Risk management processes vary slightly between organizations, but the basic steps remain the same. These steps include identification, evaluation, and mitigation.
Some risks, such as natural disasters or market shifts, are outside a company’s control. These risks require a different approach.
When avoidance isn’t possible, the next step is prioritizing the risks. Those that can bring a business to a standstill should be dealt with immediately.
Identifying Potential Impacts
Risks that threaten a project’s objectives, timeline, or budget should be identified and addressed as early as possible in the project. The more time passes before risks are identified, the harder it is to control them and the more impact they can have on a project’s overall success.
Once you have a list of potential risks, examine each to see how much it could affect your business (risk scope). This step also involves evaluating how often the risk might occur and the severity of its consequences should it occur. This data will determine a risk’s priority in the next step.
During this step, it’s also important to consider whether the risk is preventable. For example, changing work practices or ensuring all personnel wear the appropriate protective equipment may prevent a safety risk. Risks that can’t be prevented should be treated by developing a contingency plan.
It’s worth mentioning that the risk management process is a continuous, cyclical activity. It’s a good idea to review your risk assessment procedures regularly and communicate the importance of this activity to all staff. This helps promote a culture of transparency and accountability, which can help you avoid situations like the recent scandal in New York State over underreporting coronavirus deaths at nursing homes.
Identifying Risks
Finding possible hazards that might affect the success of work efforts or goals is a crucial component of risk management. This involves evaluating the risk’s likelihood of happening and its consequences, which aid in determining the risk’s relative importance.
Risks may be found through several techniques, such as brainstorming meetings and doing a root cause analysis. Often, personnel who are familiar with the business’ working environment are the finest sources of knowledge for recognizing hazards. In order to detect potential hazards, firms must attempt to interview workers and other stakeholders.
All identified risks should be documented in some fashion. This documentation could include a risk register, a formal risk assessment, or a risk management plan. Risk assessments should be systematic, and they should be conducted at least annually. Several compliance frameworks also require that companies complete regular internal and external risk assessments.
Risks can be grouped into categories based on their frequency and severity. Those risks that are more likely to happen and have the potential for serious consequences should be given high priority. For example, if a risk can bring a project to a halt, it should be considered a higher priority than a risk that will only cause minor inconveniences.
Prioritizing Risks
When risks are identified, their impact and likelihood of occurrence should be assessed to determine their importance. This process is called prioritizing the risks, and it’s an important step in a risk management plan because it allows teams to concentrate on addressing the most critical risks first.
One of the most popular ways to prioritize risks is by their severity. Severity is determined by the impact a risk could have on the project’s cost, schedule, or technical performance objectives. The impact could also be categorized as critical, moderate, or low.
Another way to prioritize risks is by their manageability. This is based on the probability of a risk event occurring and its impact, which is assessed using a risk matrix sorted by probability and impact. Risks that fall into the upper right-hand side of the chart are considered imminent and severe, meaning they need to be addressed urgently. In contrast, risks in the lower left-hand corner have negligible impact on the project and should be treated with a low priority.
Other methods of prioritizing risks include analyzing the financial impact, which is helpful when budgeting for mitigation activities. Some teams may prioritize risks based on the potential fines they’ll incur if not addressed in time, while others choose to rank risks based on their estimated remediation costs.
Mitigating Risks
Once identified, risks must be evaluated to determine whether to eliminate or accept them. Eliminating risks is generally the best approach. For example, a company that realizes that opening a new office could cost it more money than it can earn in revenue should consider eliminating the risk by halting the expansion plans until it can afford to take the hit.
For some risks, however, avoidance isn’t possible. Companies can minimize the effects of those risks by implementing mitigation strategies, including reducing the likelihood of them occurring and reducing their severity if they do occur.
This step involves brainstorming and gathering employees to review all the different risks that could impact the company. The group will create a consensus view that gets recorded on a visual risk map and recommends action plans for each major risk. It’s also a good idea to involve external sources to cross-check the data.
This is a critical step. Identifying the root causes of all risks and evaluating how they interact is important. For example, suppose location hazards cause a risk and also have an impact on employee safety. In that case, the company can address both risks by implementing measures to reduce the dangers from the locations and training employees to be careful when working at the sites.
