Risk management requires a great deal of work in identifying and evaluating risks. All companies are confronted with risks of all types, it is important to react well to them.
07/10/2022
HOW TO MANAGE RISKS IN COMPANIES ?
7 minutes de lecture
According to the labor code, the employer or company manager is responsible for the health and safety of his employees.
In order to do so, he must know his employees, their workplaces but also all their activities.
But in a company as in real life, there can be many unforeseen events. To try to reduce and anticipate them, it seems essential to highlight the present and probable risks within the company.
In this article, we will go back over these risks to give you the best practices in terms of risks in order to best protect all your assets and contribute to the solidification of your GRC pillar.
What is a Risk?
Whether in a company or elsewhere, zero risk does not and will never exist. A risk is an event or an uncertain situation, having a more or less severe impact and being able to call into question the functioning of the activity.
These risks may be financial, relating to market, credit, cash flow and liquidity risks. They can also be operational risks, such as technological, IT, juridical or even human risks.
Whatever the size of the company, its sector of activity and its exposure to potential threats, it has become essential today to control the management of these risks.
Each uncontrolled risk can generate a cost and have functional, organizational and even structural consequences.
What is the Difference between a Risk and a Danger?
It is not uncommon to use these two terms as synonyms. However, within the framework of risk management in companies, it is important to differentiate them.
A danger is an event or situation that will cause damage that can be physical, moral… A risk implies a danger with the probability, the duration and the frequency of exposure to this danger for a person, a group or a company…
Thus, in business, data loss is considered a danger. The probability of this danger actually occurring is high if individual employees use weak passwords like “1234” or “Password”. So there is a risk here.
Let’s see together what is the right method to use to manage risks in business.
Step 1 : Risk identification
The identification of the risk will involve its categorization. There are many ways of categorizing risks. Here we will simply mention three categories that seem very important to us.
Internal Vs External Risks
In a complex environment, the possible permutations far exceed our ability to predict or even understand the risks.
Indeed, although every decision taken within the organization has a consequence, there are also factors that cannot be foreseen because they are external to the internal activity of the company.
Often, these risks are related to the geographical area in which one is located. They include demographic, environmental, competitive and social-economic risks. These factors often require a reactive approach because it is difficult to control.
Internal risks, on the other hand, are directly linked to decisions made by managers, executives and directors within the organization.
After that, it is important to identify the nature of the risk to be able to better respond to it later.
Nature of the Risk
There are a thousand and one ways to classify the different risks, let’s try to define the main categories that companies face:
Strategic risks: the strategic model of an organization is what makes its advancement, its strength, and its growth if it is solid. Unfortunately, developing a strategy implies risks of inconsistency between the elements that constitute it and that can keep it from maintaining a long-term activity.
Financial risks: The strategic model is closely linked to financial risks because one can influence the other. They are a danger for the cash flow and especially the profitability of the company. We can speak here of credit risk, exchange rate risk or liquidity risk.
Operational risks : These are caused either by external challenges or inefficient internal processes. They include a wide range of risks, among which three stand out for their impact:
- IT risks: whether related to data protection, malware or hacking, it is essential to take these dangers into account.
- Legal risks: they are related to obligations, contracts and especially rights. The number of penalties and fines that companies have received over the years is incalculable, so it is important to pay particular attention to these issues.
- Psycho-social risks: working conditions and employee suffering are problems that are the result of bad practices. Today, processes are in place to identify and analyze these risks.
Individual risk Vs collective risk
A risk can affect a company as a whole, but also individual employees. If a certain number of the latter are confronted with a risk, it can become global and affect the company in a significant way. Therefore, they should not be neglected.
As an individual risk, we can cite the risk of falling, falling objects or chemical risks for companies handling dangerous products.
Conversely, hacking associated with ransomware, malicious computer software that blocks access to data, is a collective risk that affects the entire company. These are unfortunately becoming more and more frequent in recent years.
Step 2: Evaluation by Prioritizing Risks
In order to define the priority risks, their criticality must be evaluated. They can be estimated according to two criteria: probability and severity.
- The severity is the consequences of the risk if it were to occur. While it may have an impact on a negligible part of an organization, it may also have a significant effect on the entire business.
- Probability is the percentage of chance that a risk will occur. The higher the probability rate is, the more likely it is that the risk will occur.
A scale of measurement is established for each criteria which allows to position each risk in this matrix and to measure their criticality (tolerable, intermediate and intolerable)
Even if this approach does not provide a solution to these potential problems, it is nevertheless important in understanding these risks, the circumstances in which they may arise and the consequences they may cause.
Step 3 : Risk Control
For effective risk management, it is essential to know the company’s processes and to understand how resources, actors and the main activity generate the expected results.
However, companies are exposed to risks to which they react in different ways:
Reduction: Although attempted by some companies, it is rare that a risk can be eliminated. An alternative would be to reduce it. This strategy is strongly recommended when the presence of a risk is intolerable, as it is usually very costly.
Transfer: This strategy consists of outsourcing the risk to another entity that will take full responsibility for it. Subcontracting (internal and/or external) is a solution to achieve this risk transfer.
Acceptance: Accepting risk is accepting to use it as a strength to create value. Usually, this strategy is used when the risk is minimal and does not represent a significant danger. However, some companies take the bet to accept big risks because they see them as opportunities.
Avoidance: It is also appropriate, as its name indicates, not to accept the risk by avoiding it. If the risk is unmanageable or a threat to the business, it may be advisable to avoid it for the good of the company.
The choice of one of these strategies depends on the context of the company, as well as its needs and objectives. This choice will be much easier if the risk has already occurred in the past. The company can then rely on its experience in risk management to control it in the best possible way.
Risk Steering
The impact of the strategies put in place will change over time, which is why it is necessary to periodically reassess the risks. This makes it possible to rework the strategy or to ensure that the one chosen was the right one.
This dimension is essential to the company’s durability because yes, each entity within the company has the responsibility to constantly question itself.
Risk Management, the Key to the Process ?
Risk-taking remains one of the main sources of development and progress in the history of humanity. Without these numerous initiatives, scientific, industrial and technological advances would not be what they are today.
This is why it is essential to take them into account, to identify them, to understand them and to deal with them in the best possible way.
A successful company is one that knows how to manage risks and use them wisely.
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