The current dynamics of the market, plus economic and political uncertainties, has made risk management the top of the investments of organizations.
About this we will talk throughout this article. Continue reading to understand in depth what business risks are, what is risk management and why it is important to worry about it!
What sets a risk in the business?
A risk, in a business context, is anything that threatens the organization’s ability to generate profits at its target levels. In the long run, risks can threaten the sustainability of the company.
Business risks are broadly categorized as pure risks, which are negative events over which the organization has no control, and speculative risks, which are potential effects of actions taken and choices made that may have positive effects and/or Negative.
Another model categorizes business risks as internal and external (resulting from events occurring outside the organization).
What is risk management?
Risk management is the process of identifying, evaluating and controlling threats to the capital and gains of an organization. These threats, or risks, can derive from a wide variety of sources, including financial uncertainty, legal responsibilities, strategic management errors, accidents, and natural disasters.
IT security threats and related risks, for example, have become one of the top priorities of companies with digitized business models. As a result, they invest in identifying and controlling threats to their digital assets, including proprietary corporate data, customer personal information, and intellectual property.
Risk management standards have been developed by various organizations, including the International Organization for Standardization (ISO). They are designed to help organizations identify specific threats, assess vulnerabilities, think ways to reduce these risks, and then implement efforts according to organizational strategy.
The principles of ISO 31000
, for example, provide structures for improvements in the risk management process that can be used by companies, regardless of size or segment of activity. They were designed to “increase the probability of achieving goals, improve identification of opportunities and threats and effectively allocate and use resources for the treatment of risks,” according to ISO.
ISO recommends that the following target areas, or principles, should be part of the overall risk management process:
- The process must create value for the organization;
- Must be an integral part of the general organisational process;
- Take into account the company’s general decision-making process;
- explicitly address any uncertainty;
- be systematic and structured;
- Based on the best available information;
- be adapted to the project;
- Take into account human factors, including possible errors;
- be transparent and inclusive;
- be adaptable to change;
- continuously monitored and improved.
What steps make up a risk management strategy?
Regardless of whether they are based on ISO principles, all risk management plans follow virtually the same steps. They are:
The company identifies and defines potential risks that may negatively influence a specific process or project.
Once specific types of risk have been identified, the company determines the probabilities of occurrence, as well as its consequences.
The objective of the analysis is to better understand each specific instance of risk and how it can influence the projects and objectives of the business.
The risk is then evaluated after determining the general probability of occurrence, combined with its general consequence.
The company can then decide whether the risk is acceptable and whether it is willing to accept it based on its “risk appetite”.
During this step, the company evaluates its best-ranked risks and develops a plan to relieve them by using specific controls.
These plans include risk mitigation processes, prevention tactics and contingency plans in the event of a risk being realised.
Part of the mitigation plan includes tracking to continually monitor and track new and existing risks. The overall risk management process should also be revised and continually updated.
Why risk management?
Risk management is important in an organization because, without it, it becomes quite difficult to define your goals for the future. If the company defines objectives without taking into account the risks, it is likely that it loses its direction once any of these risks become real problems.
In addition to all that we have already pointed out, see below for some reasons why you should invest in risk management in your business
Risk management reduces surprises
One of the strong characteristics of a risk management strategy is the early awareness of potential problems. This means that the right people can intervene to mitigate a problem before it becomes too serious.
This strategy also avoids the “fire fighting” scenario, which is often an expensive and costly way to fix problems.
Risk management before they materialize produces fewer “sensational headlines”, but a smoother, more efficient and more economical way to manage business.
Provides better quality data for decision making
With risk management, leaders have access to better quality and more useful data, allowing them to make better decisions, more grounded in the reality of the business or a specific project.
Being able to access real-time risk information means that decisions are made based on the latest data, not on a report that is already outdated before reaching the executive team.
Makes the expectation of success more realistic
Knowing that a risk is being managed actively establishes an expectation for the success of a project. With this structure implemented, everyone begins to work knowing that success is the expected result.
This changes the entire mentality of the team: knowing that they are working on something aimed at delivering great results to the company improves morale, supports productivity and, hopefully, engenders and environment where success is achieved.
Improves team focus
With the risks being tracked and actively managed, teams can focus on critical results. Risk management supports this because it serves to highlight where results may not be achieved, focusing on the team in what to do regarding concerns to put projects and action plans back on track.
With risk management launching a light on challenging areas, teams can act quickly to deal with them, ensuring that actions are taken to deliver successfully. This prevents problems from being overlooked in the occupation of day to day operating — especially when these problems seem difficult to solve.
How about risk management is a reality in your company? What did you think of the reflection we brought in this article? Leave your comment!