Risk management has always been an important tool in running any business, particularly when a market experiences a downturn. In any economic environment, an unexpected surprise can destroy your business in one fell swoop if you don’t have the right risk management strategies in place to prevent, or at least mitigate, the damage from that risk.
External risks are out of your control. These business threats include, but are not limited to, interest rates, exchange rates, politics, competition, market changes, and more. Internal risks are in your control and include information breaches, noncompliance, lack of insurance, growing too fast, and many more. Having the right risk management strategy will help you mitigate and manage risks when running a business.
What is a risk management strategy?
A risk management strategy is a tool that companies can use to reduce security vulnerabilities. Such a strategy gives enterprises the procedures they need to identify, evaluate, and address cybersecurity incidents. And as the number of data breaches continues to escalate, risk management is more important than ever.
Why is it important?
This is where risk management becomes an essential part of your wider business strategy. By identifying and analyzing potential threats to your organization, a process mitigates the impact of any negative events or changes that could otherwise be disastrous. To illustrate how to, let's take a closer look at the importance of risk analysis and identification in a business.
Uncertainty in any form is bad for business and, by its definition, is difficult to quantify. As Warren Buffett once said, though, "risk comes from not knowing what you are doing." Therefore, understanding the internal and external aspects of your business organization is an integral part of knowing how to protect it.
The more knowledge you have about such factors, the lesser the threat posed by uncertainty to your business, which is where a thorough PESTLE analysis can be useful. This is because companies generally exist in a complex ecosystem of constant political, social, economic, and environmental upheaval. Unexpected events arising from any of these spheres can have a damaging impact on your organization.
Knowing how to identify when your business is likely to be affected is a core component of risk management. While, of course, you can never truly remove the element of risk in business, many adverse events can indeed be accounted for and mitigated. After all, the maxim that "prevention is better than the cure" is as valid for the health of a business organization as it is for any human condition.
Success in business rarely arrives by chance – more often than not, it is a product of meticulous planning and diligent execution. Unforeseen events can affect the success of your business if you do not have built-in countermeasures in your plans.
If you ignore risk management entirely, everything that you do will carry with it a high chance of failure. For instance, imagine a situation where you fail to identify a workplace safety hazard. If any accident does occur, it could lead to worker injury, reduced productivity, and, likely, a costly lawsuit.
These events could effectively end your chances of achieving the initial targets as set in your business plan, yet with adequate risk management, it is something that could easily be avoided. When done correctly, risk management identifies threats, minimizes their likelihood, and allows you to ensure your strategies with suitable precautions and countermeasures.
Expenses and Losses
Risks can be divided based on the nature of their impact on your finances: income risk and expense risk. Any events or mishaps that reduce your productivity – or your ability to provide services to your clients – will result in a loss of income.
Developments that raise the cost of your production or other parts of your overhead also come under expense risk and can present in many forms. For example, a change in legislation might result in increased taxes or compliance expenses; alternatively, additional competition could lead to a rise in marketing expenses.
If you can anticipate these risks, then you can prepare strategies to deal with them well in advance – or even avoid them altogether. For instance, keeping a portion of your budget aside for such expenses can help you avoid costly interest payments from sudden loans if and when the need arises.
Another positive impact of risk management is on your assets. You can avoid costly expenses that can arise due to damage or destruction of assets if you take precautions. Loss of critical assets can have a huge impact, especially if your business is an SME.
Having a proper risk management strategy in place helps to convey a positive message about your business. Internally, it instills confidence among your employees about the capabilities of your leadership; after all, having a safe workplace also helps to boost morale.
When disaster does inevitably strike, your organization's ability to continue delivering to clients will also have a significant impact on your brand. It demonstrates that your business is robust and reliable and that you emphasize a professional culture that can continue to get the job done even in the face of setbacks.
Risk management sounds like a defensive business activity. It has a negative connotation, and the assumption is that the activity is performed to avoid losses. However, during risk management, companies are forced to study their processes and risk factors in detail. The management is aware of all the possible things that can go wrong.
