Companies operate in a constantly changing environment, where new risks and threats can arise without warning at any given time. Risk assessment is an essential component of any organization’s governance, risk management, and compliance (GRC) program. Without a structured risk assessment process, your business will likely experience financial losses, reputational damage, and regulatory penalties. By implementing a robust risk assessment process, organizations can recognize potential risks and take proactive steps to mitigate them, ensuring long-term success and sustainability.
Following the five-step risk assessment process below will give your organization a structured approach allowing you to identify, analyze, evaluate, and prioritize risks consistently and systematically. The process is designed to help companies understand the potential impact of risks on their business objectives, determine the likelihood of their occurrence, and develop effective risk mitigation strategies.
Step 1: Identify risks
Risk identification is the first step in setting up an ERM program. Identifying risks involves determining which risks are relevant and have the most impact on the business. Any threat or event that might prevent the company from achieving its objectives can be classified as a “risk.” Identifying and documenting risks ensures your organization can proactively recognize potential threats and take necessary measures to manage or mitigate them. This step helps businesses to develop a comprehensive understanding of the risks they face and prioritize them based on their likelihood and potential impact.
For example, a manufacturing company that produces medical equipment may identify the risk of a supply chain disruption. They can then take measures to secure alternative sources of materials and develop contingency plans in case of any future supply chain disruptions. Failure to identify and mitigate this risk could result in product manufacturing delays and financial losses while potentially impacting the health and safety of patients who rely on the medical equipment.
This exercise allows businesses to “start where they are” by taking an honest look at potential impacts on their business objectives. From there, organizations can optimize risk management efforts and ensure adequate resource allocation while mitigating potentially business-disruptive events.
Step 2: Analyze risks
Analyzing risks enables organizations to better understand the potential impact of identified threats. The second step of your risk assessment process should involve assessing the likelihood of the risk occurring and its potential impact on the organization, often called a risk matrix.
Risk managers may want to hold a risk assessment workshop to align all necessary stakeholders to expedite risk analysis. By prioritizing high-risk areas when working on a risk assessment process, organizations can focus their resources on implementing controls to reduce the likelihood and potential impact of these risks. It also ensures you’ve created a risk register for different functions/business units, scoping which risks and common controls are relevant to that business unit.
Doing so also allows organizations to determine the appropriate risk management strategies and prioritize risk treatment activities. For example, you may address low-likelihood risks with minor impacts through simple controls or accept them as part of the organization’s risk appetite. In contrast, high-likelihood risks with severe impacts may require more comprehensive risk management strategies, such as transferring the risk through insurance or implementing additional controls.
When considering your risk assessment process, understanding your organization’s risk threshold is essential in determining the appropriate risk management strategies, prioritizing risk treatment activities, and ensuring the effective and efficient allocation of your organization’s resources. It’s important to note that your risk analysis will be much simpler with centralized risk data and a tool that can deliver simple reports and dashboards to help get stakeholder alignment on the priorities.
Step 3: Evaluate risks
Evaluating risks involves comparing the level of risk against established criteria or standards to determine whether the risk is acceptable or requires treatment. This step helps organizations determine the level of risk and whether it’s within acceptable levels.
Step three of establishing a risk assessment process enables organizations to prioritize risk treatment activities and effectively allocate resources. By evaluating risks, companies can identify and focus their resources on high-priority risks that require treatment while accepting or monitoring low-priority risks that are within acceptable levels.
For example, if a risk is deemed acceptable, your organization may choose to bear it and not take further action. However, if a risk is deemed unacceptable, you may choose to transfer the risk to another party, such as an insurance company, to mitigate its financial impact.
Arguably the most critical step in the risk assessment process, evaluating risks ensures making informed decisions about risk acceptance and risk transfer.
Step 4: Mitigate risks
Mitigating risks is integral to the risk assessment process because it enables organizations to take proactive measures to reduce the likelihood or impact of identified risks. By implementing risk management strategies, organizations can protect their operations, reputation, and customers while also complying with regulatory requirements and building trust with stakeholders.
Let’s consider a small business that operates in a coastal area and relies on its servers and computer systems to operate. As part of their risk assessment process, they may identify the risk of a hurricane or other natural disaster that could potentially damage their servers and result in data loss. To mitigate this risk, the business could take a number of steps, including backing up its data, implementing a disaster recovery plan, and investing in insurance.
By taking these steps to mitigate the risk of a natural disaster, the business can reduce the potential impact of risk on its operations and reputation. This can allow them to quickly restore their data, implement their disaster recovery plan, and ensure their servers and equipment are protected.
Mitigating risks is also important because it enables organizations to meet regulatory and legal requirements. Many industries have specific regulations and laws that require companies to implement certain risk management measures. Implementing this step in your risk assessment process shows that your organization can demonstrate compliance and avoid potential legal and financial penalties.
Step 5: Monitor and review risks
The fifth and final step of the risk assessment process is to monitor and review the identified risks. Monitoring and reviewing risks involves regularly assessing the effectiveness of risk mitigation measures and identifying potential new risks. This helps organizations stay current with changing business environments, threats, and opportunities.
For instance, a financial institution may identify the risk of fraud and implement measures such as internal controls and audit procedures as a means of mitigating those threats. However, as new technologies and business practices emerge, the risk may evolve and become more complex. By regularly monitoring and reviewing the threat during the risk assessment process, the financial institution can identify new trends and patterns that may require updates to its risk management strategies.
Monitoring and reviewing risks enables organizations to continuously improve their risk management processes and identify areas for improvement. By collecting data and metrics on the effectiveness of risk mitigation measures, organizations can identify areas that require improvement and make informed decisions about where to allocate resources.
It’s important to stay current with changing business environments, threats, and opportunities. By regularly assessing the effectiveness of risk mitigation measures and identifying new risks that may emerge, organizations can continuously improve their risk assessment processes and make informed decisions about where to allocate resources.
Streamline your risk assessment process with Resolver
By following these five steps, organizations can effectively manage risks and ensure that their GRC program remains effective while providing a structured approach for conducting a comprehensive risk assessment process. Prioritizing risks based on their likelihood and impact and treating and monitoring them allows organizations to effectively manage risks and ensure that their GRC program remains effective.
If you’re looking for a comprehensive and efficient solution for looking at your risk assessment process holistically, Resolver can help. Our platform offers a wide range of tools, reports, visualizations, and resources to help organizations implement an effective GRC risk assessment process. Learn more about how we can assist with your risk assessment process by booking a demo or scheduling an ERM product showcase.