What is Risk Management and how does the process work?

There is no such thing as a business without risk. Companies had to manage (and most importantly overcome) various obstacles introduced by technological, competitive, economic, and environmental factors. A 2022 PwC Global Risk Survey states that businesses that take up a strategic approach to risk management are 5x more likely to achieve better business outcomes and deliver stakeholder confidence.

This blog is going to give you a brief introduction to what risk management is, how important it is, how businesses react to risks commonly, and what are the steps of the risk management process, so that you can use it to improve your business performance.

Risk management is the process of recognizing, evaluating, and minimizing or eliminating threats and uncertainties that can compromise your organizations’ capital and earnings.

It is focused on trying to figure out what might not go to plan and preparing counter-measures to mitigate the risks. The process involves evaluating risk’s probability, its impact, developing strategies for actions to minimize harm, and recording and observing the measure’s effectiveness.

Let’s take a look at what strategic risk comprises:

Your ability to differentiate your offerings and add value can be diminished with new changes in the competitive environment which can gradually lead to a significant loss in revenue.

This is a risk stemming from errors in internal operations. For example if a restaurant has a policy of throwing out chicken after an hour, but employees ignore the rule, it can cause foodborne illness and negatively affect the business.

This risk involves the possibility of losing market share, reputation, or money due to stakeholders’ loss of confidence in the franchise’s objectives. This usually happens if a business fails to control the strategic risk sources.

When the current carrying value of your company’s assets can get higher than its projected future cash flow, it is under threat of becoming impaired. Changes in consumer demand, legal factors, and physical condition can cause asset impairment.

Now, let’s take a look at the 3 major causes of strategic risk:

Information has always been essential for effective leadership. If your business has any gaps in performance measures it can impact the decision making and decentralize it.

It may be rewarding to take entrepreneurial risks but company culture that also entails internal competition and executive resistance can cause problems.

This pressure usually results from a rapid growth or expansion of your business. The industry knowledge gap and talent shortage due to this rapid expansion is risky.

Risk management is important for several reasons. Let’s take a look at them:

Risk management is essential if you want to plan for the future. You and your organization can move forward by having a strategy that effectively manages threats.

Greater awareness of risks and visibility within the workplace will allow your employees to proceed with necessary training that can ensure safety.

With risk management you get a better understanding of the risks. With more data you can make decisions more confidently across business operations.

With effective risk management you will be able to maintain a safe working environment which encourages employees and makes them more engaged with work.

Failing to comply with relevant rules and regulations can lead to legal repercussions. Risk management considers this as a risk and ensures that you stay 100% compliant.

Now, let’s take a look at how businesses react to potential risks or the primary types of risk management:

When an organization figures out that there is a risk associated with the reward or a particular situation and accepts the risk, it is risk acceptance. In this type of risk management a business understands that mitigating the risks and the events that may follow is far costlier and demanding of effort than just accepting the loss from the risk.

When a business shares the risk to the entire team it is the method of risk sharing. It is generally seen with the employer-based benefits that enables a business to pay a share of insurance premiums with the employee. With this the company can share the risk (in essence) with all the employees who are enjoying the insurance benefits. The cost of premiums shrink proportionately with the number of participants sharing the risk.

When a business manages the risks by shifting them to another party, it is risk transference. The best example here is how insurance works. For example, when a business gets insurance for a specific event/s, they successfully transfer the financial risk to the insurance company.

In this method of risk management a business aims to minimise the loss rather than eliminating it completely. This approach lets businesses use methods and steps to reduce the effect of a particular event. It is a combination of risk acceptance and reduction as it acknowledges the consequences first and then tries to contain the loss from spreading.

Risk avoidance is a method for eliminating risk by not involving in activities that may incur losses. For example, if a business avoids business expansion (for the time being) to prevent the risks of overextending their capital, inability to generate enough revenue to cover the cost of expansion, etc. they use this method.

These five are the basic steps that businesses take to manage risks:

In its operational environment, there are various types of risk (regulatory, market, environmental, legal, etc.) that a business is exposed to. A business should try to identify as many risk factors as possible.

Having a risk management virtual assistant by your side is helpful during these stages, because in manual systems these steps involve a lot of administration and documentation. Your risk management VA can insert all the information into the system and make them visible to every stakeholder in the organization.

