A Guide to Risk Management Process (With Practical Examples)
By Indeed Editorial Team
Published November 5, 2021
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Risk management is a vital component of business planning and also has applications in personal decision-making. Many of our actions involve risk, but when risks become more complex, you may benefit from a risk management process. Understanding risk management procedures may help avoid and react to risk more effectively. In this article, we define risk management processes, explain the steps involved in it, explore why it's important, and provide three practical examples for you to review.
What is a risk management process?
There are five fundamental processes involved in managing risk, known as the risk management process. The process of risk management begins by detecting the risk, analyzing the identified risk, prioritizing the risk, implementing a solution, and finally, monitoring the risk to prevent it from posing a threat in the future. Each step in this process requires extensive documentation and administration for it to be fulfilled.
How to conduct the process for risk management
Here is a list of the key steps included in risk management:
1. Identify the risk
The first step in risk management is to identify which risks the business faces in its operating environment. Risks come in various forms, such as legal, environmental, market, and regulatory risks. It's critical to identify as many of these risk factors as possible. If a business uses risk management solution software, they can enter this data into the system for proper identification and monitoring. By doing this, each risk is now visible to any stakeholder with access to the system.
2. Conduct a risk analysis
After identifying a risk, you can now analyze it. It's critical to understand the relationship between risks and other organizational characteristics. If you want to find out a risk's severity and significance, it's necessary to determine how many business operations it affects. You can perform this analysis manually in a manual risk management system. When utilizing a risk management solution, one of the most critical initial tasks is associating risks with various documents, rules, procedures, and business processes. This means that the system may come pre-configured with a risk framework to evaluate risks and inform you of their consequences.
3. Evaluate or rank the risk
Most risk management solutions categorize risks according to their severity. Businesses rate risks that may have minor consequences as low, while they rate risks that may cause catastrophic loss as high. It's critical to rate risks because it enables the organization to gain a complete understanding of its risk exposure.
4. Respond to the risk
There may be risks you can remove or minimize by seeking help from specialists in the field. This may mean scheduling meetings with stakeholders to allow everyone to communicate and discuss the issue. If the business uses risk management solution software, the system can inform all essential parties. The business can then discuss the risk and potential solutions within the system. Upper management can monitor the proposed solutions and watch for progress. Rather than requiring everyone to contact one another for updates, everyone can receive updates immediately from the system.
5. Monitor and assess the risk
It may be challenging to remove all risks, and some risks may always exist. Market risks and environmental risks are types that a business continuously evaluates. A risk management system monitors the organization's whole risk framework in a digital environment. As changes occur, everyone receives notifications and updates.
What is the significance of risk management?
Risk management enables organizations and investors to plan for the unexpected while minimizing damage to profits, investments, and reputation. An effective risk management plan enables an organization to remain operational, define its objectives, and capitalize on new opportunities. After successfully mitigating risk, investors may be able to maintain favourable returns.
For instance, if a corporation has significant liabilities and invests most of its money in the stock market, this has implications for the business's long-term sustainability. This is especially true if those investments don't generate strong returns. When a business assumes huge risks without a risk management strategy in place, it harms the business's credit rating. This may cause a decline in investor confidence, additional layoffs, and asset sales. If that same business conducts a thorough risk assessment and only takes on risks it can comfortably manage, it can limit its losses and earn more profit.
Examples of risk management
Here are several examples of common types of risk management:
Example of an individual refraining from purchasing stocks
Here's an example of someone who is assessing the risk of purchasing stocks:
Sean plans to invest in a company's stock because its shares have regularly increased in value over an extended period. Regardless of their current increase, it is likely that the stock prices eventually decline. He can evaluate his risk by asking the following questions:
How great is the risk? There is a risk that those stocks may depreciate before newer investors sell them.
*How likely is it that this stock's price may fall? Although he is unable to determine the exact probability, Sean considers current circumstances, such as eager sellers, company news, acquisitions, and organizational changes. These factors might cause stock values to decline.*
*What are the implications of declining stock prices? As a new investor, Sean faces the possibility of losing most of his assets if stock prices decline.*
*How are you going to manage this risk? With the news about the company's value in mind, Sean decides not to purchase the stock, avoiding the risk entirely.*
Example of a business recalling faulty products
Here's an example you can review involving risk management of recalling faulty products:
Numerous reports have surfaced of electrical system faults in the trucks sold by Silver Corp. There have been 500 instances of electrical system failures to date, with the majority involving two truck types manufactured within three months. Here's how Silver Corp. can approach risk management:
*How great is the danger? At least 500 trucks are experiencing electrical difficulties. They can trace the problem back to wire faults in the trucks that have undergone checks. The wires were all obtained from the same source over three months.*
*How likely is it that there are additional trucks with this issue? 800 of the 24,000 vehicles sold in a single year are from the two models, and issues occurred with trucks manufactured over three months. According to this study, around 800 of the trucks may have this issue.*
*What are the possible implications? Inaction may cause the breakdown of the electrical system or engine shutdown and Silver Corp.'s liabilities may increase because of consumer lawsuits and fewer people purchasing the company's trucks. A recall can cost up to $10 million.*
*How does this risk compare to the other risks that the business faces? This is a key priority at the moment.*
*How are you going to manage this risk? The CEO can initiate a recall, notify investors, and contact the National Highway Traffic Safety Administration. Silver Corp. can replace the faulty wires with the right ones following the recall.*
Example of a business that takes a risk to execute a project
Here's an example of a business that is taking a risk to execute a project, and how they can assess the risk they may encounter:
Dantech Software Co. is currently creating a new game console that may be available in the coming months. One concern associated with the project is the use of a microchip. This is how Dantech may approach risk management:
*How great is the danger? A vendor's microprocessor may overheat if the consumer uses the console for an extended period. Once the system overheats, the entire system can fail.*
*How likely is it that the system may fail? Early tests show that 3% of consoles experienced a system failure.*
*What are the possible implications? Within five years of the console's release, the company can provide free repairs for any systems that fail. Each repair may cost up to $125 in time and labour, which represents approximately one-fifth of the expected revenue for each console sold.*
*How does this risk compare to the other risks that the business faces? This is not the highest risk, based on the expected severity of the problem. There is still time to correct the problem, especially given the increased production of consoles to meet demand.*
*How do you intend to mitigate this risk? Dantech Software Co. accepts this risk, notifies all shareholders, and may cooperate with the vendor to remedy the microchip issue.*
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