Enterprise risk management is a strategic activity that aims to minimize business risks, failures, losses, and uncertainties through a continuous process of planning, organizing, and controlling an organization’s human and material resources.
According to the risk rating agency Standard & Poor’s “a company that demonstrates excellence in risk management consistently identifies, measures, and manages its exposure to risks and losses, within predetermined limits of tolerance.
Its processes are carried out systematically and effectively, as well as being continuously refined. In this way, the company optimizes its risk-adjusted returns, has superior financial strength and corporate risk management influences the decision-making process”.
Thus, effective risk management increases the company’s value. This is because by effectively managing uncertainties, it is possible to take advantage of the risks and opportunities associated with them, to improve the capacity to generate value.
How to manage corporate risks?
If you are (or have ever been) part of a project that has had an unsuccessful stage, you have heard someone say, “did you know the risks inherent in the project”. What many people are unaware of is that a risk does not always lead to a negative scenario. What makes an event negative or positive is how it is managed.
But how to manage corporate risks effectively? Let us look at some steps that must be implemented in the business routine. Follow!
Step 1: risk mapping and identification
Companies have different ways of functioning, such as specific values, conduct guidelines, processes, systems, and management model. Therefore, each organizational environment must be understood and mapped, to have its vulnerabilities, weaknesses and controls analysed.
It is important to highlight that each organization must define the risk analysis model according to the context of its type of business. For example, if you are in the initial or mature phase, if you are a market leader or if you are looking for a better placement.
One way to efficiently conduct the mapping is to define critical processes, such as sales and marketing processes (revenue generation), financial controls, among others. Or sensitive areas, such as logistics, supplies, commercial etc.
Once the weaknesses and vulnerabilities of the business have been identified, we proceed to the identification of potential risks, which can affect the business and, consequently, its good functioning. For example, revenue generation, rising costs, uncontrolled cash, management problems, non-compliance with laws and regulations, loss of assets and inventory.
Step 2: risk assessment and prioritization
The basic premise of efficient risk management is to generate value for the business. Thus, not every risk is worth mitigating, it is necessary to analyse the cost-benefit ratio. But how do you know which risks should be prioritized?
To prioritize a risk, the probability and impact analysis must be considered. As well? For the analysis of the probability, it is necessary to verify the chance of occurrence of the events or set of events, since they are materialized risks.
The chances of weaknesses and vulnerabilities to be explored must also be analysed. For each item analysed, it is necessary to assign a score according to a predetermined scale.
Regarding the impact, the dimension of the consequences should be considered in the case of the occurrence of one or a set of events, or in the case of vulnerabilities and weaknesses to be explored. For each topic, assign a score according to a predetermined scale.
With the probability and impact analyses it is possible to identify the criticality of the identified risks and define an order of prioritization, starting from those of high criticality to those of low criticality.
Step 3: definition of solutions for dealing with risks
After assessing the risk classification, it is necessary to establish mitigation strategies, preventive plans, and contingency plans. In other words, it is necessary to define actions that reduce exposure to risks. But how to define risk management strategies?
The solution to reduce potential risks can range from actions to review processes, create performance reports and monitoring and control mechanisms, to the establishment of a risk management area and governance instruments.
Businesses follow these steps because they ensure that the business can minimize the damage caused by risks. Businesses are now using technology to help them detect and manage risks. There are A.I. powered solutions which can monitor market movements and highlight any problematic trends. There are risk insight solutions which can monitor internal data and processes of an organization to determine the riskiest areas in the business. Today’s risk managers are equipped with modern risk management software, which has enabled them to manage risks better than it was possible before.