It has become a global economy with unpredictable outcomes, which means that a business must master the risk control process more than ever.
Whatever your role in your company—from managing a multi-billion dollar enterprise to leading a single small project—your organisation’s success might depend on its risk control measures. But what is the risk control process, and why does your organisation need it?
Let’s examine the process.
Understanding Risk Management
Fundamentally, this means identifying risks, assessing their nature and severity, setting priorities, and then taking measures to eliminate or minimise the probability of their occurrence and/or impact.
The aim is to anticipate and cope with future risks, whether financial, operational, or strategic, to enable the business to achieve its purposes with minimum disturbance.
The risk management process typically follows these steps:
- Risk Identification: recognising potential risks that could affect the project or organisation
- Risk Assessment: evaluating the identified risks to understand their potential impact
- Risk Control: implementing measures to reduce or eliminate the impact of these risks.
- Risk Monitoring: continuously tracking the risks and the effectiveness of the control measures
- Risk Communication: all parties (internal and external) are aware of significant risks and mitigation processes
Together, these steps represent a robust risk management process that helps organisations prepare for problems and react to control and mitigate their effects.
The Importance of Risk Assessment
Risk assessment consists of analysing the potential risks identified during the risk identification phase, intending to calculate the likelihood that an identified risk event will occur and quantifying the consequences if that event does happen. Risk analysis often employs qualitative and quantitative risk assessment approaches, enabling risk managers to assign a risk score, for example, high, medium or low, to each identified threat.
For instance, a risk matrix might map risks onto a scale, reflecting the probability of occurrence against impact severity so that risks requiring immediate attention or those tracking over more extended periods can be prioritised.
Implementing Risk Control Measures
And then, finally, after the risks are appropriately measured, we have risk control – we set in place the control measures that can be used to manage and mitigate the risks, all according to their nature:
- Engineering Controls: physical changes to facilities, equipment, or processes to reduce risk
- Administrative Controls: policies, procedures, and practices designed to manage risk
- Personal Protective Equipment (PPE): gear and equipment designed to protect individuals from identified hazards
- Behavioural Controls: training and behaviour modification techniques to reduce human error
Risk control aims to reduce residual risk, i.e., the remaining risk after risk control measures have been applied, to a level acceptable to the organisation (Risk Appetite).
The Role of Risk Monitoring
Risk monitoring includes monitoring the effectiveness of risk control measures over time. It involves regularly reviewing and updating the risk register. This document includes all identified risks, the potential impact of risks, the differential effectiveness of control measures in reducing risks, and the actual status of risks.
Good risk monitoring means a continual dialogue between the risk manager and other stakeholders to identify changes in the risk environment that could lead to amending the risk management plan, either to include new risks, reassess existing risks, or change the overall risk management framework.
Project Risk Management
Project risk management plays a crucial role in project management as it can help deliver projects on time, within budget, and to the required quality. Project risks can come from various origins, such as technical challenges, resource issues or external factors like regulatory changes or market fluctuations.
An essential part of the project risk management process is compiling risk registers that list possible risks to the project and evaluate their likelihood and importance. For example, for a construction project, the risks may include weather conditions, supply chain disruption, or labour shortage. Active risk control is a vital management technique to prevent such risks and improve project results.
Financial and Operational Risks
In business terms, financial risk is the possibility that the organisation may incur financial loss due to market shifts, credit-related issues, or investment losses. To mitigate the financial risk, we need to know our organisation’s financial exposure and take steps to reduce this exposure.
Operational risk, on the other hand, signifies the possibility of loss due to employee misconduct, system failures, or human error in general. It can entail flaws in internal processes, systems, and controls. Robust internal control mechanisms can help control and mitigate operational risk.
Enterprise Risk Management
Enterprise Risk Management (ERM) is a comprehensive, forward-looking methodology for identifying and assessing all of the risks that might impact an organisation – not just in one part of the business operation, but across the organisation as a whole: finance, operations, strategy, reputation and every part of an organisation’s enterprise. ERM is not just risk management; it is risk management that has been integrated into an organisation’s strategy.
Successful risk management inside ERM means the risk management process is integrated into the business and its goals and objectives. This will help to ensure that risk management is proactive rather than just reactive and supports long-term success.
Strategic and External Risks
Strategic risks could impact an organisation’s ability to fulfil its strategic mission. They can be externally driven, such as market or economic changes, shifting competitive dynamics, regulatory reforms, and technological advances. Risk managers’ involvement in strategic risk can help an organisation proactively address its long-term challenges and opportunities. Managing strategic risks requires a more forward-looking approach to risk management.
On the other hand, external risks arise from outside the organisation and are generally difficult or impossible to control. Examples include climate change, natural disasters, economic downturns and geopolitical events. The organisation can’t eliminate these threats, but it can work to reduce their effects. This might include spreading supply chains over multiple sources, taking out insurance or drawing up contingency plans.
