Corporate Risk Management is the discipline that allows, through the mapping of the main risks that affect a company, to identify the probability of their occurrence and to contain or limit the consequences that they may have on an organization.
In times of uncertainty, every company, from the family-owned company to the more structured multinational, should limit its exposure to risk factors that could potentially put the core business in crisis and even the survival of the company itself.
Here are some of the reasons why risk management is important for businesses:
- Any business, even the most solid, can suffer moments of crisis.
- It is important to anticipate and prevent unforeseen market developments.
- Risk diversification also allows you to explore new market niches.
Before continuing to read this article, I suggest you take a look at the Digital Project Management course syllabus.
In the video, I told you about the following topics:
- What is meant by Risk Management;
- What are the main risks that companies are facing;
- How do you manage risks by predicting them in time?
What is Risk Management?
Risk Management is one of the aspects that deal with the discipline of Project Management, a process that is becoming fundamental, as well as in the IT and Banking fields where it originated, also in the Digital Marketing sector.
The ISO 31000 standard of 2018 defines Risk Management as the set of coordinated activities to define and control risk within an activity.
In a nutshell, what does the Risk Management plan consist of? Having solutions that allow companies to be able to diversify their business in case of unforeseen events to their main activity.
Let’s take an example of the Training sector. I have found myself managing moments of crisis in companies that wanted to improve the skills of their employees. With the Lehman Brothers crisis, the B2B sector entered a crisis and the only valid strategy was to diversify the business towards B2C, offering private training to people interested in enriching their skills.
The phenomenon we are witnessing in recent years of uncertainty in which many companies diversify their business by resorting to digital channels is a clear example of this process. Digitizing the business has helped many companies to open new unexplored markets that were unreachable for logistical and geographical reasons.
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The concept of risk
Risk, by its nature, is an unforeseeable event, therefore this activity is above all linked to the precise knowledge of company dynamics and the tracking of everything that has had an impact on the company in the past.
However, the discipline of Risk Management is regulated by specific legislation, which I will tell you about below in all its facets.
The risk management approach must always be:
- Integrated: the discipline must extend transversely to all company departments to have a 360° view of the company’s activity.
- Customized: no risk management activity is the same from one company to another. There is a framework that companies must follow to correctly intercept risks, but every company has complex dynamics that must be explored in detail.
- Dynamic: Risk management is a business in constant flux, as it continuously receives input from all departments of the company.
- Continuously updated: the approach to Risk Management must be cyclical, activating phases of analysis of new potential risks for each evolution of the corporate context.
What are the business risks?
In an increasingly diversified context, each company has its peculiarities and characteristics which make it unthinkable to make a single list of risks. However, it is possible to adopt a reference risk management framework that allows organizations to have a correct approach to the various stages of the process.
It is possible to make a breakdown of the different types of risk that companies, in their daily activity, are faced with:
- Operational risk: related to carrying out the tasks necessary to carry on the business. In manufacturing companies, it can be linked to the performance of work, warehouse turnover, or the seasonality of products, in consultancy companies, for example, linked to the loss of the largest customer, especially if adequate diversification of the customer portfolio has not been implemented.
- Strategic risk: relating to the company’s positioning in its market. A type of strategic risk could be linked to a new player who overturns the current logic of the market and shifts consumer interest.
- Financial risk: mainly attributable to financial factors such as, for example, changes in the exchange rate or financial defaults of suppliers/customers for import-export companies.
The 4 phases of the Risk Management process
To understand what are the phases of a Risk Management process, let’s start by saying that the Risk Management process must be structured in such a way as to be carried out cyclically.
There are 4 specific moments:
- Risk analysis;
- Risk assessment and management;
- Risk containment;
- Reporting and communications.
1. Analysis
The first phase of Project Risk Management requires knowledge of the context. Through a framework that allows all activities to be traced, the risks that could potentially impact the various company divisions are identified. Each risk is associated with a risk index (or risk scoring), which measures the possibility of the occurrence of that negative event and the impact it would have on company dynamics.
2. Evaluation and management
After a careful analysis, a risk assessment is carried out and the various risky events are ordered based on the Risk Scoring to have a picture of their dangerousness within the company dynamics.
The next phase is risk management where the operator defines a series of activities that potentially should be implemented to contain the risks. All activities must indicate the expected effectiveness and the resources to be invested to be completed.
Now, as anticipated, many companies have embarked on a digital transformation process by opening an online business. By its nature, digital activity has different characteristics compared to those of physical activity, if only for the IT equipment that it is necessary to have but also for the different regulations with which electronic commerce is regulated. Possible risks for those who open an online business are:
- Little understanding of the regulations governing this type of business;
- Lack of digital training to optimize e-commerce;
- Employee resistance to change;
- Inadequacy of the technological infrastructure and the available budget.
