It’s time for a risk management refresh
In the current environment, companies large and small need to reassess how they think about risk management. Every business faces some level or risk, and the Covid-19 pandemic has exacerbated these risks for many industries. Even the acceleration of industry trends such as retail shopping moving to digital channels has caught some businesses on the back foot.
According to a survey by McKinsey Consulting, the boards of leading companies spend only 9% of their time on risk management. As the business landscape is changing rapidly right now, all companies need to have a hard look at the risks facing their business, even if they’ve carried out a proper risk assessment in the recent past.
Here are the four key components of building a solid risk management protocol, used to help a business understand their risk appetite and risk-vs-return comfort levels. Is your company due for a refresh on internal and external risk management?
What risks does your business face?
The first step in any risk management plan is to understand the risks you’re dealing with as a business owner. Do you have physical risks, such as fire in a warehouse? Do you have personnel risks, such as losing a key employee to a competitor or liability if an employee is injured? Do you have operational risks, such as outsourcing certain tasks instead of hiring more staff? Do you face strategic risks, such as reliance on one supplier for a key raw material or deciding how much to invest in cutting edge technology?
Do you face financial and reputational risks if a client claims your professional service or advice was negligent? Or if a member of the public is injured on your business premises?
As each business is unique, so too are the risks involved. The larger the business, the more stakeholders who should be involved in carrying out a thorough risk assessment. Larger companies can engage managers and board members to help identify potential risks, as it’s critical to cast a wide net at this stage of the process.
What is the potential impact of each risk?
According to The Financial Conduct Authority (FCA), when assessing risk a business needs to consider both the potential impact of the risk and the probability of it occurring. While most businesses in the UK don’t fall under the purview of the FCA, the FCA are certainly experts in risk management and their framework is useful for any size business.
Metrics are used to quantify the potential harm that can befall a business if a problem occurs, and the likelihood of a problem occurring. Then risk impact and probability metrics can be weighted as high, medium-high, medium-low or low to determine which risks are most critical to manage and observe.
How can you mitigate these risks?
Some risks are relatively easy to manage. For example, business insurance can be purchased to manage the liability risk of injury or damage to third parties or employees, the operational and financial risk of a flood in your premises or the risk of clients suing for negligence. With the average cost of business insurance starting in the hundreds of pounds a year for a small business, buying business insurance is a relatively cheap and easy way to mitigate some business risks.
Other risks may be harder to manage, and solutions for some problems are not as obvious. For example, a small manufacturer might be deciding if it’s prudent to spread out their raw materials purchasing across different vendors to mitigate dependence on one supplier, but lose volume discounts as a result.
How does your business monitor and report on risk?
In the end, risk management is only effective if there are internal processes in place to monitor risk and flag any arising issues. No matter the size of the organisation, risk managers should provide reports to management at regular intervals.
And given the speed with which the business environment is changing at the moment, companies would be wise to proactively reassess the entire risk management process on a regular basis. Even businesses that have adapted and weathered Covid-19 so far will surely face new risks as we emerge into a new world. Businesses that can manage risks well will surely end up in stronger position compared to businesses that are unprepared.
This was posted in Bdaily's Members' News section by Erin Yurday .
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