Risk management is the process of mitigating risks to limit their impact on the health of a business.
What are The Components of Risk Management?
For risk management to be effective, it must be systematic, structured, collaborative, and cross-organizational. There are several ways to categorize an effective risk management process’s constituent elements, but it should incorporate the following business risk management elements.
1. Risk Identification
Risk identification is the process of documenting potential risks and then categorizing the actual risks the business faces. The totality of potential and actual risks is sometimes referred to as the risk universe. It’s important to systematically identify all possible risks because it reduces the likelihood that potential sources of risk are missed.
2. Risk Analysis
Once risks have been identified, the next step is to analyze their likelihood and potential impact. How exposed is the business to a particular risk? What is the potential cost of a risk becoming a reality? An organization might divide risks into “serious, moderate, or minor” or “high, medium, or low” depending on their potential for disruption. Risk analysis helps businesses to prioritize mitigation. The business might choose to deprioritize mitigation compared to a risk with a high cost and a high probability of occurring.
3. Response Planning
Response planning answers the question: What are we going to do about it? For example, if during identification and analysis, you realized that the business is at risk of phishing attacks because its employees are unaware of email security best practices, your response plan might include security awareness training.
4. Risk Mitigation
Risk mitigation is the implementation of your response plan. It is the action your business and its employees take to reduce exposure. Following our previous example, the implementation might involve security awareness training, the creation of onboarding material to educate employees, and so on. The organization must design controls that reduce the risk down to appropriate levels. These controls must be tested to ensure they are suitably designed and operating effectively.
5. Risk Monitoring
Risks are not static; they change over time. The potential impact and probability of occurrence change, and what was once considered a minor risk can grow into one that presents a significant threat to the business and its revenue. Risk monitoring is the process of “keeping an eye” on the situation through regular risk assessments.