Having an effective risk management strategy is crucial because it empowers you with the tools you need to identify and manage potential risks. You can only mitigate the risks you can identify.
Generally speaking, there are five main steps you need to integrate into your business in order to effectively manage risk and control potential threats to an organization’s capital and earnings.
Workiva outlines these five risk mitigation strategies as follows:
- Define business strategy and objectives. Business strategies must integrate risk management frameworks into the planning stage.
- Establish KPIs. Key Performance Indicators should be specific enough to see where improvement is needed and how risks can be measured.
- Identify risks that create performance variability. These risks include unknown, external factors that will impact results, like future customer demand.
- Establish KRIs and tolerance levels. Key Risk Indicators are leading indicators that anticipate potential issues and threats. Risk tolerance levels tell you when to act.
- Integrate reporting and monitoring. KPIs and KRIs need to be continuously monitored in order to effectively mitigate risk.
Here’s a closer look at these risk mitigation steps.
1. Define business strategy and objectives
Risk mitigation needs to be integrated into all of your business strategies from the start. For example, when implementing SWOT analysis, you’ll uncover some potential problems, but this system isn’t designed to mitigate risk. In addition to identifying weaknesses, limitations, restrictions, and threats, you’ll need to develop a risk assessment matrix or risk management framework to specifically manage risk.
2. Establish the right Key Performance Indicators (KPIs)
A huge risk to your business is not measuring the right data. You need to measure results in a way that provides you with actionable insights. Some KPIs might look good on paper, but will be useless in terms of helping you resolve issues and improve your efforts.
Your KPIs should give you detailed insight into what you can improve to get better results. For example, a KPI of overall sales is too general to show you where you can get better leverage. However, sales per customer or sales from repeat customers will help you see the specifics of what’s going on so you can take specific action.
3. Identify potential risks that create performance variability
It’s critical to know what risks can vary business performance. Make a list of as many of these risks as possible, including unknowns and external factors. For example, your list might include:
- Delayed deliveries
- Manufacturer issues
- Increased demand in the industry
- A shortage of supply
- Price changes
- Fluctuation in customer demand due to the economy, holidays, and other unpredictable situations
Your list will be specific to your industry, as there are countless factors that have the potential to impact performance. Try to list as many risks as possible, including unknowns, to be prepared and a firm understanding of your business’ risk exposure. For each identified risk, craft a risk strategy plan for how you’ll deal with the impact. Some issues will catch you off guard, but you’ll be glad you prepared a risk framework ahead of time.
4. Establish Key Risk Indicators (KRIs) and risk tolerance levels
KRIs and tolerance levels go together. Effective KRIs are leading indicators that tell you about potential issues, and risk tolerance levels tell you when to act. When you create KRIs, they need to be based on established business practices or performance metrics that already exist or are currently being tracked.
An effective way to track KRIs is to use Workiva’s risk assessment matrix template, or simply make a list in a spreadsheet and color code them with green, orange, yellow, and red, where green indicates the lowest risk and red indicates the highest risk.
It’s critical to rank your risks visually so that you can know at a glance what’s going on and which risks pose the biggest threat to your business.
5. Integrate reporting and monitoring
Both KPIs and KRIs need to be reviewed and adjusted ongoingly. Some may stay the same, but over time, you’ll end up refining some and ditching others. Risk assessment professionals may find reporting tools that automate reporting can provide continuous monitoring and give you the chance to mitigate risks as they arise.
How strong is your risk management strategy?
A solid mitigation strategy works with known and unknown risks, and often requires implementing alternative approaches aside from traditional risk mitigation strategies. Some risks simply cannot be managed through a standard rules-based model.
There will always be risks that pose a threat to your business, but with a strong risk management strategy that includes monitoring and refining, you can identify ways to increase success while minimizing your risk exposure.