RISK MANAGEMENT FRAMEWORK: AN OVERVIEW
A risk management framework is a plan with components that provide the foundations and organizational arrangements for designing, implementing, monitoring, reviews, and continuously improving risk management for an organization. It is a reality that by implementing a risk management plan and considering the various potential risks or events before they occur, an organization can save money and protect its future from unnecessary losses.
This article presents an overview of risk management and provides descriptions of basic information about risk management. It covers the meaning of Risk, risk management, and risk framework. It also explains why we should manage Risk and what contains the significant components in managing Risk.
What does Risk mean?
Risk refers to the possibility that an undesired event that might prevent or impact attainment of organizational goal occur. The impact can be a threat to the delivery of the goals or resulting in a missed opportunity. These threats could stem from various sources, including financial uncertainty, legal liabilities, accidents, natural disasters, and many more. Thus, it has become increasingly important for organizations to have an effective plan for managing such risks.
What is Risk Management
Every organization faces the Risk of unexpected, harmful events that can cost the organization money or cause it to permanently close. Risk management allows organizations to prepare for the unexpected by minimizing risks and extra costs before they happen. It is the duty of every manager, therefore, to plan for effective risk management. Risk Management is a process for identifying, assessing, managing, and controlling potential events or situations or threats to organizational performance. Therefore, adopting a risk management framework that embeds best practices into the corporate risk culture is essential.
Why Manage Risk
Risk is a reality to business owners or managers; thus, managing Risk is an essential component to any organization regardless of the size and industry to which the organization belongs. Organizations need effective risk management, which plays a crucial role in the quest for financial steadiness and outstanding performance. Thus, a well-run organization will have a comprehensive risk management framework in place. Properly managed risks results to the following:-
- Ensures a safe and secure work atmosphere for all staff and clienteles.
- Upsurges the stability of business processes while also reducing legal obligations.
- Provides defense from events that are harmful to both the organization and the environment.
- It helps establish the organization’s insurance needs to save on unnecessary premiums.
What are the components of the risk management processes?
The risk management process involves systematically applying policies, procedures, and practices to communicating and consulting, establishing the context, and assessing, treating, monitoring, reviewing, recording, and reporting the Risk. The critical processes in risk management include establishing context, risk identification, measurement, mitigation, reporting, monitoring, and governance.
Establishment of Context
The establishment of context entails understanding the circumstances hence, setting the foundation for the rest of the processes. Thus, Managers are responsible for establishing criteria for evaluating Risk and defining the structure of the analysis.
Risk identification is the 2nd step after having established the context. Risk identification entails establishing, recognizing, and describing the Risk to the organization. The process involves determining what might happen, how, why, and when it might happen. Identification of Risk considers causal factors, the Risk itself, and the consequences. Managers should identify and define potential threats that may negatively impact and influence specific organizational processes or projects.
Risk measurement is the 3rd component of managing Risk after the organization’s risk identification step. Risk measurement provides information on the quantum of either a specific risk exposure or a combined risk exposure. At this stage, the manager determines the overall risk likelihood of occurrence combined with its broad consequences. Thus, risk measurement involves analyzing and evaluating the extent of Risk entailed in any aspect of the organization. The resulting decision can be accepting the Risk or start implementing mitigation measures.
Risk Analysis and evaluation
Risk analysis is the process of assessing the control effectiveness, residual Risk, and inherent Risk. Control effectiveness of the Risk involves applying the organization’s rating guide to the design and effectiveness of each control individually and jointly mitigating the Risk. After considering the overall control effectiveness, the determination of residual Risk and the inherent risk level follows. Through risk analysis, managers can further understand the specific instance of Risk and how it could impact the organization’s objectives or project. Hence, the decision whether the Risk is acceptable and whether the organization is willing to take it on the basis of its risk appetite.
Mitigation of Risk
Mitigation of Risk or risk treatment refers to the plans to improve the control effectiveness. While implementing the risk mitigation plan, organizations decide which Risk to eliminate or minimize and how much of its core risks to retain. Thus, the organization assesses its highest-ranked risks and plans to alleviate them using specific risk controls.
This step involves tracking new and existing risks. Monitoring requires regular reporting on specific and aggregate risk measures to stabilize the risk level and keep it optimal. Risk reports must be sent to risk personnel who have the authority to adjust or instruct others to adjust risk exposure. Some people call this person a risk champion.
The entire risk management requires the involvement of all employees. Thus, risk governance is the process that ensures all employees of the organization perform their responsibilities per the risk management framework. Risk governance entails defining the roles of all employees, segregating duties, and assigning authority to individuals, committees, and the Board for approval. Further, Risk Governance facilitates setting risk limits, exceptions to limits, risk reports, and general oversights.
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