As organizations continue to operate in an uncertain and competitive environment riddled with threats to their operations, including climate catastrophes, supply chain disruptions, and cyberattacks, strategic risk management is fundamental in ensuring a company’s success.
Research shows that 85% of business owners feel they’re working in a moderate to high-risk environment, and 79% of board members feel that improved risk management strategies are critical in protecting their companies and providing value in the next five years.
Thus, organizations must be ready to deal with various types of strategic risks and have a robust risk management framework to reduce threats' impact on their operations and even transform some risks into opportunities.
This article will dive into the complex world of strategic risk management, key risk management strategies, factors to consider when crafting a strategy, and how to conduct a detailed strategic risk assessment. At RiskRecon by Mastercard, our risk rating model can help you better understand the threats your organizations may face and act on those threats in a broader context. This risk rating model automatically assesses cybersecurity threats based on the prevalence and severity of risks.
What Is Strategic Risk Management?
Strategic risk management (SRM) is a process that identifies, quantifies, and mitigates business and cyber risks that affect or are significant to an organization’s business strategy, objectives, and strategy implementation. It prioritizes what risks could happen in advance and outlines sub-strategies to deal with them.
Due to increasing risk exposures in recent years, such as cyberattacks and financial crises, there has been an increased focus on strategic risk management. Also, it has become a vital risk type for boards and executive management to understand and make educated decisions on.
There are many types of strategic risks, including:
- Changes in consumer preferences and demands
- Competitive pressure
- Legal and regulatory changes
- Technological shifts
- Merger integration
- Stakeholder pressure
- Senior management turnover
Strategic risk focuses on the big stuff, and prioritizing strategic risk management involves handling the big stuff first. Thus, a robust strategic risk management framework must prioritize understanding the threats your company faces to take adequate steps to protect your business.
Why Is Risk Management So Important?
Risk management is vital because it helps businesses understand how they can identify and reduce potential threats, which could have a substantial impact on their financial stability and reputation or cause non-compliance with regulations or laws.
Implementing a robust risk management plan can help your company address issues like data privacy and protection, financial crime, cybersecurity risk, and many more as they arise. A practical framework must reflect the ever-evolving risk landscape, which requires regular risk evaluations.
You should also broadly share your risk management framework across your organization so that all your employees and managers have the information they require to make timely risk-based decisions and coordinate measures and efforts to eliminate risks appropriately.
Typically, the ultimate goal of risk management is to identify potential risks before they happen and devise a plan for addressing them.
Risk management looks at external and internal risks that may harm a company. Risk management accountants and managers often break their frameworks into four parts. The four parts include defining a strategic risk management strategy, identifying and assessing risks, managing emerging risks by implementing a strategy, and devising a contingency plan.
With RiskRecon’s Portfolio Issue Priority Matrix, you can safeguard your digital assets from third-party risks by having real-time visibility of your third-party vendors’ cybersecurity performance. This priority risk matrix can help you discover and monitor third-party risks and effectively act on threats with the highest potential to hurt your business.
What to Consider When Building a Risk Management Strategy
In a competitive and uncertain business landscape, all companies must implement procedures and policies to manage risk effectively to achieve strategic and business objectives. Sadly, many companies don’t fully understand the threats they have ignored and whether they’re monitored, controlled, and aligned with their risk tolerance.
Although management priority and regulatory requirements historically drive risk management investments, to build an effective risk management strategy, you must also consider additional pressures like expectations of counterparties and associated threats, protection of market value, and the management’s need to have reasonable awareness and control of rapidly emerging threats. Even if your budget might be tight, your company will benefit immensely from dedicating more efforts to risk management.
These five strategies can help you build an effective risk management strategy:
1) Enterprise Risk Management (ERM)
Instead of implementing tactical, compliance-based processes that are silo-based, focus on evaluating risks singly as supported by regulations.
Enterprise Risk Management (ERM) strategically examines risk management from the entire organization's perspective. It’s a top-down approach that seeks to discover, evaluate, and devise a plan to remedy potential risks that may affect an organization's objectives and operations.
ERM takes an integrated approach and calls for business and cyber risk decisions that make sense for the entire firm.
2) Build a Risk Culture
Your risk culture must support your risk management strategy with a tone at the management level that references the value of effective risk management, integrates risk management into all executive communications, and displays desired risk management behaviors.
