The memory of COVID-19 may seem like a distant past, but it led to one of the most significant disruptions we have ever seen in the modern age.
Enterprises and small businesses worldwide were struggling to navigate the changes ushered in due to the pandemic, and the resultant “new normal” brought with it another level of risk that led to a domino effect on the way an organization functions.
If you are a business leader or a project manager, you need to consider a broad range of factors to ensure your risk management strategy is effective. While this may seem like a no-brainer, the reality is far from it. According to the State of Risk Management 2023 Report, 41% of organizations surveyed experienced three or more critical risk events in the last 12 months.
Risk factors are increasing, but it is small or unplanned events that create the most major hurdles. According to a FEMA report, 40-60% of small businesses are unlikely to recover after a natural disaster. Meanwhile, a Cyberthreat Index of Business Survey states that 48% of small to mid-size businesses can be permanently shut down after a major data breach.
Are you starting a new project or reprioritizing the business plan for an existing project? Risk management process should be on top of your priority list and is vital for the success of any project management.
In this article, we will go over the five-step risk management process and explain each step in greater detail. This will help you get much-needed critical training for risk management and prepare you to craft well-thought-out business plans that factor in risk analysis.
What is the Risk Management Process?
Risk management is the process of identifying, assessing, evaluating, monitoring, managing, responding to, and taking action to mitigate any negative risk associated with a particular activity.
Knowing the risks involved in your operation is critical, as it can help you create the right business plan that considers those factors to ensure your risk management strategy is effective.
It can also help the business make informed and strong decisions, mitigating any expected risks and minimizing the possibility of failure.
Identification and risk analysis ensure that:
- Projects are planned by factoring in previously unforeseen costs
- Project timelines highlight chances of risk and create a plan of action to help navigate this risk
- Resource planning is more efficient and aligned with the business plan
- Tracking project costs and timelines are more accurate
- Project teams are better aware of regulatory and other legal requirements
- There is less panic and more understanding of why chances or challenges are arising as they progress
Importance of Risk Management
Risk management is of utmost importance as it helps organizations anticipate and proactively address potential risks. By identifying and analyzing risks, businesses can make informed decisions, minimize losses, and optimize opportunities. Effective risk management enhances stakeholder confidence, ensures compliance, and supports the achievement of strategic objectives. Check out our Financial Analysis, Valuation, & Risk Management course and Everything You Need to Know About Risk Analysis in Financial Management.
Risk Management Process Steps
Here is a look at the five steps involved in the risk management process and the details of each:
Step 1: Identify Your Risks
The first of the risk management steps in the risk management process is to identify potential risks that could impact the organization's objectives. This involves brainstorming, conducting risk assessments, and leveraging historical data and industry best practices.
Identifying risks is all about foreseeing any potential roadblocks or pitfalls in your planning and ensuring that your team knows how to react in case that risk manifests.
A known risk for a healthcare company could be delayed timelines in high-stress situations like the COVID-19 pandemic.
This is the most common risk that any project manager runs into. Delayed timelines impact the overall budget, delivery date, and the risk of losing out on a potential opportunity.
To mitigate this risk, a thumb rule is to overestimate the time needed to complete a task and create buffers to ensure that if one part of the project gets delayed, the overall project timelines are not hampered.
Step 2: Analyze All Risks
Once risks are identified, they need to be assessed in terms of their probability, impact, and severity. This step helps prioritize risks based on their significance and likelihood of occurrence.
During this risk management process, project managers, team leaders, and business leaders brainstorm on how they will mitigate the risk and accurately analyze each risk.
By putting the risk under the microscope, you can uncover the common issues, see the greater risks that may unravel as a result of an identified risk, and create a project plan that is detailed and ready to take on these challenges.
A project risk log is a great way to start categorizing risks and ensuring your business plan outlines how each risk will be addressed.
Step 3: Evaluate and Prioritize Every Risk
Now that the risk analysis is complete, it is time to prioritize and rank each risk using several parameters like the likelihood of the risk happening, the potential effect, and the criticality of this risk in your project. In this risk management process step, organizations develop strategies to mitigate identified risks. This may involve implementing control measures, transferring risks through insurance or contracts, or accepting certain risks based on the organization's risk appetite.
Prioritizing risks and your project plan ensures you get a holistic view of the project and create the right solutions for each risk. It will also help you ensure that resultant risks are minimized and that there is no interruptions or delay in your project due to known or identified risks.
Step 4: Treat Your Risks
Once you start working on implementing your plan, there can be foreseen or unforeseen risks that you will have to take on at every step.
The previous stages of the risk management process should set you up to know what to do in case a disaster strikes. You can’t always anticipate every risk, making it essential to start treating it when it happens.
For example, during the COVID-19 pandemic, healthcare staff and workers had to mitigate two key risks - meeting the regulatory requirements for COVID-19 safety while at the same time dealing with increasing demand for patient care.
Here, a risk analysis would be helpful to understand which risk should be tackled first and help create a plan of action.
Start by prioritizing the highest risk factor, determine the right resources to work on this risk, and either solve or mitigate the risk so that it doesn’t lead to delays or create a roadblock for your overall project.
You can refer to the project risk log to identify the actions to take in case the risk happens. This proactive approach to treating the risk ensures a project’s chances of success and completion are high.
Step 5: Monitor Your Risks
Now that you have identified, analyzed, and mitigated your risks, you need to monitor your project for both effectiveness of your plan and the types of risk events that have occurred. Continuous monitoring of identified risks is essential to ensure that mitigation strategies are effective. Regular reviews, data analysis, and performance tracking help organizations stay proactive and adjust risk management efforts as needed.