This is far better than having to send an email for a report that contains all the information.

In this step you have to analyze the risks you have identified. You have to figure out the scope of the risk and how different factors within your business are linked with those risks.

There can be risks that are barely any inconvenience and risks that can bring the whole organization to a standstill. In this step, you have to determine how many functions of your business are affected by the risk factors to gauge the seriousness and severity of it.

You have to consider factors like severity of impact, loss of time, potential financial loss to the business when you are analyzing each risk. By focusing on each risk you should try to understand any common issues across the board so that you can further refine the process.

At this stage, you need to rank the risks or prioritize them. This is required because it will allow the organization to get a complete view of the risk exposure.

For example, the upper management does not need to intervene if the business is only vulnerable to a couple of low-level risks (risks that only cause some inconvenience). On the other hand, immediate intervention is needed if there is any high-rated risk (risks that can cause catastrophic loss).

At this stage you either focus on eliminating the risk completely or containing it as much as possible. To do so, you have to connect with experts in the risk specific fields.

You have to contact every stakeholder and set up meetings to discuss the risk and its possible solutions. You should ensure that the upper management can keep a close eye on the solutions everyone suggests for risk mitigation and the progress the company makes.

Whatever you do, you cannot eliminate all the risks that are present. For example, environmental risks and market risks will always stay present and need to be monitored.

You have to connect and check in with risk managers individually so that you’ll know if throughout the project any red flag pops up. And actively maintaining a risk register is another important task. If you stay consistent you can create a living document for you and your team to refer to anytime. It will also allow everyone to see how risks are changing, enabling them to react faster to risks and even take proactive measures.

Just like there are various types of risks that can affect a business, there are various strategies to mitigate them too. Following are some of the risk mitigation strategies that most business follow:

• Cyber liability insurance 
• Professional liability insurance 
• General liability insurance 
• Property insurance 
• Product liability insurance 
• Business interruption insurance 
• Worker’s compensation insurance 

Traditionally, businesses either hired an outside firm for the risk management or appointed in-house employees with experience in this matter. However, currently risk management is heavily getting outsourced to virtual assistant service providers.

Businesses are preferring risk management virtual assistants or a team of them for the tedious yet necessary task. This will help you avoid paying unnecessarily huge amounts to firms specializing in risk management or adding experienced professionals to your in-house team. To know how to hire a virtual assistant you can refer to our detailed blog on this topic.

Both of these expensive options are not necessary when you can get the right talent, skill, and expertise at a fraction of a cost and pay only for the tasks completed.

To avoid business disasters, ensuring that your goods and services meet the highest requirements for quality is one of the most labor-saving and cost-effective risk management strategies.

A company’s reputation depends heavily on customer satisfaction which in turn contributes greatly to a company’s sustainability and long-term success. Quality assurance would greatly help a company by keeping the quality consistent or gradually improving it.

By testing a product or service’s dependability, efficacy, and usability and fixing any problems that you identify would ensure that customers get the best from your brand.

Business system silos are unconnected and inaccessible parts of a company’s operations that do not share information or communicate. The more silos you have the more difficult managing risks would be.

An organization with siloed systems can have important data about possible risks in various formats and separate locations. One needs to put all the signals about potential issues into one coherent picture to manage risks effectively.

By establishing a unified view or removing these silos you can improve your decision-making and get better at responding to risks.

Risk management involves preparing for potential threats and being prepared to adjust and adapt when things go south. Be it entrepreneurs, start-ups, small, medium, or large business owners being prepared to alter business plans is necessary.

With external factors changing unexpectedly you will run into unanticipated opportunities and challenges. To maintain your forward direction you need to be adaptable and ready to change your course.

To do this successfully you need to go through regular evaluations which will enable you to see whether your business is moving towards the right direction, potential red flags within the business and so on.

Risk management is an integral part of all businesses. You know that some risk is inevitable, but if you still try your best to eliminate or minimize most of it you would benefit tremendously.

But as you cannot plan for everything and hiring a risk management firm or building new in-house teams is way too expensive, the smart and widely popular solution is to outsource this function to experts.

If you partner with a reliable virtual assistant services provider you can get a VA or team of them who can take care of your risk management without the obvious downsides of doing all of this on your own.