Posted on: March 16, 2023
If you are trying to break down the silos within your organization, are interested in learning more about risk management, or just need a refresher, the risk assessment process is a great place to start. In fact, ensuring that risk assessments are a core part of your organization’s risk and resilience program is critical in this new age of disruption.
Simply put, a risk assessment is a process that is utilized by risk management professionals to identify, analyze, and evaluate potential risks that may impact an organization’s operations. While the risk assessment process can vary by industry and between organizations, the fundamentals behind performing them remain the same. Regardless of the use case, there are five core elements that are involved in a risk assessment that you should be aware of when getting started with one. Let’s dive into those below.
An essential first step in completing a risk assessment is to identify all of the potential risks that may impact your organization. These risks can be identified through a variety of strategies, including:
- Working closely with employees who are involved in relevant organizational tasks
- Direct observation of organizational operations
- Analyzing incident reports
- Reviewing relevant organizational documentation
All of these strategies – especially used in tandem – can help risk management professionals provide valuable insight into your organization’s risk posture that you may not have previously considered.
Once your organization’s potential risks are identified, the next step is to evaluate those risks and determine the level of impact associated with each one. This includes understanding the financial, reputational, customer, and regulatory impacts of the identified risks. Here is a list of considerations that should be taken into account when attempting to understand these impacts:
- Financial: When considering the financial impact of a risk, an organization must be able to quantify the estimated cost that is associated with the identified risk should the risk materialize. Being able to tie an approximate dollar amount to it helps the organization prioritize and understand the severity of each risk.
- Reputational: The reputational impact of a risk is often difficult to quantify but is important to consider as it can also adversely impact the organization. For example, extensive negative news coverage that would impact stakeholder confidence and willingness to do business with you can have long-term affects to your organization’s profitability.
- Customer: Existing customers expect a certain level of reliability from your products or services. If a risk directly impacts your customer base and causes significant disruption to their business, it may be a higher priority than a situation that has no operational or service disruption.
- Regulatory and Compliance: Depending on the industry that your organization operates under, there might be regulatory and compliance standards that you must adhere to. Identifying whether there are regulatory impacts that could require immediate management is something that your organization should be aware of (e.g., receiving a cease-and-desist order on a project due to a risk not being managed properly).
Analyzing the likelihood of each potential risk occurring is a crucial next step. This involves determining the probability that the risk or adverse event will occur.
Ask yourself: Is this risk likely to happen every year, decade, or century? No matter what the risk may be, this scale should be used consistently for all types of risks.
Taking into consideration the type of risk, impact, and likelihood (all of which you’ve identified through the previous steps), you might determine that a risk is unacceptable. If that is the case, developing and implementing controls to mitigate or eliminate the risk is crucial. Controls are processes and/or tools that are put in place to remove, mitigate, or reduce an identified risk.
When designing and implementing controls, organizations should understand how effective they are by answering a few types of questions:
- Frequency: What is the frequency at which the control is executed?
- Nature: Is the control preventing a risk, reducing its impact, or perhaps just helping to detect it?
- Type: Is this control something that must be done manually, or can it be automated?
- Test Results and Issues: Has this control been effective historically? Has there been any issues implementing the control for other risks?
A risk assessment is not a one-time exercise but rather an ongoing process. It is essential to regularly review and update your risk assessments to ensure that they remain relevant and effective in managing various risks over time.
Want to learn more about how Fusion can help improve your risk assessment process? Contact your Fusion Account Manager or request a demo today!