Monitoring project risks is all about understanding the status of each risk, analyzing the effectiveness of your risk management strategy, and consulting the key stakeholders on any resultant risk that could arise from this action.
Some questions to ask yourself when monitoring risks include:
- Is the risk fixed temporarily or permanently?
- How can the leaders or project managers empower the team to minimize incidents similar to this risk?
- Have there been any changes since the previous instance of the risk? Should there be a new plan to mitigate similar risks in the future?
There are multiple ways to monitor risks, and clear communication with your team and stakeholders is the key to this step.
While having a risk management process is key to mitigating any possible threats, it is the ability of the project managers, business leaders, and important stakeholders in every project to communicate, identify, and escalate risks that makes it successful.
Types of Risks
Broadly, business risks can be categorized into four key types. These include:
- H3: Strategic Risks - A strategic risk could be a potential risk for a business due to strategic factors, such as a competitor entering the market. An example of this could be the risk posed to Paytm when its market share started to erode with players like UPI, Google Pay, PhonePe, and others entering the market.
- H3: Regulatory Risk - This could be due to the introduction of new rules and regulations. An example of this risk type is the changes to KYC guidelines that led to the RBI enforcing Paytm to stop onboarding new bank accounts with immediate effect. Such risks cannot be pre-empted, and each organization should be cognizant of the constant changes to regulations especially depending on the target market and type of business they are into.
- H3: Financial Risks - These could arise due to financial reasons, such as a key investor backing out of a deal, or a business running out of funds before an important event
- H3: Operational Risk - This can be an internal business risk that could include theft, breakdown, or other disasters.
The 5-step risk management process ensures that all these risks can be properly addressed, and even unknown or unforeseen risks are taken care of by leveraging the right planning and resource management.
Significance of Having a Structured Risk Management Process:
A structured risk management process provides a framework for consistent and comprehensive risk assessment and mitigation. It ensures that risks are not overlooked or underestimated. A well-defined process enables organizations to prioritize risks, allocate appropriate resources, and implement effective risk management strategies. This structured approach enhances efficiency, reduces uncertainty, and improves decision-making. Read about Operational Risk: Overview, Importance, and Types.
Risk Management Roles and Responsibilities
A successful risk management process involves assigning clear roles and responsibilities. Key stakeholders, such as senior management, risk managers, and project teams, play vital roles in identifying and assessing risks, implementing control measures, and monitoring the effectiveness of risk mitigation strategies. Collaboration and communication among these roles are critical for successful risk management.
Overall, risk management is the responsibility of every individual, especially organizational leaders, including CXOs, project managers, department heads, and analysts.
However, to ensure that one person can focus on risk analysis and management, organizations hire a risk manager responsible for identifying, evaluating, and incorporating risk-mitigation activities for the company.
The risk manager evaluates the risks for the organization carefully and constantly communicates with employees and leaders to understand inherent risks, gaps, and timelines for each department, ensuring they are apprised of the risks posed and can act on them.
Risk managers can specialize in finance, legal, control, product development, quality management, or overall project risk management.
Since risk management is a critical role in most organizations, risk managers can get an annual salary of around $110,000, depending on their skillset, area of specialization, and years of experience.
To be a risk manager, having a project risk management course certification is crucial, as it is seen as a testimony of the knowledge and expertise that the person brings to this role.
The Risk Management Process in Action
The 5-step risk management process is critical for any organization, as it has consequences and substantially impacts the business and its outcomes.
Some of the reasons why critical training for risk management is always a priority for any business is because of:
Prevent LawsuitsImpact on Growth or Success
Identifying, evaluating, and mitigating risks makes the business feel more confident about its decision-making.
It ensures that projects are completed, and critical deadlines are met with. It also helps the company stay on a growth trajectory and ensures steady overall growth of the organization.
Prevent LawsuitsMitigate Losses
Manning risk, especially financial risk management, can help organizations prevent or minimize their losses by taking the right action at the proper intervals.
In the event of a risk or an unpredicted change in market conditions, having a risk mitigation approach enables the organization to prioritize and shift gears, as necessary.
Moreover, it can help the organization manage the situation better, and being unable to prepare for risks or manage difficulties can cause irreparable damage to the company and its overall reputation.
This is also one of the biggest reasons catastrophic events can lead to even seasoned enterprises going out of business.
Not meeting any risk management standards is a threat not just to the success of a project but also due to its legal implications of it.
Non-compliance with any regulations or frameworks means the company can face an imminent lawsuit, resulting in legal fees, high fines, settlement costs, and loss of reputation.
Now that you know the five steps of the risk management process and how to confidently build a business plan and be prepared for risks, you are ready to take on any challenge that may come your way. However, if you have a particular interest in financial risk management or project risk management training, a career as a project manager or a risk analyst is the ideal one for you.
A well-executed risk management process is a cornerstone of organizational success. By following the 5-step risk management process, businesses can identify, assess, mitigate, and monitor risks effectively. This systematic approach minimizes the impact of potential threats and maximizes the opportunities for growth. Remember, risk management is an ongoing process that requires continuous evaluation and adjustment to adapt to changing circumstances. By implementing a structured risk management process, organizations can navigate uncertainties, protect their interests, and drive sustainable growth. Read about Finance management: - Meaning, Scope, & Importance.
If you are looking for a project risk management course to help you succeed on this path, the Certificate Program in Financial Analysis, Valuation & Risk Management is your best bet.
Our program offers participants the comprehensive instructions and training required to compete successfully in today’s dynamic business environment. It will help you master the theoretical and real-world concepts of financial risk management and overall project risk analysis.
This program is developed for business leaders and project managers who want to be efficient at managing projects and leading them through various challenges to see the finishing line.