Understanding the Risk Management Process

Risk management is a deliberate process that involves identifying, assessing, and mitigating potential risks to achieve a desired outcome. This process is often used in business, finance, and other areas where uncertainty and unpredictability are present.

The risk management process typically starts with identifying potential risks, which can be internal or external. For example, a company may identify a risk of financial loss due to a market downturn. According to the risk assessment process, this risk is categorized as a high-risk event.

A risk management plan is then developed to mitigate or minimize the identified risks. This plan may include strategies such as diversification, hedging, or contingency planning. By implementing these strategies, the likelihood and impact of the risk can be reduced.

Effective risk management requires ongoing monitoring and review to ensure that the risk management plan remains relevant and effective. This involves regularly assessing the likelihood and potential impact of identified risks and updating the risk management plan as needed.

Risk management is the process of mitigating risks to limit their impact on the health of a business. Business risk is any action or inaction that increases a business’s exposure to factors that might reduce its revenue, damage its reputation, or cause it to fail altogether.

Every business leader manages risks when making decisions, evaluating risks and rewards to choose the best and safest course of action.

A coherent risk management framework systematically adheres to a business’s risk management policies and procedures. This is in contrast to ad-hoc risk management, which is unlikely to consistently contribute to the business’s objectives.

Many regulatory frameworks and auditing standards require businesses to implement systematic risk assessment and management processes.

Risk identification is the process of documenting potential risks and categorizing the actual risks a business faces. This process is crucial to systematically identify all possible risks and reduce the likelihood of missing potential sources of risk.

The risk universe is the totality of potential and actual risks a business faces, and it's essential to consider not just current risks but also those that might emerge in the future.

Risk sources may be internal or external to the system that is the target of risk management. Examples of risk sources include stakeholders of a project, employees of a company, or the weather over an airport.

Risks are related to identified threats, such as the threat of losing money, the threat of abuse of confidential information, or the threat of human errors, accidents, and casualties.

Common risk identification methods include objectives-based risk identification, scenario-based risk identification, taxonomy-based risk identification, common-risk checking, and risk charting.

Here are the main risk identification methods:

Risk charting is a method that combines the above approaches by creating a matrix under headings such as resources, threats, modifying factors, and consequences.

Risk analysis is a critical step in the risk management process. It involves identifying and assessing the likelihood and potential impact of risks.

To analyze risks, you can use qualitative and quantitative risk analysis. This helps determine how a risk will impact your schedule and budget.

Risk analysis helps businesses prioritize mitigation by categorizing risks as "serious, moderate, or minor" or "high, medium, or low" depending on their potential for disruption.

A risk might have a potentially serious impact, but a very low likelihood, so the business might choose to deprioritize mitigation compared to a risk with a high cost and a high probability of occurring.

Analyzing risks involves looking at the likelihood that a risk will be realized, and the potential impact that risk would have on the organization if that risk were realized.

Risk prioritization becomes simpler by quantifying the likelihood and impact on a three- or five-point scale.

The risk's overall risk score is generated by multiplying the risk's likelihood score with the risk's impact score.

The risk owner and risk manager will rank and prioritize each identified risk and opportunity by occurrence probability and impact severity.

Evaluating the probability of occurrence involves determining a percentage, usually on a scale of 1 to 99%, based on experience, project progress, or expert feedback.

The impact severity is estimated using a scale to classify the different impacts and their severities.

A numerical value is assigned to the evaluation to objectively prioritize the risks.

The criticality level of a risk or opportunity is obtained by the equation: Criticality = P x I.

Risk Prioritization is a crucial step in the risk management process. It helps you focus on the most critical risks that could impact your project.

You don't need to tackle all risks at once, as having a large list can be overwhelming. Categorize risks as high, medium, or low to create a clear horizon line and prioritize them accordingly.

High-priority risks demand immediate attention, as they can derail your project. Failure isn't an option, so address these risks first.

Low-priority risks, on the other hand, have little to no impact on the project's schedule and budget. You can act accordingly and focus on more critical risks.

Keeping an issue log is essential to track risks that become issues and implement corrective actions. This helps you stay on top of your risk management plan.

Risk treatment is a crucial step in the risk management process. It involves identifying strategies to reduce the probability of risks occurring or their impact, or to increase the likelihood of opportunities occurring and their benefits.

To develop a treatment plan, an organization must first identify their strategies for treating risks. The objective of the treatment plan is to reduce the probability of the risk occurring or to reduce its impact.

There are four essential techniques for planning risk management: acceptance, transfer, avoidance, and reduction. The acceptance technique involves intentionally assuming risks without financial protections, while the transfer approach shields the organization from losses by shifting risks to a third party.

