. 4, pp. 325-327.

Lundqvist, S 2014, ‘An Exploratory Study of Enterprise Risk Management: Pillars of ERM’, Journal Of Accounting, Auditing & Finance , vol. 29, no. 3, pp. 393-429.

Treasury Board of Canada Secretariat 2012, Guide to Integrated Risk Management . Web.

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IvyPanda . 2019. "Reflection on the Concept of Risk." June 21, 2019. https://ivypanda.com/essays/reflection-on-the-concept-of-risk/.

1. IvyPanda . "Reflection on the Concept of Risk." June 21, 2019. https://ivypanda.com/essays/reflection-on-the-concept-of-risk/.

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