Business risk management (BRM) is a simple term for a concept that is complex, comprehensive and absolutely critical to the survival of an organization. Every sane person engages in basic risk management during their daily lives. It’s why we look both ways before crossing the street, use seat belts in cars and keep our food in a refrigerator. Just like in our personal lives, managing risks in our professional life requires planning and deliberate, strategic action.
Overview: What is business risk management?
Risk management encompasses several distinct concepts: risk analysis, threat prevention and reactive strategy. Essentially, it includes everything from assessing possible risks to figuring out how to prevent them or address them after they happen. Since business leaders can’t realistically prevent and plan for every possible risk, they need to carefully analyze threats and weigh possible options to choose the ones that provide the most value.
3 benefits of business risk management
Effective risk management can save a company and make the difference between survival and ruin. On a smaller scale, the benefits revolve around reducing expenses due to foreseeable circumstances and events.
1. Maintain consistency
Financial and operational consistency is a central benefit and objective for any BRM strategy. The reason leaders want to anticipate, prevent and promptly address disruptions is to prevent these issues from impacting customer relations and the bottom line.
2. Limit liability
Limiting legal liability is another great argument for comprehensive risk management. Taking steps to address threats the safety, security and efficacy of products or services is crucial when defending against lawsuits in court. Failure mode and effects analysis (FMEA) is a basic part of quality assurance, which also builds customer confidence.
3. Build employee confidence
Since any good risk management plan includes training and equipping personnel to handle unexpected situations, it can also do wonders for morale. Employees who feel safe and in control are more confident and can react appropriately when issues do arise. Focusing on employee well-being also increases loyalty and dedication to organizational goals.
Why is business risk management important to understand?
The ability to understand, analyze and address risks is fundamental for managers and leaders at any level of an organization. Large companies often maintain entire departments dedicated to this goal, including human resources and quality assurance. It’s a subject that leaders need to understand to do their job properly.
1. Managing risks is a core leadership skill
Anyone who aspires to be in business leadership during their career needs to know how to assess and manage risks. These decisions are often difficult and deal with dangerous circumstances. If you can’t get comfortable with these choices, then you won’t be comfortable as a leader.
2. Every company faces risks
The stakes at a car wash may be lower than at a hospital where lives are on the line, but that doesn’t mean there aren’t risks. Every company faces potential threats to employee safety, customer confidence and financial consistency.
3. New threats are always rising
One of the most frustrating things about risks is that they are always changing. New technology, practices and policies always open up a company to new threats. Leaders need to understand this and pivot their strategy to take these new challenges head-on.
An industry example of business risk management
A pharmaceutical company maintains an active chemical laboratory on-site. The lab is responsible for storing, testing and dispensing many different kinds of chemicals, including some that are hazardous for humans when directly exposed. Even though all the lab technicians are trained, experienced and have ample protective equipment, there are still risks. That’s why the lab is outfitted with emergency shower stations to rinse chemical residue and fire extinguishers in case of chemical combustion.
3 best practices when thinking about business risk management
Even though data and statistical thinking drives BRM strategy, it’s not always an exact science. There’s still room for personal experience and preference, which is why you should keep these basic best practices in mind at each step of the process.
1. Pick your priorities
You can’t predict and prepare for every possible situation. This is a common mistake people make when they start their risk management plan. You need to do real research and analysis to figure out what threats are the most likely and the ones with the most potential damage to establish priorities. Trying to manage every possible risk is a recipe for disaster.
2. It’s not always perfect
Risk management plans aren’t always perfect, but something is better than nothing. It’s better to implement an actionable plan in the near future than spend years waiting to come up with the perfect one. There will always be room for improvement, so don’t let that stop you from making progress.
3. Get others involved
Leaders need to know about risk management, but that doesn’t mean they need to do it alone. In fact, it’s always better to involve others when assessing, analyzing and planning for problems. Outside focus groups, current employees and stakeholders are all possible sources of great ideas and information.
Frequently Asked Questions (FAQ) about business risk management
1. What are the main risk types that face businesses?
Every company faces a broad spectrum of threats from every direction, so it helps to break them down into groups. The basic types of risk are security, regulatory, operational, financial and reputational.
2. What are the stages of risk management?
There are several ways to divide the stages of risk management. However, any outline should include discrete steps for identification, analysis, prioritization, prevention and reaction.
3. How can a business identify risk?
Identifying risks is a combination of imagination, research and experience. When in doubt, take a procedural approach by analyzing each part of essential processes to figure out what has or can go wrong. Look at similar companies and some of the problems they’ve faced and consult with risk management experts for more insight.
Face your risks responsibly
There’s no such thing as a business without risks. In fact, the fact that there are risks is often the reason why there’s a business opportunity to be found. However, there’s a big difference between taking an informed risk and running recklessly. Every company should leverage sound risk management practices to secure their assets, build confidence and ensure a profitable future.