When an organization implements an enterprise risk management system, the first essential step of the process is risk identification. Identifying risks within an organization is the foundation that builds a functional and effective risk management process.
However, recognizing potential risks is useless without the next step, which is risk assessment. Assessing risks is a crucial part of enterprise risk management; its purpose is to analyze and prioritize the identified risks by using specific methods to aid understanding within the organization.
How It Works
Enterprise risk assessment is the analysis of pre-identified potential risks to better understand the influence of said risks on an organization. This process is constantly developing and should be done regularly.
The first step in assessing risk is to determine the organization’s goals within a stated time period. For example, “Over the next three years, one goal is to increase annual profit margins by 50%.” When a list of objectives and a timeline are established, members within an organization can better develop and understand criteria for risk assessment.
Enterprise risk assessments prioritize potential events based on certain criteria and arrange this information in a visual, grid-like format. Some criteria that determine the impact of potential risks are as follows:
Likelihood – how likely is this risk event to occur?
Finances – how will finances be impacted?
Reputation – how will reputation be impacted?
Significance – is this risk important/how important?
Preparedness – is the organization prepared to treat this risk?
Velocity – how quickly will this risk occur?
Future Trend – how might this risk change over time?
Control Capability – does the organization have the skills to treat this risk?
Interdependency – does this risk influence the occurrence of other potential risks?
The assessment information, such as the examples above, can be gathered through surveys, interviews, workshops, and meetings with integral members and key stakeholders of the organization. These measurements are specific to each entity, following the unique and customizable nature of enterprise risk management. Enterprise-wide discussions are essential to a successful risk assessment procedure. The gathering of this data and knowledge will uncover opportunities and help the organization consider the overall impact of events.
Qualitative vs Quantitative Analysis
Understanding the complex nature of each risk and its impact can be tricky, therefore breaking the measurements down even into further categories can be a comprehensive way to look at the process. These two categories are qualitative and quantitative analysis.
When analyzing risk in a qualitative manner, descriptive details are used instead of a dollar value to grasp the possible impact. Reputational risks can be placed into this section since it is difficult to allot a numerical value to these.
When analyzing risk in a quantitative manner, a dollar value is used to understand the possible impact. Financial risks can be categorized in this way in the form of losses and revenue because a hard number can be assigned to these.
After all the information is gathered, ranked, and discussed, the results should then be weighed up against the organization’s risk appetite and tolerance. Now, the organization is ready to make informed decisions on which risks to focus on and how to respond to them in order to achieve set objectives.
Managing risk the right way is a process that implements step-by-step procedures for an organization to fully understand risk and how to respond to it. Identifying, assessing, and treating probable events are all essential steps to effective risk management.
The goal of enterprise risk assessment is to analyze and score the identified risks and how they might impact, either positively or negatively, an organization on a holistic level. This step leads to risk treatment and opportunity response, which is the driving force of the successful achievement of objectives at the core of any organization.