3) Ascertain Your Risk Appetite
Developing a well-defined risk appetite will help your employees understand the risks your organization is ready to take on. Also, it helps the board and management align views on risks on threats before an incident happens.
4) Identify Your Risks
To create an effective risk management strategy, you must first identify the risks your organization faces or may face in the future. Various methods like surveys, interviews, and facilitated workshops can help you identify emerging threats that may cause negative consequences for your company.
5) Conduct a Risk Assessment
Risk assessments prioritize risks across your organization and highlight the top risks (more on that below)
Conducting a Strategic Risk Assessment
Here are seven simple steps that can help you conduct a detailed strategic risk assessment:
1) Learn About the Strategic Risk Strategy of Your Organization
The first phase in the strategic risk assessment is thoroughly understanding the fundamental business objectives and strategies. Some companies have well-defined strategic objectives and plans, while others only have informal strategy documentation. Either way, your assessment must summarize your company’s business objectives and basic plans. This is a vital stage because, without essential details to focus on, your strategic risk assessment might result in a lengthy list of potential risks with no way to prioritize them.
2) Collect Data and Views on Strategic Risks
Next, collect data and views on your company’s strategic risks. You can do this by conducting surveys, interviewing key directors and executives, and analyzing critical documents like investor presentations and financial reports. This step offers an opportunity to ask what key individuals in your organization consider as potential emerging risks.
3) Create an Initial Strategic Risk Profile
Integrate and examine the information collected in the first two stages to create a preliminary profile of your company’s risks. The type of presentation and level of detail will depend on your organization’s risk culture. Simple lists are enough for some businesses, whereas other organizations might want to include more detail in their strategic risk profiles. A risk profile should contain a brief list of the top strategic risks and their likely ranking or severity.
4) Validate and Finalize Your Strategic Risk Profile
Next, validate, refine, and finalize your initial strategic risk profile. Based on how you conducted the data collection process, this step may involve validation with some or all key directors and executives. However, gaining substantial validation to curb major disagreements on the final strategic risk profile is crucial.
5) Create a Strategic Risk Management Framework
Carry out this step in tandem with Step 4. While adequate effort can go into an initial strategic risk profile and risk assessment, significant effort should also create a framework to improve risk identification, monitoring, and management actions related to the risks identified. The ultimate goal of this step is to help and improve a company’s ability to manage and track its top strategic risks.
6) Communicate the Strategic Risk Management Profile and Framework
Communicating your company’s strategic risk management framework and top risks can help you understand potential risks and how they’ll be managed. This helps guide your employees on the risks and potentially how threatening they might be. Further, communicating your expectations towards risk mitigation reinforces that managing risks is a core goal and the expected role of employees across the company.
7) Execute the Strategic Risk Management Framework
Again, the value of the risk assessment process stems from implementing a framework for managing and tracking risk. Based on the dynamic nature of threats, these seven steps make up a circular-loop process that must be recurring and continual within a company.
RiskRecon’s continual digital profiling and security analytics offer maximum visibility into your digital systems. IT professionals and security teams can leverage this data to know where an organization is hosting its systems, its configurations, and if it meets security requirements. RiskRecon’s ability to determine assets at risk can help your security teams quickly discover issues, prioritize risk response, and act effectively.
What Are Five Key Risk Management Strategies?
Managing company risks calls for adopting different strategies to deal with various risks. Not all threats warrant similar actions or responses. Here are five fundamental risk management strategies you can employ to protect your assets and business:
1) Risk Avoidance
Risk avoidance often encompasses removing the likelihood of a risk becoming a reality or threat. This risk management strategy aims to eliminate the possibility of a risk materializing or constituting a hazard from the start. This could mean altering your manufacturing procedure or avoiding some activities, like entering into a new but potentially threatening contract.
The viability of risk avoidance largely depends on your unique business circumstances. Don’t forget that avoiding certain activities because of the possible risks also means missing out on the opportunities and returns associated with those activities. With time, you must re-assess your risk avoidance strategies and find alternative methods of managing the underlying issues.
2) Risk Acceptance/Retention
Risk acceptance or retention means that an organization won’t take measures to prevent risk possibility and impact. This“do nothing” approach means you acknowledge the impending risks upfront. It’s the best approach if your company can deal with or absorb the consequences of the risks.
However, you should know that if risks occur frequently, they can cause business disruptions and high remediation costs. Thus, evaluating this risk management approach alongside other strategies is crucial. You should use this strategy if the consequences are low and not severe.
