Is the identification, assessment, and prioritization of risk (defined in ISO 31000 as the effect of uncertainty on objectives, whether positive or negative) followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate eventsor to maximize the realization of opportunities.
Risks can come from uncertainty in financial markets, project failures (at any phase in design, development, production, or sustainment life-cycles), legal liabilities, credit risk, accidents, natural causes and disasters as well as deliberate attack from an adversary, or events of uncertain or unpredictable root-cause.
Several risk management standards have been developed including the Project Management Institute, the National Institute of Science and Technology, actuarial societies, and ISO standards. Methods, definitions and goals vary widely according to whether the risk management method is in the context of project management, security, engineering, industrial processes, financial portfolios, actuarial assessments, or public health and safety.
The strategies to manage risk typically include transferring the risk to another party, avoiding the risk, reducing the negative effect or probability of the risk, or even accepting some or all of the potential or actual consequences of a particular risk.
Certain aspects of many of the risk management standards have come under criticism for having no measurable improvement on risk, whether the confidence in estimates and decisions seem to increase.
What is Business Risk Management?
Business risk management is a subset of risk management that focuses on risks to business operations, systems, and processes. Identifying, prioritizing, and addressing risks will help you to minimize unforeseen incidents and penalties and keep your business on course.
The goal of business risk management is to detail what kinds of risks exist in your specific business and figure out how to prevent them entirely or minimize their impact on the business as a whole. To do this, most risk managers take a five step approach. First, identify the risks involved in all aspects of the business. Second, review the probability of the negative events occurring. Third, come up with a plan, a way to decrease the risk. Fourth, put the plan into action. Last, monitor the situation to see if the plan is effective or if it needs to be altered.
Kinds of Risk
When many people think of risk management, they think of events that need to be insured against, things like fires, floods, and accidents in the workplace. These kinds of events are important in business risk management, but they are not the only kinds of risks that need to be considered when managing risk. Risk management includes risks that are a part of the industry the business is in and the way in which it does business. Because of this, business risk management is a way of codifying the way decisions are made and guiding those decisions are made in the future.
Most businesses take risks with their financial assets on a regular basis. Choosing the wrong supplier or distributor can backfire when the supplies needed to make a product do not arrive on time or the distributor goes out of business, stranding the products with no way to move them. Relationships with clients also can be risky, especially if a company comes to rely on one too much. A business risk management process or plan should cover these kinds of risks and how decisions should be made. In other words, it should say how much risk is too much in a financial relationship.
While these may include physical risks, business risk management should also take into account how to prevent theft, fraud, and other crimes by employees. Another risk to a business caused by employees is simple human error, where even a tiny mistake in entering data or in the manufacturing process can have huge and sometimes devastating consequences. Risk management should include a quality control process for data input and production to minimize the impact of employee errors.
Benefits of Business Risk Management
Having a risk management plan in place not only can help in the event of an emergency, it can also help guide the way the company does business. It will help to organize the allocation of resources and capital by helping to regularize the way that priorities are set. This will help with decision-making and planning, as well. Since risk management requires the anticipation of potential problems, it can help the business prevent a disaster or at least prevent a disaster that happens from having too severe an impact on finances and other assets.
There are many areas of a company that benefit from business risk management, and not just those that deal with safety and disaster planning. Make sure that your business has a plan for dealing with all of its risks!
The Application of Risk Management
The application of Risk Management (RM) fundamentals are intended to help organizational leaders, supporting staff, managers, analysts, and operational personnel with developing a framework to make risk management an integral part of planning, preparing, and executing organizational missions.
The purpose of this 43 page document is to:
Promote a common understanding of, and approach to, risk management;
Establish organizational practices that should be followed;
Provide a foundation for conducting risk assessments and evaluating risk management options;
Set the fundamental underpinning for institutionalizing a risk management culture through consistent application and training on risk management principles and practices; and
Educate and inform organizational stakeholders in risk management applications, including the assessment of capability, program, and operational performance, and the use of such assessments for resource and policy decisions.
Four foundational elements frame what executive management and directors need to consider when evaluating the best way to implement enterprise risk management (ERM). These four elements – process, integration, culture and infrastructure – are intended to be flexible in application because strategies, organizational structures, operating philosophies and risk profiles vary in complexity across industries and firms.