Utilizing risk management strategies

In a global economy, risks can come from almost anywhere. Let’s say a company receives a major order from a new customer from overseas; it would be easy to say yes and start working on fulfilling the order. 

But many companies have been burned by such clients. In some cases, the customer takes the product and never pays. Or it turns out the customer is simply using the order to access the company’s database or payment system.  

In other words, the company wasn’t prepared for the risk. The Association of Certified Fraud Examiners estimates businesses lose about 5% of their gross revenues to fraud. What’s more, private companies and small businesses are more vulnerable to occupational fraud than large corporations. 

In short, businesses of all kinds and sizes need to prepare for numerous risks — and their consequences. In crafting a risk management plan, an organization identifies potential risks, evaluates their likelihood and potential impact, and develops strategies for either avoiding them or mitigating their consequences. Risk management strategies can help them determine which risks are potentially the most dangerous. 

Identifying areas of risk

In recent years, fraudulent activities like the one at the beginning of this article have become more dangerous. Fraudsters are making use of sophisticated digital techniques to outwit employees and the company’s IT network. 

Fraud is just one of the risks a business must prepare for. Companies need to identify all potential risks that could impact their operations or objectives. They need to conduct a thorough analysis of any internal and external factors that might pose a threat. 

What businesses want to prevent is a risk becoming a risk event — the term risk management experts typically use to describe when a risk becomes a real problem. Fraud, for instance, is always a risk for companies. But when a phishing scammer can steal company data or even funds, a potential issue becomes a crisis. The key to risk management is finding potential red flags before they become expensive problems or disasters. 

Once a company has identified the risks, it needs to assess the likelihood of each risk occurring and how dangerous its potential impact might be. By understanding these factors, organizations can prioritize their efforts in managing and mitigating the risks.

One tool that companies can use for their prioritization efforts is a risk assessment matrix, a visual tool for assessing the likelihood and severity of potential risks. A risk assessment matrix involves plotting potential risks and assigning values to the probability of the risk occurring and the severity of its consequences. 

Organizations can use this tool to identify the most pressing threats, develop action plans, and take appropriate mitigation measures. By assigning risk levels to different scenarios, organizations can focus their attention and allocate resources to the risks that pose the most significant threats. This method ensures that the business is efficiently and effectively using both money and employee time to minimize potential risk impacts. 

Monitoring areas of risk

Monitoring is the process of keeping tabs on potential risks. It also involves determining whether tactics for preventing or mitigating risk are working as intended. Organizations must continually review and update their risk monitoring plans since the sources of risk are ever changing. In the case of fraud, new situations will always arise. During the holiday season, for instance, retailers have learned they need to be vigilant about fake gift cards, which, according to Better Business Bureau data, have cost businesses and consumers millions of dollars. 

Organizations need to be prepared for disruptions to their business models, as well as for data breaches and natural disasters. Compliance requirements also change as new regulations are enacted and industry standards are updated. 

Risk mitigation strategies

Mitigation is a set of responses intended to reduce the harm of a risk event. Some forms of mitigation aim to prevent such an event; others intend to handle the event once it occurs. Most organizations can’t avoid every single risk — some are too unpredictable. For instance, a reliable vendor or customer might suddenly stop delivering services or paying bills. 

Some risks could result in catastrophic impacts, while others are much less likely to do so. An organization should allocate its resources accordingly. 

Risk response planning

The organization should have a response plan in place before any such risk event occurs. This plan can include business backup plans, for example, in the case of a hurricane or other disaster; media crisis management, such as when a business gets bad press; and other forms of risk response that will vary depending on the organization’s business or mission. 

Besides developing mitigation strategies, a business should determine whether there are risks that simply aren’t worth preventing. Risk tolerance is the amount of risk an organization is willing to bear within a specific project, activity, or timeframe. In some cases, the potential harm of a risk is so low that the costs of avoiding it wouldn’t pencil out. 

Who guides the risk strategy?

For a risk management plan to be as effective as possible, a company ideally should establish a dedicated risk response team to oversee all aspects of risk management. True, this isn’t something every business can afford to implement. But at the very least, the company should bring together leaders and employees who oversee areas where risks could cause the most trouble. These areas typically include IT, accounting, sales, and inventory management — because the effects of risk interconnect. For instance, a fraudulent vendor or customer also intersects with other types of risks, including cybersecurity, credit, and business reputation. 

With business risks becoming more complex, a company should consider ways digital technology can make its risk management strategy more efficient. Digital solutions can also reduce the costs of such a strategy. It’s an investment that can pay off by lowering the costs of fraud and other big risks — wherever they might come from.