Risk Management Explained: The Risk Management Process

Risk management is a type of business initiative used to identify risk—including market risk, safety risk, IT risk, and legal liabilities—and implement management strategies to promote risk reduction.

Some companies have a full-time risk manager (sometimes called a chief risk officer or CRO) whose team continually conducts risk assessments and develops risk management plans for the entire company. Other companies use project risk management plans to tailor risk mitigation to specific projects or endeavors. Still other businesses rely on consultants and insurance companies to provide the most effective risk management tools.

Risk identification and reduction benefit any business that has valuable human capital, physical property, or intellectual property. Without good risk control, the company could lose these assets to theft, natural disasters, or lawsuits. Proper risk analysis can offer valuation to various business assets, evaluate the risk to those assets, and prioritize strategies to contain that identified risk.

Risk management applies to a wide number of scenarios that emerge in the course of business, including:

• Technological risk: Unsecured computer networks could lead to IT risk.
• Market risk: Unforeseen changes in the market like supply chain disruptions or a global pandemic could threaten business continuity.
• Legal risk: Undisciplined accounting procedures could draw the attention of financial service regulators.
• Human-factor risk: A toxic workplace culture can impact project management, employee morale, recruitment, and retention.

There are two principal ways that companies manage risk related to their business: traditional risk management and enterprise risk management.

• Traditional risk management: In a traditional risk management approach, a company's department heads must mitigate risk within their own specific domains. This means that information technology departments handle IT risk, plant managers handle physical risk, and human resources departments handle risk related to employee conduct and retention. Department managers report to the top corporate officers, who must ultimately steward the entire company's risk management procedures.
• Enterprise risk management: Enterprise risk management is a more holistic endeavor, where all sectors of a company adhere to one set of risk management strategies. Companies that favor enterprise risk management often have dedicated risk control teams led by a chief risk officer (CRO) whose main duty is to assess and reduce overall risk. These teams oversee all aspects of corporate risk management, from employee safety to IP protection to cybersecurity to regulatory compliance and beyond. The CRO is often one of the lead corporate officers and may report directly to the company's chief executive officer.

Every risk management team has its own way of assessing risk and responding to crises. Consider one six-step template for a good risk management process.

1. 1. Identification: Risk managers examine individual departments or whole companies. They note an organization's risk in various areas ranging from cybersecurity to fire risk. The process of identifying risk is continual. As companies change and the surrounding business landscape also changes, new forms of risk emerge.
2. 2. Prediction: Risk management professionals, having identified potential sources of risk, determine the likelihood of these dangers coming to pass. This is similar to the work of an actuary at an insurance company. In some cases, insurance companies consult companies on actual risk probability.
3. 3. Prioritization: Given that most companies have limited resources, risk management officers decide which risk mitigation goals are worthy of financial, physical, and human resources.
4. 4. Strategizing: With risks identified, analyzed, and prioritized, the company must craft risk management solutions to mitigate the problems they've identified.
5. 5. Action: At this point, the company enters a phase of risk treatment where they take action to eliminate or greatly reduce various forms of risk. A company might install non-slip floors in its factories, improve computer network security, or institute mandatory sexual harassment training. They might also adjust their insurance policies to focus on the most realistic sources of business risk. In addition to mitigation plans, they may institute contingency plans to limit potential impact if a risk avoidance strategy fails.
6. 6. Evaluation: After risk management strategies have been implemented, risk management teams monitor their results. They may devise specific metrics to track risk mitigation, they may use anecdotal evidence, or they may use a combination of both. Using this data, they adjust risk mitigation plans to make them all the more effective.

Get the MasterClass Annual Membership for exclusive access to video lessons taught by business luminaries, including Sara Blakely, Chris Voss, Robin Roberts, Bob Iger, Howard Schultz, Anna Wintour, and more.

Risk management is a type of business initiative used to identify risk—including market risk, safety risk, IT risk, and legal liabilities—and implement management strategies to promote risk reduction.

Some companies have a full-time risk manager (sometimes called a chief risk officer or CRO) whose team continually conducts risk assessments and develops risk management plans for the entire company. Other companies use project risk management plans to tailor risk mitigation to specific projects or endeavors. Still other businesses rely on consultants and insurance companies to provide the most effective risk management tools.

Risk identification and reduction benefit any business that has valuable human capital, physical property, or intellectual property. Without good risk control, the company could lose these assets to theft, natural disasters, or lawsuits. Proper risk analysis can offer valuation to various business assets, evaluate the risk to those assets, and prioritize strategies to contain that identified risk.

Risk management applies to a wide number of scenarios that emerge in the course of business, including:

• Technological risk: Unsecured computer networks could lead to IT risk.
• Market risk: Unforeseen changes in the market like supply chain disruptions or a global pandemic could threaten business continuity.
• Legal risk: Undisciplined accounting procedures could draw the attention of financial service regulators.
• Human-factor risk: A toxic workplace culture can impact project management, employee morale, recruitment, and retention.

There are two principal ways that companies manage risk related to their business: traditional risk management and enterprise risk management.

• Traditional risk management: In a traditional risk management approach, a company's department heads must mitigate risk within their own specific domains. This means that information technology departments handle IT risk, plant managers handle physical risk, and human resources departments handle risk related to employee conduct and retention. Department managers report to the top corporate officers, who must ultimately steward the entire company's risk management procedures.
• Enterprise risk management: Enterprise risk management is a more holistic endeavor, where all sectors of a company adhere to one set of risk management strategies. Companies that favor enterprise risk management often have dedicated risk control teams led by a chief risk officer (CRO) whose main duty is to assess and reduce overall risk. These teams oversee all aspects of corporate risk management, from employee safety to IP protection to cybersecurity to regulatory compliance and beyond. The CRO is often one of the lead corporate officers and may report directly to the company's chief executive officer.

Every risk management team has its own way of assessing risk and responding to crises. Consider one six-step template for a good risk management process.

1. 1. Identification: Risk managers examine individual departments or whole companies. They note an organization's risk in various areas ranging from cybersecurity to fire risk. The process of identifying risk is continual. As companies change and the surrounding business landscape also changes, new forms of risk emerge.
2. 2. Prediction: Risk management professionals, having identified potential sources of risk, determine the likelihood of these dangers coming to pass. This is similar to the work of an actuary at an insurance company. In some cases, insurance companies consult companies on actual risk probability.
3. 3. Prioritization: Given that most companies have limited resources, risk management officers decide which risk mitigation goals are worthy of financial, physical, and human resources.
4. 4. Strategizing: With risks identified, analyzed, and prioritized, the company must craft risk management solutions to mitigate the problems they've identified.
5. 5. Action: At this point, the company enters a phase of risk treatment where they take action to eliminate or greatly reduce various forms of risk. A company might install non-slip floors in its factories, improve computer network security, or institute mandatory sexual harassment training. They might also adjust their insurance policies to focus on the most realistic sources of business risk. In addition to mitigation plans, they may institute contingency plans to limit potential impact if a risk avoidance strategy fails.
6. 6. Evaluation: After risk management strategies have been implemented, risk management teams monitor their results. They may devise specific metrics to track risk mitigation, they may use anecdotal evidence, or they may use a combination of both. Using this data, they adjust risk mitigation plans to make them all the more effective.

Get the MasterClass Annual Membership for exclusive access to video lessons taught by business luminaries, including Sara Blakely, Chris Voss, Robin Roberts, Bob Iger, Howard Schultz, Anna Wintour, and more.