When new products have to be launched or when new markets have to be entered, companies have a ready framework that can be deployed in order to avoid these risks. Hence, in a way, risk management ends up enabling companies to take calculated risks and expedite their growth. Extensive risk management processes mean that the company has a lot of data. This data can be mined in order to gain meaningful insights, which ultimately leads to better decisions.
One of the benefits of risk management is that it changes the culture of a business organization. Companies that tend to focus more on risk management tend to be more proactive as compared to other companies which can be reactive.
Risk management forces the companies to take a hard look at each of their business processes and decide what can possibly go wrong. This detailed what-if analysis helps companies become more proactive and forecast probable issues. Companies that extensively use risk management have fewer business disruptions as such issues are foreseen and taken care of at an early stage.
The proactive approach is very helpful since it helps companies to identify failed projects at an early stage. The continuous feedback helps companies to decide whether investing additional money in a failed project will help it turn around or whether it is just throwing good money after bad!
The day-to-day processes of risk management force companies to collect more and more information about their processes and operations. As a result, companies are able to identify the parts of the process which are inefficient or where there is scope for improvement. Risk management departments are supposed to continuously monitor the working of various departments in relation to external entities and look for things that can go wrong. The end result is that during the process, many opportunities are identified, and processes are improved. Risk management processes often work hand in hand with business process reengineering and quality improvements in the process.
Your company’s logo, brand, digital presence, and reputation are also an asset, and your customers take comfort in seeing and interacting with them daily. When your business has a well-thought-out and developed risk management plan and acts on it, your customers can maintain a sense of security and confidence in your reputation and brand. Your risk strategies and processes help you protect your brand and reputation by safeguarding these assets. It also ensures that customers can maintain faith in your ability to be there and deliver the products and services to which you’ve committed. The result is a higher degree of customer satisfaction and loyalty.
Methods for Risk Management
Once the risks are identified, and the risk management strategy has been implemented, different approaches can be taken for different kinds of risks, depending on their severity and effects on the business.
Keep in mind that each risk tends to be unique, and you may need to take a fresh approach to new risks. That said, it is still good to know some of the more used approaches to risk management.
Risk avoidance isn’t turning a blind eye to the advent of risks. Instead, it is ensuring that you are avoiding risks from happening. Prevention is better than cure, and that’s what risk avoidance tries to live by. A risk avoidance approach works by deflecting as many threats as possible to avoid all potential future disruptions, costly damages, and downtimes to businesses.
If you choose this approach, you are aiming to completely eliminate the possibility of the risk occurring. One example of risk avoidance would be with investment. If, after analyzing the risks associated with that investment, you deem it too risky, then you simply do not make the investment.
Treating risks by avoiding them should be reserved for risks that would have a major impact on your organization. If you avoid every risk you come up against; then you may miss out on positive opportunities. You never know; that investment you decided not to make could have paid off. That is why it’s important to thoroughly analyze risks and make the most informed judgment you can.
One of the primary reasons for arranging different risks at the priority level is determining whether some risks are worth it from the business perspective. That priority list comes in handy for this approach by helping companies understand whether or not they even need to retain some risks. For example, in case the level of severity of a risk is less than the efforts and time it would take to manage it, it’s better not to retain that particular risk, and so on.
Sometimes the best approach to risk management lies in sharing the risk across different customers, vendors, departments, and external organizations. This works by figuring out where the risks are shared and working on solutions collaboratively to mitigate and manage risks.
Mitigating risks is the most commonly discussed risk response. However, it isn’t always practical or possible. It may be the best option if a risk poses a real threat or problem, and avoidance or acceptance won’t suffice. If a risk creates a negative impact and one that could be costly to your company, employees, vendors, or customers, then that risk should be mitigated. This means identifying the risk, assessing all possible solutions, devising a plan, taking action, and monitoring the results.