The avoidance strategy involves choosing not to participate in high-risk ventures, while the reduction approach lowers risks by implementing strategies like insurance. These techniques can be categorized into four major categories: avoidance, reduction, sharing, and retention.

Here are the four categories in more detail:

The ideal use of these risk control strategies may not be possible, and some may involve trade-offs that are not acceptable to the organization. In such cases, the organization must weigh the pros and cons of each strategy and choose the one that best suits their needs.

In some cases, the organization may choose not to mitigate a risk and instead accept, transfer, or avoid it. However, these details should still be captured in the risk register, as they may need to be revisited in future risk management cycles.

Risk monitoring is a crucial step in the risk management process. It involves tracking the progress of risk initiatives and staying updated to have an accurate picture of the project's overall progress.

You'll want to set up regular project meetings to manage risks and have a series of communication channels dedicated to this process. Transparency is key, so everyone in the project knows what's going on and can help manage the process.

The frequency of risk monitoring and reporting depends on the risk criticality, and a monitoring and reporting structure should be developed to ensure there are appropriate forums for escalation and actioning on risk responses.

Risk monitoring is not a one-off event, but a process that recurs through the life of an organization as it endeavors to anticipate threats and proactively handle them. Regular risk assessments can help organizations continue to monitor their risk posture.

Having a risk committee or similar committee meet on a regular basis, such as quarterly, integrates risk management activities into scheduled operations and ensures that risks undergo continuous monitoring. Regular risk assessments can help organizations continue to monitor their risk posture.

The risk management process is a crucial step in ensuring the success of a project. It involves identifying, assessing, and mitigating potential risks that could impact the project's objectives.

According to the ISO 31000 standard, the risk management process consists of several steps, including risk identification, risk analysis, risk evaluation, risk treatment, and risk monitoring.

To identify risks, it's essential to engage your team early in the process and involve stakeholders, including the client's representatives and vendors, in a risk identification session. This will help you create a comprehensive list of potential risks.

Risk management plans should propose applicable and effective security controls for managing the risks. For example, an observed high risk of computer viruses could be mitigated by acquiring and implementing antivirus software.

The risk management plan should contain a schedule for control implementation and responsible persons for those actions. It's also essential to have good documentation, including a risk register that records all identified risks and accompanying scores and mitigation strategies.

The risk management plan should be actionable, with feasible activities that need to be completed for mitigating risks or establishing controls. This requires having the right people, processes, and technology in place.

Here are the key components of an effective risk management plan:

By following these components, you can ensure that your risk management plan is effective in managing project risks.

Risk management strategies help organizations navigate uncertain situations. They involve identifying, assessing, and mitigating potential risks to minimize their impact.

There are several risk management strategies to consider, including leveraging existing frameworks and best practices. This approach can help streamline the risk management process and ensure consistency across the organization.

A treatment plan is a key component of risk management, outlining specific actions to reduce or eliminate a risk. For example, having your car checked annually by a repair shop can reduce the risk of it breaking down.

To develop an effective treatment plan, each action should begin with an action verb and have a clear purpose. This ensures that everyone involved understands what needs to be done and by when.

The cost of a risk mitigation plan must be integrated into the project budget. This helps ensure that resources are allocated accordingly and that the plan is feasible.

Examples of risk management strategies include:

These strategies can be tailored to an organization's specific needs and goals. By incorporating them into the risk management process, organizations can better navigate uncertain situations and achieve their objectives.

Risk management is a crucial process in various industries, and its application varies depending on the sector. Medical devices, for instance, require a rigorous risk management process to identify, evaluate, and mitigate risks associated with harm to people and damage to property or the environment.

In the medical device industry, the International Organization for Standardization (ISO) provides a process framework for risk management in ISO 14971:2019. This standard is applicable to all types of medical devices and requires evidence of its application by regulatory bodies such as the US FDA.

The offshore oil and gas industry, on the other hand, is regulated by the safety case regime in many countries. Hazard identification and risk assessment tools and techniques are described in the international standard ISO 17776:2000.

In the finance industry, risk management is a top priority. Banks and fund managers employ various strategies to protect their assets and maintain a stable financial position.

A traditional measure in banking is value at risk (VaR), which estimates the possible loss due to adverse credit and market events. This helps banks determine how much risk capital to hold on the net position.

Banks also seek to hedge these risks through various techniques and practices. The Basel III framework governs the parallel regulatory capital requirements, including for operational risk.

