Risk management is a standard tool that companies use to mitigate potential commercial threats, such as loss of money, customers or market share. However, not all companies understand the importance of risk management or how to prioritize it among their other important business objectives.
Why is Risk Management Important?
There are many proven benefits to risk management. First, it plays a critical role in strategic planning and long-term business planning. If executives fail to prepare for certain risks, then the planning and subsequent operation efforts and expenses will be wasted. Second, risk management helps executives more effectively use human and financial resources. Third, it increases the ability of the company to deliver on time results, products and services. Fourth, it reduces potential legal costs through avoiding litigation issues. For example, it will reduce the likelihood of product malfunction or personal injury lawsuits. Once the company effectively incorporates risk management into their business operations, customers will enjoy better products or services, which will lead to an enhanced reputation. Finally, it will promote continuous improvement, which naturally will lead to higher quality standards.
How to Start Prioritizing Risks
Every business project or prospect will entail different levels of risk. However, management can use a risk matrix in order to analyze and prioritize risks. All members of management should contribute their opinions in order to guarantee a comprehensive assessment. The first step is to identify and list every potential risk, even if the likelihood of them occurring is very slight. This will allow the team to transition to the second step of properly measuring the likelihood of each risk occurring. Most risk matrixes use a one to five scale, with 1 being highly unlikely and 5 being highly likely. Time should be taken to properly weigh and debate every risk. The third step is to assess the potential impact of the different risks. This step will involve abstract analysis best performed by executives with excellent business acumen and experience. The final step is to determine the overall calculated risk. There are standard formulas used to calculate the overall risks associated with a certain event.
How to Control and Mitigate Risks
Most projects begin with strong organization and a detailed risk matrix, but day-to-day operations result in the risk matrix becoming inaccurate and out of date. Failing to update the risk matrix is the most common reason why risk management fails. In order to have a successful risk management program, the risk matrix must be continually updated and controlled through regular reviews. Keep in mind that as priorities shift, impacts will change and new risks will emerge. Therefore, management should schedule weekly or bi-weekly reviews of the risk matrix. This may be difficult to schedule, but it is very easy to simply email out the risk matrix to the management team and ask for updates and feedback. On the other hand, mitigating the highest risks does not stop them from happening, but instead establishes an organized contingency system that will lessen the overall impact on the project.
In the end, every business project carries a certain level of risk. However, a solid risk management program is the best way to keep these risk factors low and minimize the impacts of risks that do occur. As long as management regularly reviews and updates the risk matrix, the company will minimize their collective risks.