Risks are common in any business or project, but how organisations choose to respond to and face risks makes the difference. The British Academy for Training and Development offers a specialised Risk Management in Projects course designed to equip professionals to manage risks effectively throughout the project lifecycle. The risk management lifecycle provides a more structured approach to risk identification, analysis, mitigation, monitoring, and review throughout the entire life of a project or operation.
Understanding and applying these core stages will further strengthen the decision-making process of organisations, leading to losses and the general improved resilience of the companies. The article discusses the top five stages in the risk management lifecycle to help build a stronger and more proactive risk strategy.
Step 1: Identify the Risk
The starting point for any process of risk management is to identify the risks to which the business is exposed within the environment in which it operates. There are different types of risks: Different types of risks require different approaches. Broadly, risks can be categorised into strategic, operational, financial, or hazard risks.
Strategic risks: Such types of risks usually arise because of the changes which may take place in the business environment, market dynamics, or even in the strategic direction of the organisation. For instance, the emergence of a new competitor or technological innovation may disrupt the company's position in the market.
Operational risks: These are risks that arise from the daily actions of the organisation. As an example, these risks may include the failure of important processes or systems or resources, human errors, and breaches of internal controls.
Financial risks: Financial risks mainly revolve around the economic scenario and financial dealings of the organisation itself. They include changes in market prices, interest, credit quality, and currency exchange rates.
Hazard risks: These risks include risks originating out of natural calamities, accidents, or some other sort of event occurring that can cause large-scale damage in terms of tangible or physical assets of an organisation.
Strategic risks: This risk involves changes that could happen in the business environment or market dynamics or even in the organisation's strategic direction. For example, an example of such a risk would be the emergence of a new competitor or technological innovation that could disrupt the marketing position of the company.
Operational risks: Such risks arise from everyday operations of a business in an organisation. Failure of critical processes, systems or resources, human errors or breaches of internal controls may constitute operational risk.
Financial risks: All financial risks are associated with the economics and financial activities of the organisation. Changes in market prices, interest rates, credit quality, and currency exchange rates could all represent financial risk for the organisation.
Hazard risks: These risks involve naturally occurring calamities, accidents, or some other events which may happen to cause immense destruction to the assets of an organisation.
So, it becomes imperative to try to identify most of this risk in some form. In a manual environment, these risks are noted down manually. In case the organisation has some risk management solutions employed, all this information is inserted directly into the system. The advantage of this method is that these risks are visible to any stakeholder in the fact that they have access to the system. Rather than being stored in those precious emails, by having to write in to some report for access, anyone who wants to see what risks have already been identified can do so by simply needing to access the risk management system.
Step 2: Risk Analysis
Once a risk is recognised, an analysis of it has to be done. The area of the risk needs to be identified. It is equally very essential to understand the relationship between that risk and other factors within the organisation. To evaluate the risk's magnitude and seriousness, it will be necessary to check how many business functions such a risk will affect. Then, it could be a risk that may freeze the entire business if realised or may simply be a minor hindrance in analysis.
In manual risk management, such analysis must be performed manually. The most critical among the initial steps in the implementation of a risk management solution is the mapping of risk to various documents, policies, procedures, and business processes. The system shall already have certain mapped risk management procedures to assess the risks concerning their utmost implications.
Step 3: Evaluate the Risk or Risk Assessment
Risks must be ranked and prioritised. Most risk management applications differentiate various categories of risks based on how serious the risk presents itself. For example, damages rated as low may disrupt regular operations, while risks assessed at the highest are those that can damage or destroy something of value.
Risk ranking is critical to allow the organisation to get an overview of risk exposures across the entire organisation. There might be several low-level risks that could potentially affect the business, but this does not warrant action from upper management. Then, just the presence of one single highest-rated risk is sufficient grounds for immediate action. There are two classifications of risk assessment:
1. Qualitative Risk Assessment
The qualitative risk assessment is essentially qualitative. While we can derive metrics from the risks, most risks are not quantifiable. The climate change risk that several businesses are focusing on cannot be measured as such, but only separate components can be measured against each other. There must be a qualitative risk assessment method that provides objectivity and standardisation to risk assessments across the enterprise.
2. Quantitative Risk Assessment
Quantitative risk assessments are the best approaches when measuring finance-related risks. This makes the practice of quantitative risk assessments quite a norm within the financial sector, as this sector is primarily all about figures, whether it be the money, the metrics, the interest rates, or any other point of data that is considered significant for assessing risks within a financial concern. Also, since quantitative risk assessments of automated assessments are easier than those of qualitative ones, they are generally deemed more objective.
Step 4: Treat the Risk
Every risk should be avoided or contained as diligently as possible. This is done by connecting the relevant professionals or experts from the field about which the risk refers to. In a manual environment, this implies reaching out to every stakeholder and then setting up sessions where all will talk regarding the issue. Then the subsequent complication is that the discussion is broken down into various e-mail threads, different phone calls, different spreadsheets, and many more.
With a risk management solution, the relevant stakeholders will all be sent notifications from within the system. There will also be a discussion about risks and their possible solutions in the same system. Upper management will also be well aware of solutions being proposed and progress made within the system. So instead of everybody contacting everybody to get wired-up news, everyone can get the news from the risk management solution directly.
Step 5: Monitor and Review the Risk
Some risks cannot be completely eliminated; there will always be some risks. Market risks and environmental risks: these are just two examples of risks that will always have to be monitored. Under manual systems, monitoring occurs of diligent employees. Such professionals need to closely watch all risk factors. In a digital environment, the risk management system assesses the entire risk profile of the organisation, and at the moment that any factor or risk change occurs, it is visible to everyone. Furthermore, computers are much better than humans in the continuous monitoring of risks. Monitoring risks ensures business continuity.