Risk management and risk-based thinking are two essential concepts to incorporate when an organization is striving to succeed and reach objectives. Enterprise risk management, unlike traditional risk management, is a perfect example of these two ideas working together to establish and sustain productive operations within a company.
Many organizations struggle to understand risk-based thinking and how it relates to, and differs from, the activity of risk management. So what are the distinctions, and how do they work together?
Risk management is a process, or series of actions, taken by a company to identify, evaluate, prioritize, and deal with risks towards the organization. Risk management processes apply designated resources to treat risks according to whether they are threats or opportunities.
Risk management procedures must establish context, monitor progress, and continuously communicate risks between departments. Risk management is a business tool that makes a significant impact on the operational abilities of an organization.
Comparatively, risk-based thinking is the concept that companies must proactively and holistically engage in handling risk and making it a part of every quality management system. A quality management system is a conglomeration of processes focused on providing high standard, consistent products or services as a means to manage uncertainty.
When a company adopts risk-based thinking, it frames uncertainty in a way that is driven by objectives. Risk-based thinking allows organizations to incorporate risk into decision-making.
In short, risk management is made up of formal processes to analyze and treat risk, whereas risk-based thinking aims to embed preventative action into an organization’s every decision as well as put risk examination at the forefront of every process being established.
How They Work Together
Enterprise risk management, or ERM, is a risk management approach that prioritizes a holistic point of view when handling uncertainty. Enterprise risk management also evaluates significant risks and puts into place appropriate responses to said risks.
The nature of ERM makes it the perfect example of risk management and risk-based thinking working in harmony to create a system that increases the effectiveness of operations, provides efficient risk responses and leads to the achievement of goals. Enterprise risk management takes the integrative ideas of risk-based thinking, and the systemized processes of risk management, to construct a flexible yet strong method to handle potential risks.
The incorporation of these two concepts in ERM is what makes such a difference to organizations that don’t find traditional risk management to be of any merit.
Before deep-diving into the meaning of risk-based thinking and how it relates to risk management, it can be a challenge to even distinguish the two from each other. However, once clearly defined distinctions are made, organizations can start to reap many benefits by the implementation of both risk management and risk-based thinking.
Sustainable, productive, and overall quality operations are the goals of every company. In order to achieve this, organizations should adopt a risk-based thinking approach when managing risk and creating quality management processes. Risk-based thinking and risk management go hand in hand in the success of this pursuit.
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