Identification: The first step in risk management is to identify the risks that the organization faces. This involves understanding the organization's business, its operations, and its environment.
Assessment: Once the risks have been identified, they need to be assessed in terms of their likelihood and impact. This helps to prioritize the risks and determine which ones need to be addressed first.
Control: Once the risks have been assessed, they need to be controlled. This can be done through a variety of methods, such as avoiding the risk, transferring the risk, reducing the likelihood of the risk, or reducing the impact of the risk.
Monitoring: The final step in risk management is to monitor the risks on an ongoing basis. This ensures that the risks are still being effectively controlled and that new risks are identified as they arise.
Protects the organization from losses: Risk management helps to protect the organization from potential losses by identifying and addressing risks before they can cause damage.
Reduces costs: Risk management can help to reduce costs by identifying and avoiding unnecessary risks.
Improves decision-making: Risk management provides a framework for making informed decisions about risks.
Increases compliance: Risk management can help the organization to comply with legal and regulatory requirements.
Identifying all risks: It can be difficult to identify all of the risks that an organization faces.
Assessing the likelihood and impact of risks: It can be difficult to accurately assess the likelihood and impact of risks.
Implementing effective controls: It can be difficult to implement effective controls to manage risks.
Maintaining ongoing monitoring: It can be difficult to maintain ongoing monitoring of risks.
Avoidance: This is the most proactive approach to risk management, and it involves identifying and eliminating potential risks before they can materialize. For example, a company might avoid entering a new market if it believes that the risk of failure is too high.
Retention: This approach involves accepting a risk and budgeting for the potential losses that may occur. For example, a company might retain the risk of its warehouse being damaged by a fire, and it would factor in the cost of rebuilding the warehouse into its financial plans.
Transfer: This approach involves transferring the risk to a third party, such as an insurance company. For example, a company might transfer the risk of its employees getting sick by purchasing health insurance for them.
Mitigation: This approach involves taking steps to reduce the likelihood or severity of a risk. For example, a company might mitigate the risk of its computer systems being hacked by installing security software and training its employees to identify phishing emails.
Acceptance: This approach involves accepting a risk and not taking any action to manage it. This may be appropriate for risks that are relatively small or unlikely to occur.
The best approach to risk management will vary depending on the specific risk and the organization or individual involved. However, all five of these approaches can be effective in reducing the impact of risks.
Summary:
Avoidance - Eliminate the risk before it can occur.
Retention - Accept the risk and budget for potential losses.
Transfer - Transfer the risk to a third party, such as an insurance company.
Mitigation - Take steps to reduce the likelihood or severity of the risk.
Acceptance - Accept the risk and take no action to manage it.
Technics used to manage the risk
Qualitative risk assessment
In a qualitative risk assessment, each risk is rated on two dimensions: likelihood and impact.
For example, the risk of a project being delayed might be rated as "medium" in likelihood (it is somewhat likely to happen) and "high" in impact (it would have a significant negative impact on the project schedule).
Quantitative risk assessment
is a formal and systematic approach to quantifying the risks associated with a project, activity, or operation. It involves using statistical data, engineering analysis, and expert judgment to estimate the likelihood and consequences of potential hazards. QRAs are used in a variety of industries, including petrochemicals, aviation, healthcare, and construction.