In 2022, 41% of organizations reported that they experienced three or more critical risk events in the last 12 months.
If you’re among the organizations being barraged by risk events, then you need a strong risk management strategy to help you become more resilient.
What is a risk management strategy?
A risk management strategy is a strategy that addresses how an organization intends to identify, assess, respond to, and monitor risk. It may also prescribe policies, procedures, and methodologies for performing these risk assessment, risk response, and risk monitoring activities.
An effective risk management strategy must consider the following:
- Stakeholder concerns and priorities
- The organization’s policies and procedures
- The organization’s financial resources and legacy investments
- The organization’s culture
- The organization’s long-term objectives
- The organization’s risk tolerance
- The organization's internal environment
- The existing controls that mitigate risk
- All categories or types of risks including operational, financial, and compliance
- How risks are identified, assesses, and mitigated
- How risks are documented and communicated
- How risks, controls, and objectives are continuously monitored
Why is a risk management strategy important?
Having a risk management strategy is important for shaping an organization’s risk management process, including security control selection and assessment, contingency planning, and system authorization decisions. It’s also important for guiding both investment and operational decisions.
Below we’ll take a closer look at the risk management process, which should be encompassed by the organizational risk management strategy.
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Risk management steps
Risk management can be thought of as a continuous process comprising the following components.
1. Risk framing
Risk framing is a critical first step in risk management. It involves describing the risk environment in terms of:
- Risk assumptions (assumptions about the threats the organization should be prepared for)
- Risk constraints (legal, regulatory, and contractual requirements)
- Risk tolerance
- Organizational priorities and trade offs
Risk framing may also include information about the tools or techniques used to support the organization’s risk management activities.
Only after you’ve established a risk context can you create a risk management strategy that provides the organization with a common perspective for assessing, responding to, and monitoring risks.
2. Risk assessment
Risk assessment involves identifying risks and assessing the likelihood they will occur and the potential impact they may cause the business if they do occur. Risk assessment should also involve determining the cost of implementing strategies to mitigate, reduce, or eliminate the risks.
All risks should be identified and tracked in one place — often called a risk register — which can then be regularly reviewed and updated with new risks as well as response plans and resolution notes.
3. Risk response
Next, your organization must respond to each risk. There are four common responses:
Risk avoidance is ideal if you want to eliminate exposure to a risk entirely. For example, you may choose not to collect sensitive data from customers to avoid the risks involved with keeping that data safe. Or you may choose not to integrate your information security system with other applications in order to reduce risks to your system.
In both cases, this risk response requires you to limit your business in some way. That’s why any risk that you avoid should be re-evaluated down the line with the goal of finding another risk response that addresses the underlying issues.
Like risk avoidance, risk acceptance means that no action will be taken to address the risk in question. But in this case, the organization must be willing to expose whatever vulnerability the risk entails.
You may opt for this response if the risk is unlikely to occur, or to have a significant impact if it does occur. In this case, the cost to mitigate or avoid these risks is too high to justify given the small probability or estimated impact of the risks occurring. For example, you may choose to keep legacy systems active if they are not connected to sensitive data environments because the costs and resources required to retire them are too high.
Risk mitigation is the most common risk response. It involves reducing likelihood or impact of a risk by implementing controls or countermeasures. For example, continuous monitoring can help mitigate compliance risks by automatically alerting you of non-conformities.
Risk transference is another way to reduce the risks facing an organization that involves contractually shifting risk to a third party, typically for an ongoing fee. Unlike risk mitigation, risk transference doesn’t change the magnitude, likelihood, or impact of the risk. Instead, it shifts all of the liability associated with the risk to another party.
If only some of the liability associated with the risk is shifted to another party, that is considered risk sharing.
An organization’s risk management strategy may constrain its risk response. For example, you may have a commitment to specific technologies that prevents you from transferring the risk of certain services to a third party. That means your organization will have to design and implement risk treatment plans and controls to mitigate or accept those risks instead.
4. Risk monitoring
Finally, risks as well as risk assessment and response activities should be continuously monitored to ensure your organization is properly managing risk. This is particularly important as your business grows and industry standards and threats change over time. This is where a risk register comes into play as well.
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Risk management strategy examples
Risk management strategies differ depending on how the various stakeholders frame risk, including what threats and potential harms or adverse consequences are of concern to them, what their risk tolerances are, and what risk trade-offs they are willing to make.
Let’s take a look at a couple of examples below.
Diversification is a risk management strategy typically referred to in the context of farming and investing. Any company, however, may employ this strategy by expanding operations and/or their products and services into new markets or industries. That way, if one product or market fails, then the others can buoy your business as it pursues other opportunities.
Vertical integration is a strategy for managing supply chain risk. With this strategy, a company takes direct ownership of various stages of its production process by establishing their own suppliers, manufacturers, distributors, or retail locations or acquiring existing ones so it doesn’t rely on third-party contractors or suppliers.
Contracting, or outsourcing, is the flip side to vertical integration. It involves contracting some of your business operations, like payroll and information technology, to external service providers so that they take on some operational burden and risk. However, this also introduces third-party risks that must be managed.