3) Transfer of Risk
When you identify and consider risks, reducing the consequences via risk transfer could be a viable risk management strategy. This strategy works by transferring the consequence and strain of the risk to another party. Thus, when adopting this strategy, it must be in a way that’s acceptable to all parties involved.
For instance, if your production team builds a new product, but the final product has some defects. Issues in the production process might not directly affect the defects but are caused by problems with materials you purchased from an outside vendor.
You can transfer the consequences to the vendor responsible for providing the materials by asking the vendor to cover the costs linked to the product defects.
4) Risk Mitigation
Risk mitigation isn’t feasible or practical. It might be a viable option if a risk poses a problem or threat and/or risk acceptance or avoidance won’t suffice. If a risk threatens to impact your organization, vendors, employees, or customers, then it’s best to mitigate that risk. That means identifying risks, analyzing solutions, devising a response plan, taking action, and monitoring results.
5) Risk Reduction
Risk reduction involves taking measures to prevent or reduce the impact of a risk. This strategy ultimately makes risks less severe.
This is a common risk management strategy when it comes to risk mitigation. Risk reduction is sometimes referred to as lowering risk. By choosing this strategy, you must work out the actions or measures you’ll take to make risks more manageable.
An example of risk reduction is in manufacturing and the risk of products with incorrect specifications. A quality management system can reduce the odds of this happening. Your company may face risks in the finance industry due to new regulations. A digital solution can help you manage regulatory requirements while reducing non-compliance.
With RiskRecon, you can easily identify and track third-party risks and quickly act on the threats with the highest potential to damage your business.
How Can I Improve Risk Management?
The risk environment changes dynamically with time, and your risk management framework should change in tandem.
According to recent research, 60% of participants agree that the complexity and volume of risks have skyrocketed recently. Yet only a third of businesses have effective enterprise risk management processes.
Gone are the days when one department or team could effectively manage and mitigate risks.
Modern businesses should integrate an elaborate risk management plan and strategy that involves the entire organization to avoid surprises while unlocking invaluable opportunities.
Businesses that want to improve their risk management strategies should start by taking these four steps:
- Be ready for increased risks. Risks and threats have always been a part of the business world and will continue to increase. Organizations face many risks related to supply chain disruptions, geopolitical tensions, cybersecurity, environmental disasters, global health emergencies, human rights abuses, and emerging technologies. A robust risk management plan can guide your team in creating detailed responses to potential threats your business may face.
- Involve every department in risk management. Risks rarely affect just one department. Thus, a siloed approach may not work. Because threats have cascading consequences, an employee from every department should be involved in the risk management planning process. For example, a cybersecurity breach affects all employees, and many teams might have to play a role in the recovery process. Leadership and HR teams must notify employees about the issue and guide them on how to proceed. Communication teams must publish announcements to inform the staff, customers, and vendors how the company handles the matter. Finance teams must analyze the damage and create a budget for fixing and improving the security systems. And the IT team will have to get systems and networks up and running and ensure the organization's data is secure. A diverse risk management planning team can offer a broad range of viewpoints and reduce the possibility of your company falling victim to dangerous dead spots.
- Make better vendor choices. It’s your company, so you should choose vendors carefully to protect it and your risk interests. RiskRecon can help you improve your risk management processes by improving your vendor selection process. RiskRecon provides you with readily available assessments for each vendor you’re evaluating. This allows you to compare vendor security ratings and make informed decisions.
- Develop effective cybersecurity architecture. The pace of cybersecurity breaches is increasing every year. At the same time, consumers are also becoming aware of cybersecurity threats and requesting more protection from brands they interact with. A robust cybersecurity architecture has never been more essential. Your cybersecurity architecture plan must be flexible to adapt and protect your company despite the ever-evolving cybersecurity risk landscape. It should have three key components to ensure better risk management: policy-related elements, standards, and security and network elements.
How Can RiskRecon Help Me?
Are you ready to conduct an effective strategic risk assessment? RiskRecon can help you identify internal and external risks that might hurt your organization’s reputation.
Our risk-prioritized ratings allow you to address the most critical items based on risk severity and the asset value at risk. Instead of constantly monitoring everything yourself, our systems take the load, automatically producing action frameworks to emphasize issues that exceed your organization’s risk policy threshold.
With our help, you’ll gain more understanding of the risks your company faces after partnering with third-party vendors. To learn how automatic risk assessment can create a more confident workplace, unlock our 30-day trial today!
