What are the key aspects of effective strategic risk management?
September 20, 2022at6:00 PM
The business world is unpredictable, and strategic risk management is the best way to respond to negative events.
Examples such as the COVID-19 pandemic, inflation, and rising oil prices show that not only can the unexpected happen, but it often does happen. Therefore, rather than hoping for the best, businesses need to have a plan to deal with risks so they recover quickly when problems arise.
With the right approach to strategic risk management, you can turn major catastrophes into minor speed bumps that are easily overcome.
Here are the key aspects to consider when planning risk management strategies.
What exactly is strategic risk management?
Risk management consists of three steps. First, you identify possible risks. Then, you categorize the risks, deciding how much damage they can do and how likely they are to happen. Finally, you create strategies for mitigating these risks.
These strategies can involve taking steps to lower the odds of the problem occurring or creating a response plan to deal with the problem if it ever arises.
When defining and planning for risks, a step-by-step approach is best. At NFA Consulting, we can help you with step-by-step strategic planning and risk assessments to define where potential problems lie and create strategies to deal with them.
Here are the key steps you need to take for this process.
1. Define your objectives
Quantifying risks is an important step in strategic planning. You first need to have a metric to measure risk. You can do so by first defining the overall goals of your business and then seeing how an event will affect your ability to achieve these aims.
With this approach, you may find that some of the events you are most concerned about will not actually affect your ability to pursue your goals.
2. Create key performance indicators
The second step in risk management planning is to find metrics that best track performance. The goal of risk management is to return to normal as soon as possible after a negative event. You can use key performance indicators (KPIs) to track the recovery. These figures may track sales, leads, production levels, or revenue. The goal of your strategies is to return KPIs to pre-event levels as quickly as possible.
3. Choose strategies for dealing with each defined risk
If you decide that a certain event will derail the pursuit of your objectives, you need to find a strategy or several strategies that can help you overcome it should it ever occur.
Depending on your business processes, you can run forecasts and modeling programs to help decide which strategies could work the best. You need to clearly define the response and create a framework that employees can follow should the event happen. You should also detail the KPIs necessary to measure the effectiveness of the response as well as the ultimate goal of the strategy.
4. Continue to monitor risks
The risks can change for two reasons. First, the risk itself may change. For example, the economic climate could improve, or a new government policy could negate the risk. If the risk gets mitigated by outside actions or circumstances, you no longer have to worry about it, and you can recategorize it as unimportant.
Your business could also change. New processes, more reliable materials sources, or automation can change your business in a way that automatically cancels out risks.
On the other hand, risks can sometimes get worse. Commodity prices can change, competition can increase in your industry, or new advances can complicate your plans.
NFA Consulting can assist you with strategic risk management
At NFA Consulting, we can help with the key steps of risk management to develop a framework for dealing with problems quickly so that they do not affect your overall goals.