The practice of risk management is an essential part of running a long-term successful business. Some businesses shell out millions of dollars annually to protect themselves against possible risks and threats while other firms might not know what risk management is.
So, what is risk management? Risk management is the practice of forecasting and evaluating potential risks and how they may compromise the objectives of the company. The goal of risk management is to maximize efficiency while minimizing risk. The first and highly crucial step is risk identification.
What is Risk Identification?
Risk identification is the key first step in the risk management process. Organizations must build a register of risks that could interfere with achieving their objective(s). Depending on your firm’s complexity, size, industry, and various other factors, identification of potential risks could be a straightforward process that might not need constant revisitation or a complex one that requires continuous, ongoing updates. It is essential to empower those closest to the source of risk to communicate and document concerns to ensure your organization is aware of potential obstacles.
Sources of Risk
Risk is all around us. Every decision you make involves a certain level of uncertainty, which is the foundation of risk. Businesses break down sources of risk into two segments. The two segments are internal and external factors. Internal factors can include your workforce, workflows, and so forth. On the other hand, external factors can include third parties, regulations, security breaches, and so on.
Certain risk sources are more relevant and emphasized based on several characteristics such as your field of work for example. A car manufacturer might place a lot more emphasis on supply chain risk than marketing risk due to themselves sourcing parts from all around the world. This emphasis will cause the risk managers at said car manufacturer to focus a lot more resources into their supply chain control.
How to Identify Risk Sources
Numerous ways are available to help identify your business’s most important sources of risk. Risk management software is available to help integrate and keep the risk process consistent, which can help a firm of any size identify and prevent risk. Businesses can go one step further by ensuring this software also includes a third-party risk management framework so you can identify the risks throughout the vendor lifecycle. Risk identification or any step of the risk management process can be very beneficial. Common internal practices can also be implemented to help identify new threats and monitor existing ones.
Brainstorming is a very common practice for the identification of new risks to your business. Brainstorming involves cooperating with your managers and corporate officers to identify the various events that could affect your firm, stakeholders, or key vendors.
Contrary to the attitude you may try to hold day-to-day, the idea of thinking positive is not always the right thing to do. For risk identification, being pessimistic is very beneficial to identifying if a factor is worth your time and resources. Pessimism is a thought process that does wonders in identifying the level of risk associated with a particular event. If it helps, think about it as being a “realist”, not a “pessimist.” Your organization needs to be objective and honest with itself to ensure risk is identified and managed appropriately.
In certain cases, upper-level management and administration might not have the clearest idea of where risk can lie, especially on the ground level. Employee and consumer feedback is a direct way to receive day-to-day insight on potential threats that lie within the business units’ daily procedures. Front-line employees may encounter new risks from time to time or encounter the same issue repeatedly. The ability to track and keep an eye on these issues is a great starting point in terms of minimizing risk in your company.
When done correctly, risk identification prepares your organization for the next stage of the risk management process, risk analysis. The time spent upfront identifying potential sources of risk now enables the assessment process to determine where time and resources should be spent to control and minimize risks.
Anna Kornesczuk is the Risk Management Solutions Lead for Fusion Risk Management, a leading provider of risk management software and solutions for businesses.
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