Formalizing Risks

A risk classification plan is designed to analyze risk factors both operationally and strategically (or regarding control and strategy). Manageable risk factors are those that arise from an environment in which the business is already accustomed. The skills and know-how required to solve problems should be available within the organization. Examples of this type of risk may be the Research & Development department, which is unable to develop new products or solve a problem with unsatisfied customers.

Strategic risk factors are those that arise from the unfamiliar business environment. Resources and abilities to solve this kind of problem may not be in place. Taking charge of this kind of situation may require a change in the direction of the strategy or a new trend in the allocation of capital resources.

Formalizing risks

The next step in the enterprise risk management process involves the formalization of risks. This consists of the use of scientific methods such as operational research techniques. It is necessary to quantify the different risk factors that have been identified in previous analyzes. There are four steps in formalizing risks.

  • Model the different sources of risk
  • Link them to financial measures
  • Develop a portfolio of strategies to address these risks
  • Optimize investments with a collection of strategies

Exploiting risks

The final phase of the risk management process is the exploitation of risks. This title assumes that risk can be considered both a threat and an opportunity. To exploit a risk, the management must put the sources of risk under tension.

The knowledge or identification of risks is, in itself, for the company, a comparative advantage. Indeed, the risk may represent a threat to the competitiveness of the firm. Then, a company may be able to manage risks better than competitors.

At all levels, the exploitation of risks leads to a response. There is not one but several risk responses.

Differences between management and monitoring

There may be confusion between managing and tracking. For most, the control of the business risk management activities are the policies and procedures that help ensure that the methods to counter the risks are applied. On the other hand, monitoring concerns the entire process of enterprise risk management and its functioning.

Thus, the control of activities related to enterprise risk management only deals with the part relating to the risk response of the process. Contact David Johnson Cane Bay for more details.