Business Strategy

How to Create an Effective Risk Management Strategy for your Company

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"How to Create an Effective Risk Management Strategy for your Company"
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Do you want to have confidence that your company will still exist next week, next month, next year? Each day your business faces potential harm that can arise from your present processes or a future event. To avoid your company falling victim to harm you need to have an effective risk management strategy in place.

Most people think about risk in terms of personal injury or fraud however there are many other risks faced by companies each day:

Staff retention: If you lose key people you may lose knowledge that no one else in the business has.

Systems: If your systems fail or new systems are not tested adequately you may not be able to trade or collect revenue.

Procedures: A lack of standard procedures may mean major mistakes are made.

Training: If staff do not have the skills or knowledge to perform their role your business will not be able to function.

Competitive landscape: You need to have the right capabilities and flexibility for future growth.

Risk management is the process of identifying, controlling and mitigating the impact of harmful events on your company. An effective risk management strategy has three components; identifying risk, quantifying risk and mitigating risk.

Identifying risk:
The first task in developing your risk management strategy is to identify your business objectives and the processes that are in place to achieve those objectives. Consider each of the objectives and what may happen to prevent you from achieving them. These are the risk events you need to address.

Quantifying risk:
Each risk event needs to be quantified. To do this you need to understand the impact on your company if the event occurs and the probability of that event occurring. The impact is the estimated loss you will experience and the probability is the chance of the event happening. The impact multiplied by the probability equals the risk. If either probability or impact is zero the risk is zero and does not need to be addressed. Quantifying the risk allows you to prioritize the action you take to mitigate that risk.

Mitigating risk:
Once you have a prioritized list of risks you need to decide what action you will take to manage down the impact and/or the probability of the risk happening. For each risk identified, controls should be put in place, and routine checks that the controls are working need to be undertaken.

In some cases you will be unable to mitigate the risk. For example you cannot control natural disasters. Disaster Recovery and Business Continuity plans, whilst complementary to your Risk Management plan, require a different focus and need to be developed separately.

Implementing a risk management strategy results in a risk management plan. The plan should be documented listing the risks, their impact and probability, and the mitigating actions. The plan can also be displayed in a visual format by plotting risk against manageability for a quick overview.

As the landscape of the business environment alters, so too do the threats to your company. The world does not stand still and risk reviews need to be conducted regularly. As part of your strategy, your plan should be reviewed at least twice a year.

An effective risk management strategy will mitigate potential risk exposures before they are realized, reduce your vulnerability to events impacting your ability to maintain your day to day business, and ensure ongoing employment for your staff. Above all it will provide you with confidence that your company will prevail.

More about this author: L Hurley

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