The business world is often volatile and unpredictable in nature. While it is impossible to predict what the economic climate may be in the foreseeable future, there are still many ways in which a company can prepare for potentially negative scenarios. Such approaches are generally referred to as risk management.
However, there are a number of facets associated with this process if we hope to appreciate its inherent benefits. This is why it is important to address a handful of questions. Why is risk management important? What is the potential impact of risk on organisations? What does the financial risk cycle involve? Let us examine each of these concepts in greater detail.
Risk monitoring at a glance
Risk monitoring can be defined in a number of ways. From the perspective of a modern business, it involves a handful of key principles:
- Identifying any threats which could negatively impact ongoing operations.
- Categorising these scenarios based upon their severity and/or likelihood.
- Developing strategies to mitigate their impacts.
- Preventing future threats.
Of course, the associated risk management examples will normally depend upon the focus of the business in question. An investment advisory firm is often concerned with asset prices, bearish marketplaces and portfolio performance. A company specialising in cybersecurity may instead be cognisant of threats such as spyware, malware and the theft of personal data. Regardless of the exact scope of operations, the process itself tends to share a number of factors in common. Here are some of the most potent enterprise risk management techniques in order to better appreciate why creating a plan is crucial.
Identifying potential risks to an organisation
The first step in solving a problem is becoming aware of its existence. This mantra is just as true in terms of business risk management. The approach itself will once again depend upon the firm as well as if in-house staff members are capable of identifying the possible threats.
This is also why it is prudent to develop a plan which can be immediately activated in the event that a scenario comes to pass. Here are some of the questions which will be answered when formulating an effective risk management plan:
- Who will be notified if an event occurs?
- What are the responsibilities of an in-house risk mitigation team?
- Are there any contingency plans which can be implemented until the problem is solved?
- What type of training may these staff members require?
To be clear, enterprise-level risk management will not always be able to prevent an incident from occurring. The primary role is rather to mitigate the impacts of a threat upon ongoing operations.
The notion of risk prioritisation
Let us now assume that a dedicated department/team has already been created. the next step within the risk management process is to determine which threats are the most likely to take place. For these can then be classified in a hierarchical manner. Using the aforementioned cybersecurity firm as an example, here is a list of possible risks:
- A DDoS (Distributed Denial-of-Service) attack.
- Proprietary company data is stolen.
- Personal client information becomes compromised.
- Payment gateways are hacked.
- Viruses, bloatware or malware cause a website to crash.
Depending upon the size of the firm and its scope of operations, some of these situations may be more likely to occur than others. This is why risk management professionals need to carefully analyse those which may represent actual and ongoing threats.
Proactively responding to risks
Knowing how to manage risk is only a portion of a much larger equation. It is just as prudent to appreciate how these threats can be thwarted. There are two primary approaches that can be taken:
- Responding to a threat as soon as it is discovered.
- Preparing for emerging risks.
The first situation is rather straightforward. Referring to a cybersecurity business model, dealing with an active threat may involve several (and possibly concurrent) actions. These can include activating additional firewalls, performing a detailed antivirus scan, isolating corrupted files, and informing clients that an event has taken place.
In the event that an asset management firm has become compromised, it is likely that different measures will be taken. Supervisors may choose to immediately halt all transactions, cease future trading and block any suspect accounts. Simply stated, a successful risk management approach requires a fair degree of agility.
On the contrary, there can also be times when preparing for a threat is the most pragmatic stance to adopt. This is actually quite common when referring to the financial markets. Predictive analyses, perceived index volatility and avoiding extremely liquid conditions are some of the ways in which a firm can mitigate future threats. This is also why a financial business plan will often employ professionals who possess an FRM (Financial Risk Management) certification.
Monitoring the results and performing adjustments when needed
As this risk management article highlights, the most comprehensive strategies will employ a longitudinal approach. This arises from the simple fact that threats are continuing to evolve on a regular basis. As the global community becomes even more digitally interconnected, it is a foregone conclusion that a risk reduction process that might have worked well yesterday could be outdated in the near future.
A comprehensive risk management cycle will therefore rely heavily upon a constant re-evaluation of what strategies are still relevant as well as those which might no longer be viable. The Corporate Finance Institute also notes that adopting a pre-emptive stance will enable employees to become better prepared in the event that a threat is suddenly identified. After all, some risks may be unavoidable. This brings us to a final point.
A Quick look at the notion of risk tolerance
It is a foregone conclusion that enterprise and corporate risk management will never represent an all-in-one solution. Some scenarios will occur even if the most robust contingency plans are put into place. This is known as risk coping or risk tolerance. Even if a negative event occurs, it can be dealt with promptly without having a negative impact on ongoing operations and core competencies.
Preparation is the key to success
Recent global events have clearly illustrated that it can be difficult to predict the future. Whether referring to large-scale financial risk mitigation strategies or those utilised by an enterprise-level organisation, their importance cannot be denied. This is also why a growing number of firms are choosing to outsource their requirements to trusted asset management and advisory specialists.
Risk management can represent a somewhat complicated concept, particularly to those who are not aware of the threats themselves. Adopting a proactive stance is, therefore, the most effective way to prepare for what the not-so-distant future may have in store.