According to the ISO 31000 standard, risk management is the process that allows companies to identify, analyze, evaluate, and take action to control the risk situations to which they are exposed. These are adverse events that interfere if materialized, they hinder or affect the achievement of the objectives and can represent damages and losses.
Simply, risk management is a codified way to mitigate the risks that will harm the future of the company. Every action we take has an inherent amount of risk attached to it. When we drive a car there is a risk of an accident happening on the road. However, this does not mean that the action we are taking is wrong – it simply means that we need to mitigate the risk. Therefore, we drive safely; we look in the side and rearview mirror to make sure it is safe to make a turn, we give turn signals to tell other vehicles where we will be going, and we make sure that the cars we buy are highly rated for passenger safety.
Businesses must also manage the risks that are inherently attached to doing business. They take many steps to mitigate and manage as many of these risks as possible. This is where risk management comes in; risk management technologies act as mitigating factors that help businesses to minimize risks.
There are many types of risks (operational, financial, legal, reputational, etc.), therefore, taking into account what this standard says, a large part of management has to do with quantifying them, and to do so it is necessary to define two elements: first, the consequence or impact that each risk will have and second, the probability that the risk will occur.
Performing this quantification allows establishing a strategic action route with methods and tools to be able to prevent, control, and monitor them permanently.
Thus, adequate risk management is one that is done continuously, considers the internal and external context of the organization, and creates value for it to achieve its objectives, improve its competitiveness and guarantee its continuity and sustainability, additionally, by applying the principles of risk management it is possible to convert one or more risks into opportunities.
The Importance of Enterprise Risk Management
Management or risk management should be considered as a strategic process in companies, regardless of the sector to which they belong or size because, as explained in the previous section allows, once identified and quantified risks, we must put inactions are taken to prevent and mitigate them so that, if one or more of these occurs, the damages or losses they generate are not too great.
Likewise, carrying out a continuous risk management process with a clear focus, allows organizations to meet their business objectives since the different risks to which they are exposed are controlled and this also has a positive impact on aspects such as efficiency, reliability, and cost-effectiveness.
Suppose, for example, that one of the main risks of a company dedicated to textile manufacturing is the appearance of musculoskeletal injuries in operating personnel, to mitigate both the probability of occurrence and the impact of this risk in the area in charge, which may be that of Safety and Health at Work, must propose and develop various actions and controls to prevent workers from being injured and thus avoid disabilities that impact productivity.
Therefore, managing this risk and the others that may have, delay in the supply of raw materials, chemical risks, damage to machines, among others, allows the company to carry out all its activities in a timely manner and guarantee its operation to meet the objectives strategies effectively.
The Benefits of Risk Management?
Having an adequate risk management system in your company, in addition to the aforementioned, brings benefits such as:
- Greater identification of obstacles and opportunities for improvement.
- More efficient and successful processes.
- Greater productivity and commitment by employees to meet objectives.
- Greater ability to react in adverse situations.
- Reduction of damages or losses generated when a risk materializes.
- Lower costs and increase profitability.
- Greater compliance with strategic business objectives.
- Better level of satisfaction from employees, customers, and other stakeholders.
As you can see, risk management is a key process in companies as it helps them better prepare to face those risk situations that their operation or the context in which they are involved. Their ability to do so helps to largely determine their success or failure because inadequate or insufficient management can even lead to the closure of the business.
This is one of the best times for businesses to start using risk management technology as well, thanks to the drastic decrease in the costs of risk management technology over the past decade. There are many different solutions available, ensuring that most businesses will be able to find a solution that is a perfect fit for their needs.