Fund managers, on the other hand, employ various strategies to protect their fund value, which is often benchmarked against a specific mandate. These strategies can include diversifying their portfolio or hedging against potential losses.

Non-financial firms focus on business risk, which can negatively impact cash flow or profitability. This type of risk is often overlapping with enterprise risk management, which aims to identify and mitigate potential risks that could impact a company's value.

Here's a breakdown of the different types of financial risks faced by organizations:

Customs is a critical aspect of international trade, and risk management plays a vital role in ensuring safety and security.

The European Union has adopted a Customs Risk Management Framework (CRMF) to establish a common level of customs control protection and balance the objectives of safe customs control and the facilitation of legitimate trade.

The CRMF aims to prevent illicit drugs and counterfeit goods from passing across borders.

Two significant events prompted the European Commission to review customs risk management policy: the September 11 attacks of 2001 and the 2010 transatlantic aircraft bomb plot involving packages from Yemen to the United States.

Medical devices require a rigorous risk management process to identify, evaluate, and mitigate risks associated with harm to people and damage to property or the environment.

The International Organization for Standardization (ISO) describes this process in ISO 14971:2019, a product safety standard that provides a framework for management responsibilities, risk analysis, and evaluation.

Medical device manufacturers must demonstrate the application of risk management to regulatory bodies, such as the US FDA, which requires evidence of its implementation.

The European version of the risk management standard was updated in 2009 and 2012 to refer to the Medical Devices Directive (MDD) and Active Implantable Medical Device Directive (AIMDD) revision in 2007.

Typical risk analysis techniques adopted by the medical device industry include hazard analysis, fault tree analysis, failure mode and effects analysis, hazard and operability study, and risk traceability analysis.

These techniques help ensure that risks are identified and effectively mitigated, and can be done using various tools such as diagramming software and spreadsheet programs.

The FDA has introduced a new method called "Safety Assurance Case" for medical device safety assurance analysis, which is a structured argument supported by evidence that provides a compelling case for a system's safety.

This method is expected for safety-critical devices, such as infusion devices, as part of the pre-market clearance submission.

Megaprojects, such as major bridges and power plants, are particularly risky in terms of finance, safety, and social and environmental impacts.

Megaprojects typically cost more than $1 billion per project, making risk management a top priority.

To manage risk in megaprojects, it's essential to engage a diverse team, including the project team, client representatives, and vendors, in a risk identification session.

This collaborative approach helps to identify and prioritize risks more effectively than relying solely on individual team members.

By logging risks and using a risk tracking template, project managers can prioritize risks and develop a risk management plan to capture negative and positive impacts.

Regular meetings to monitor risk are also crucial for transparency and effective risk management.

Project management software, such as ProjectManager, can help keep track of risk and provide a risk matrix to visualize the likelihood and impact of each risk.

With the right tools and approach, project managers can mitigate the risks associated with megaprojects and ensure their success.

Supply chain risk management aims at maintaining supply chain continuity in the event of scenarios or incidents which could interrupt normal business and hence profitability. Risks to the supply chain range from everyday to exceptional, including unpredictable natural events.

Mitigation of these risks can involve various elements of the business including logistics and cybersecurity. The Sendai Framework for Disaster Risk Reduction is an international accord that has set goals and targets for disaster risk reduction in response to natural disasters.

Supply chain disruptions can have significant effects on the environment and business interruption losses. Geospatial modeling is a key component of land change science that can be used to assess risk and risk management of natural disasters and other climate events.

Insurance costs and downtime are other factors to consider when assessing supply chain risk. Regular International Disaster and Risk Conferences in Davos deal with integral risk management.

Wilderness risk management is a specialized field that requires careful attention to detail and a deep understanding of the unique challenges involved.

Benoit Mandelbrot's concept of "wild" risk is particularly relevant in wilderness settings, where unpredictable events can have severe consequences.

Mild risk follows normal probability distributions, but wild risk follows fat-tailed distributions, making it difficult to predict.

Organizations providing commercial wilderness experiences must align with national and international consensus standards for training and equipment.

The Association for Experiential Education offers accreditation for wilderness adventure programs, and the Wilderness Risk Management Conference provides access to best practices.

In New Zealand, national outdoor safety legislation plays a crucial role in wilderness risk management, and judgment and decision-making processes are essential components.

The Risk Assessment and Safety Management (RASM) Model, developed by Rick Curtis, is a popular tool for assessing risk in wilderness settings.

The RASM Model weighs negative risk against positive risk, considering both the potential for loss and the potential for growth.

Wilderness risk management consulting and training are also available from specialist organizations, helping to ensure that outdoor leaders are equipped to handle the unique challenges of wilderness environments.

