Risk isn’t static. With novel threats continuously emerging, internal and external pressures that challenge normal business operations are evolving rapidly. Staying ahead and preparing to navigate around these obstacles require organizations to create and maintain effective risk management programs so they can respond in a timely, organized fashion. As technology advances and the regulatory environment adapts, it’s more important than ever for businesses to understand how to manage the risks they face and what to do when new threats emerge.
What Is Risk Management?
Risk management is an organization’s ability to assess its readiness to respond when an adverse event occurs. For organizations to evaluate their level of preparation, there are several questions they should ask:
- What is the organization’s current risk profile, and how often is enterprise risk being assessed?
- What are the organization’s capabilities to respond to risk, including its existing business interruption plans?
- What policies are in place to enact the proper protocols when risk exceeds the organization’s acceptable risk tolerance?
- What are areas of weakness that the business needs to improve in order to better prepare for risk events?
Types of Risk
The unique profile of an organization and the industry it operates within will also help to determine which types of risk are most relevant. For example, a private company wouldn’t have the same concerns about answering to shareholders as a publicly traded one, but both would still need to consider reputational damage that could result from an incident.
There are numerous types of risk companies need to be aware of and what they entail, including:
- Compliance: Risks associated with noncompliance that can result in legal penalties and reputational damage
- Strategic: Risks that arise from adverse business decisions or the failure to implement appropriate plans in a manner that is consistent with the organization’s strategic goals
- Financial: Risks related to the financial health of the organization
- Regulatory: Risks related to changes in laws and regulations that could impact the organization’s operations or market position
- Operational: Risks related to the internal processes, systems, and people within an organization
- IT: Risks that can include cybersecurity threats, data breaches, and the integrity of IT systems
Organizations should also be aware of the impact some risks may cause to the company’s reputation, which may affect public perception and potentially lead to a loss of trust and business. Emerging risks such as technological advancements like AI can also pose unexpected challenges and changes in the market or regulatory environment.
Conducting a risk assessment allows companies to connect the dots between the different types of risk they’re most exposed to and their state of readiness for each. When the company does identify an area that needs improvement, it must then determine how it will allocate resources to address the threat that particular risk poses to business operations.
Consequences of Not Being Prepared for Risk
Proactively assessing risk gives companies an opportunity to plan for adverse events, but a failure to prepare can leave them scrambling to contain the fallout when things go awry. The most obvious danger of experiencing a risk event is operational disruption, and without the proper procedures in place, that can quickly spiral into extended business downtime and supply chain interruptions.
Certain incidents, such as cyber breaches, can also trigger costly legal and regulatory consequences. For example, organizations found to have been negligent in the way they maintained critical systems or that lacked proper security measures can receive heavy fines and be forced to undergo additional monitorship or oversight. Organizations must also consider the damage an incident can cause to brand reputation, potentially lowering trust among key stakeholders, including clients, investors, and employees. Rebuilding that trust can be a costly, resource-intensive, time-consuming endeavor.
Proactive Strategies for Mitigating Organizational Risk
A strong risk management plan helps companies prepare to handle different challenges they may encounter, but there are often questions about where to start. While it may be tempting to address risk by casting a wide net and planning for as many scenarios as possible, organizations shouldn’t overlook the need for depth in their risk assessments. Leadership should evaluate the business’s enterprise risk management (ERM) framework to verify they’re carefully considering the different types of risk and how to best mitigate them. That includes dedicating adequate resources regarding budget, personnel, and technology as appropriate for each identified risk area.
Risk assessments should also be continuous and dynamic. Threats to business are in a constant state of flux and evolution, meaning a single, annual risk assessment is no longer enough. Businesses must engage in continuous monitoring by conducting more frequent evaluations and adjusting their strategies to keep pace and stay ahead of emerging threats.
Part of the ongoing evaluation process can include incorporating artificial intelligence and automation tools to help identify potential risks while providing insights the organization can act upon. Automations and algorithms can identify potential risk patterns for experienced professionals to assess further, helping to save time and resources.
Other ways to address risk include:
- Enhancing operational resilience by creating or improving business continuity plans
- Creating risk tolerances for different business functions and formalizing them through policies
- Establishing clear communication plans that keep stakeholders informed while responding to a risk event
- Developing and applying policies and procedures to address risks, with regular updates to account for emerging threats
Risk is unavoidable. Understanding and approaching it appropriately is an ongoing process, but determining how much risk is too much differs for every organization. Even within the same company, there will likely be variations among different departments as to how much risk is acceptable. It’s imperative for businesses to understand their risk tolerance, determine the threshold they’re willing to accept, and regularly evaluate if that threshold has changed.
Written by Alejandro Anievas and Rhonda Warren. Copyright © 2024 BDO USA, P.C. All rights reserved. www.bdo.com
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