Learn more about the dynamics of e-commerce
3. Risk Control
Risk containment is the most important phase. Take advantage of the guidelines defined in the phases preceding the occurrence of a risky event. This activity includes a risk assessment phase where it is decided to implement a risk control system to limit the impacts that those identified may have on the company’s activities.
For a company that uses digital channels to diversify its business, which sees high price competition with online competitors, an example of risk control can be to resort to Dropshipping for some products, especially those that do not need to be reworked. In this way, by reducing fixed costs, it is possible to arrive at a lower selling price in line with more structured competitors.
4. Reporting
Finally, the fourth phase of final accounting and reporting is also important, especially when the outcome of the analysis and management activities carried out must be presented to the top of the company. A report must indicate the KPIs that are monitored and the strategies that the company must implement to protect itself from risks.
The report is of fundamental importance when additional resources or budgets have to be requested for these activities.
Concerning the example given above of a possible inadequacy of the IT infrastructure for companies that decide to start an online business, a possible risk containment activity is to carry out an analysis of the main competitors and the user traffic that visits their websites, to have benchmarks to refer to choose which infrastructure to rely on.
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Risk Management Strategies
The need to resort to a Risk Management strategy or not depends on the type of company, but, in general, it is recommended for all activities.
Considering the probability of occurrence and the impact on the organization as analysis dimensions, we can identify 4 types of risk and the related strategies to manage them:
- High probability and high impact: this type of event is the one against which companies should protect themselves the most. The most used strategy is to avoid the risk by acting intrinsically on the process, modifying it, or even eliminating the activity.
- High probability and low impact: the risk that the company must take into account because it is often related to the nature of the business but has a low impact on the dynamics of the organization. In these cases, a risk mitigation strategy is implemented.
- Low probability and high impact: occurs in limited cases, but could put one or more company departments in crisis. The most commonly used strategy is to transfer the risk by outsourcing the activity, for example by resorting to specialized consultancy firms.
- Low Probability and Low Impact: Risks of this type are generally accepted by companies as they are not expected to be dangerous to the business.
A Risk Management process must therefore aim to limit the impacts that an event deemed risky can have on the survival of the company.
Let’s think, for example, of a very technological reality, strongly based on the know-how of the employees. If one of the employees specializes too much or becomes the only one who knows how to do a certain activity, the company is exposed to the risk of being too dependent on this figure.
A possible Risk Management strategy must be to provide for a good turnover of personnel within the organization, perhaps placing Junior people side by side with specialized, more experienced employees, to protect themselves from a possible abandonment by Senior figures.
Generally, in all company processes, the Risk Management activity cannot have a beginning and an end but there must be continuous risk management, ensuring that the reports elaborated for a process are useful for starting the analysis phase of another activity.
Work in Risk Management
Over the years, new professional figures have emerged, highly sought after by companies that support managers in risk management.
Without a doubt, training in the economic-financial field is a good basis for developing this type of skills and the specialization courses in Project Management deal completely with Risk Management issues.
The Digital Risk Manager
Over the years, digital has become an important part of the business of many companies, including Italian ones, which have started a digital transformation process. For those who have an online business such as an e-commerce, it can be important to have a digital Risk Manager, to intercept the main online risks which can be:
- Greater volatility of customers, who can find the same product online from multiple sellers and who therefore end up using only the price as a purchasing lever.
- Barriers to entry online are much lower than offline activities, as it is easier for a new player to enter a market by increasing competition, given that you do not have to bear the high start-up costs of physical activity.
- Lack of specific digital skills to be able to implement a digitization process.
In Digital, the figure of the Risk Manager, through the use of risk management techniques, allows companies to limit and, in some cases, cancel the possibility of the onset of risks that could impede growth or even lead to the closure of the online business.
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The Cyber Risk Analyst
A figure born from the growing complexity of online businesses is that of the Cyber ??Risk Analyst who has the task of protecting a company from all the threats of the Digital world.
For example, it ensures that the company’s IT infrastructure is protected from attacks from the network.
This figure is moving away from its initial position within the IT office and is increasingly positioning itself as a key figure within a Risk Management process.
To become a Cyber ??Risk analyst you need to be a data wizard, and have excellent knowledge of the Internet and IT tools, so having a background in Engineering and IT is essential.
Furthermore, it is also possible to combine the knowledge of Web Analytics to become a Digital Risk Analyst.
Among the Risk Management jobs is the Digital Risk Analyst. Don’t waste time, download the free guide on Web Analytics!
Conclusions and personalized advice
Risk Management is a transversal discipline that must be integrated with all other departments of the organization. It must draw information from them for the initial stages of the process and must make all efforts towards them to implement a series of activities aimed at containing or limiting impacts that are potentially dangerous for the company.
Good governance must provide for diversification and growth activities, for this reason bringing the company online can be a solution. If you want to take advantage of our experience to do so, ask for a free strategic consultation.
Implementing a Risk Management process in the company allows you to have a reserve parachute in case of unforeseen events. It’s not about avoiding the risky event, it’s about being ready when that event happens.
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