Risk management planning can be such a huge investment for a small to medium-sized organization. It is crucial to ensure that your risk management dollars are going to good use by making sure that you are managing the right risks – those that present the most severe consequences or that hold the highest likelihood of occurence.
How do we make sure we’re managing the right risks?
There are a number of ways that organizations can hone in on the right risks for their operations and industry.
- Explore all Categories of Risk: Financial, operational, hazard and strategic risks may pose significant threats to your organization. It is important to devote time to identifying risks in all aspects of the business and its environment. Strategic risk is one category that is often left out from the risk identification process. Strategic Risk Management is a concept that was popularized by Adrian J. Slywotzky and John Drzik in a 2005 Harvard Business Review article. These authors presented seven classes of strategic risk for considerations – Industry, Technology, Brand, Competitor, Customer, Project and Stagnation.
- Invest in Risk Identification: Identifying the right risks ins’t always easy – especially for new businesses. More established businesses have an advantage in that they have a history to rely on that gives them an idea of what can go wrong and how severe the consequences can be. Some ways to identify risks facing your business include consulting your insurance broker, examining past losses, consulting industry associations for information on potential industry risks, gathering employee feedback, reviewing customer complaints and hiring a consultant.
- Map your Risks: Quantifying and prioritizing the identified risks helps by making you aware of what risks pose the most significant threat to your business. Risk mapping involves plotting your perceived exposures depending on expected frequency and potential severity. The higher the risk ranks in both frequency and severity, the higher it should rank on your risk priority list. It is wise to work with your insurance broker to make sure that you are considering the appropriate risks and to receive guidance on how to best mitigate the risks. Our free eBook provides more guidance on identifying and mapping risks.
The importance of managing the right risks versus the cost of managing the wrong ones is clear – if you are not considering all risk categories, identifying risks, and prioritizing them, you may not be managing those risks that can have the most severe impact on your organization. Risk identification and prioritization is the foundation of an effective risk management plan that will optimize the organization’s risk making it more stable and profitable.