Risk is transferred via a contract to an external party who will assume the risk on an organization’s behalf.
Choosing to transfer a risk does not entirely eradicate it. The risk still exists; only the responsibility for it shifts from your organization to another.
An example of this would be travel insurance. You don’t accept the risks of a lost suitcase or an accident abroad and the costs that this would bring – you pay a travel insurance company to bear the financial consequences for you.
The same goes for the workplace. You may outsource work – and the risks that come with it - to a contractor. In finance, you may adopt a hedging strategy to protect your assets or investments.
Accepting that certain risks are unavoidable, you can implement preventative measures to reduce loss frequency. For example, installing video surveillance cameras can prevent the frequency of theft in stores. Lowering a highway speed limit can reduce the number of automobile accidents on a specific road. Loss prevention measures break the sequence of events leading to a loss and thus make a loss less likely to occur.
By choosing this approach, you will need to work out the measures or actions you can take that will make risks more manageable. One example of risk reduction would be within manufacturing and the risk of products being produced to incorrect specifications. Using a quality management system can lower the chance of this happening, so this would be a method of risk reduction. In the finance industry, you may face risks associated with new regulations. Implementing a digital solution to help you manage regulatory requirements can mitigate the risks of noncompliance and would therefore also be an example of risk reduction.
Risk Management Strategies for Your Business
Having an appropriate risk management strategy is critical to dealing with the many types of risks that your organization could face. Here are the primary risk management strategies you can use:
Quality Assurance Program
A good reputation is imperative if you want a sustainable business. Customer service is key to success. Be sure to test your products and services in order to ensure the highest quality. By testing and analyzing what you’re offering, you will have an opportunity to make necessary adjustments. Also, strongly consider taking it a step further by evaluating your testing and analyzing methods.
Things seldom go as planned, and while having a plan is great, it’s seldom enough. Companies need to plan to have multiple plans or options based on various scenarios. Contingency planning is all about anticipating that things will go wrong and planning alternate solutions for the type of risks that may surface and foil your original plan.
Risk Management Team
If you want to save capital by not having to hire an outside firm, and there is time available, you can appoint current employees to head a risk management team. However, this would only be wise if someone within the team has experience in this area and can act as a leader.
Otherwise, paying for an outside risk management team will be a worthwhile investment. They will be able to map out all the risks to your company based on your type of business and set up strategies to implement immediately if any of those risks become a reality. This should lead to the prevention, or mitigation, of those risks and threats.
This risk management strategy is useful in running ‘what-if’ scenarios to gauge different outcomes to potential threats. From IT to marketing teams, many functional groups are well versed in conducting business experiments. Financial teams also run experiments to gauge return on investments or assess other financial metrics.
Theory validation strategies are conducted using questionnaires and surveys of groups to gain feedback based on experience. If a new product or service has been developed or there are enhancements, it makes sense to get direct, timely, and relevant feedback from end-users to assist with managing potential challenges and design flaws and thus better manage risks.
Minimum Viable Product (MVP)
Developing complex systems that offer nice-to-have features isn’t always the best route. A good risk management strategy considers building software using core modules and features that will be relevant and useful for the bulk of their customers — this is called a Minimum Viable Product (MVP). It helps to keep projects within scope, minimizes the financial burden, and helps companies get to market faster.
Reduce High-Risk Customers
If you’re just getting started, immediately implement a rule that customers with poor credit must pay ahead of time, which will avoid complications down the road. In order to do this, you must have a procedure to identify poor credit risks far in advance.
Risk management is a form of insurance in itself and is an imperative step for sustainable success. The strategies above should get you started in shaping a risk management plan, but they are just starting points. A deep dive into your business and industry will help you better shape a risk management plan that could save the business you worked hard to create.
Universal Creative Solutions offers strategy consulting to provide an analytical approach to potential threats that can affect your business. We go over possible risk management strategies to implement so that you can help to neutralize business threats.