In the world of risk management, information technology (IT) is a significant concern. IT risk is a relatively new term that encompasses the many risks associated with information security, technology advancement, and the real-world processes it supports.

ISACA's Risk IT framework ties IT risk to enterprise risk management, providing a structured approach to evaluating and mitigating risks. Duty of Care Risk Analysis (DoCRA) evaluates risks and their safeguards, considering the interests of all parties potentially affected.

The Verizon Data Breach Investigations Report (DBIR) features how organizations can leverage the Veris Community Database (VCDB) to estimate risk. This report highlights the importance of using data-driven approaches to assess and manage IT risks.

Incident handling is a critical aspect of IT risk management, involving an action plan for dealing with intrusions, cyber-theft, denial of service, fire, floods, and other security-related events. According to the SANS Institute, incident handling is a six-step process: Preparation, Identification, Containment, Eradication, Recovery, and Lessons Learned.

Here's a breakdown of the IT risk management process:

The offshore oil and gas industry has a regulated operational risk management system, which is governed by the safety case regime in many countries.

In this industry, hazard identification and risk assessment tools and techniques are described in the international standard ISO 17776:2000. Organisations such as the IADC (International Association of Drilling Contractors) publish guidelines for Health, Safety and Environment (HSE) Case development, which are based on the ISO standard.

Diagrammatic representations of hazardous events, known as bow-tie diagrams, are often expected by governmental regulators as part of risk management in safety case submissions.

The pharmaceutical sector is a prime example of an industry where risk management is crucial. Risk management principles and tools are being increasingly applied to various aspects of pharmaceutical quality systems.

Development, manufacturing, distribution, inspection, and submission/review processes are all being evaluated for potential risks. This includes the use of raw materials, solvents, excipients, packaging and labeling materials in drug products, biological and biotechnological products.

Risk management is also applied to the assessment of microbiological contamination in pharmaceutical products and cleanroom manufacturing environments. This is a critical consideration to ensure the quality and safety of pharmaceutical products.

The lifecycle of drug substances, drug products, biological and biotechnological products is carefully monitored for potential risks. This includes the entire process from development to submission and review.

Travel risk management is a crucial aspect of keeping employees safe while on the road. ISO 31030:2021 provides a framework for good practice in travel risk management.

Most businesses have implemented travel risk management protocols to ensure the safety and well-being of their business travelers. The Global Business Travel Association's education and research arm, the GBTA Foundation, found that these protocols typically include six key principles of travel risk awareness.

Preparation is key, and businesses should ensure their employees are aware of their surroundings and people. Keeping a low profile and adopting an unpredictable routine can also help reduce the risk of harm.

Communications are also vital, and businesses should have a plan in place for emergency situations. Layers of protection, such as traveler tracking using mobile tracking and messaging technologies, can provide an added layer of safety.

You can build a risk management protocol into your organization's culture by creating a consistent set of risk management tools and templates, with training, to reduce overhead over time.

A risk matrix is a valuable tool to help you organize your risks by severity and likelihood, so you can stay on top of potential issues that threaten the greatest impact. You can use a free risk matrix template for Excel to get started.

Having a risk culture in your organization can lead to improved governance, better planning, strategy, policy, and decisions. This is achieved by adopting the attitudes and values of your organization to become more aware of risk.

You can also use free risk management templates for Word and Excel to help you manage projects.

We've got a great selection of risk management templates to help you stay on top of potential issues. You can use these free templates to organize project risks by severity and likelihood.

Our risk matrix template for Excel is a great place to start, it's free and can help you identify and prioritize risks. This template can be used to create a risk matrix that helps you organize your risks.

We've also created dozens of free project management templates for Excel and Word to help you manage projects. These templates include risk management tools to help you identify, analyze, prioritize and respond to risks.

If you're looking for a simple and effective way to manage project risks, try our free risk matrix template for Excel. It's easy to use and can be a great addition to your project management toolkit.

Gantt Charts are a powerful tool for creating detailed risk management plans. They allow team members to schedule, assign, and monitor project tasks with full visibility.

A Gantt chart can be used to prevent risks from becoming issues by breaking down complex projects into manageable tasks. This helps to identify potential risks early on.

Team members can add comments and files to their assigned tasks on a Gantt chart, keeping all communication on the project level in real-time. This fosters a collaborative environment and helps to resolve risks quickly.

ProjectManager is an online tool that provides robust project management software for risk management. It offers real-time information, allowing you to act on accurate data.

You can try ProjectManager for yourself with a free 30-day trial, giving you the opportunity to see how it can help with risk management.