Risk Treatment and Control Measures
Risk treatment is identifying appropriate treatments or controls per the significant risk faced. There are several treatments for risk treatment, which include:
- Risk avoidance by elimination: choosing not to engage in activities that expose the organisation to risk
- Risk reduction: implementing measures to reduce the likelihood or impact of a risk event
- Risk transfer: transferring the risk to another party, such as through insurance or partnerships
- Risk acceptance: taking a chance, often when the risk outweighs the cost of management.
The strategy selected will depend on the nature of the risk, the organisation’s tolerance or appetite for risk, and the level of effectiveness of any available control measures. For example, an organisation with a low appetite for risk will prefer risk avoidance and mitigation. In contrast, an organisation with a higher appetite for risk will be more willing to take or share risks.
Risk Communication and Stakeholder Involvement
Communication is vital in managing risk. Building trust and frequent communication on the status of risks and risk management activities, along with clear documentation of the risk management plan and role/responsibility of risk owners and stakeholders, are all integral parts of a risk management process.
It’s also the risk register, which brings all risk information into one repository. This enables stakeholders to track where and when risk controls are implemented and give a clear view of the organisation’s risk profile.
Quantitative Risk Assessment and the Role of Risk Matrices
Quantitative risk assessment – for example, assigning numeric probabilities – enables a more precise, mathematical analysis of potential risks. Assessing and analysing risk could include calculating a risk’s Expected Monetary Value (EMV) – the product of the probability of a risk event multiplied by the potential financial impact.
The risk matrix visualises the relationship between a risk’s likelihood level and relative impact. When the risk is illustrated in this way, it’s possible to plot the risk on the matrix, with the more critical areas requiring more immediate attention than the lesser areas, which can be monitored over time.
For example, a risk with a high probability and high impact would be the target of control measures first; both a risk with low probability and low impact and a risk with low probability but high impact would not be the target of the risk managers – the former might be accepted because it is deemed not profitable to take on control measures; the latter might be the target of measures to monitor impacts.
The Role of the Risk Manager
Thus, the risk manager stands at the centre of the risk control process, responsible not just for identifying and assessing risk but also for coordinating the actions that will be taken to mitigate the risk, monitoring to see whether the actions were effective, and keeping stakeholders up to date.
Since risk management is an analytical task and a strategic process of constantly improving your company’s functions, you don’t want a classical number-cruncher in such a position. Instead, you would be looking for someone who can analyse problems, think strategically, and communicate with various people and departments. Risk management necessarily touches people across functions.
Developing a Risk Management Plan
A detailed risk management plan is needed to guide the risk control process. Such a plan should clearly state the organisation’s approach to risk management, including risk appetite, division of responsibilities among relevant parties, and types of risk controls.
Similarly, your risk monitoring strategy should form part of your risk management plan to remain effective. This might include regular risk register reviews, risk matrices, or management measures. Any of these could be subject to change as the risk is continuously mitigated.
Risk Management Framework and Risk Criteria
A formal risk management framework specifies the system and principles by which risk will be managed within an organisation and how it will interact and integrate with the business within the context of the overall strategy and objectives.
The framework should also specify the kinds of risks that make up the criteria and how various risks will be judged against each other to prioritise. Such criteria can include the probability the organisation will experience a risk event, the effect or amount of harm the event could cause, and the desire the business has to take risks when balancing benefits and harms is not decided.
Clearly defining these risk criteria will allow the organisation to gauge risk properly and ensure that the most critical risks are addressed first.
Managing Risk Exposure and Potential Threats
An external company without ties to your business will not be personally motivated to hide or downplay any problems or liabilities. Arguably, the most challenging issue that risk management addresses is risk exposure – where losses or some other damage is possible but is averted either by control measures or industry best practices. Managing risk exposure goes beyond the approach that some security professionals seem to favour, such as putting up a wall and declaring victory following the erection of a particular control. Risk exposure requires ongoing monitoring of the risk environment to ensure that the existing control mechanisms are appropriate for new threats.
This requires an aggressive risk identification activity where the risk management programme is reviewed and, if appropriate, the strategy is updated regularly. The earlier threats can be identified and categorised or coded; the earlier organisations can determine their risk levels and take steps to reduce the extent of their future exposure. In exercising risk management processes, an organisation’s exposure to uncertainty—risk exposure—reduces as its resilience to operating in an uncertain environment increases.
Final Thoughts: The Path to Effective Risk Management
Controlling risk effectively is a lifelong pursuit. It requires sustained attention, balancing competing priorities, and striving to improve. Whether you are managing financial, operational, strategic or any other risks, the principles of risk control are generally the same: identify the risks, assess the potential consequences, put in place measures to mitigate or eliminate them, and monitor whether that is effective.
Put all these steps in place and take a proactive approach to risk management. Your organisation can still be effective in today’s dynamic business environment and be ready to deal with any future surprises.
