What Is Risk?
Risk is the chance that the outcome differs from what is expected. Usually, when we talk about business risk, we are referring to possible negative impact and consequences of an event or decision.
In business, there will always be a certain degree of risk that any organization must face to achieve its goals. At the essence, risk is a fundamental requirement for growth, development, profit and prosperity. In a broad range of every business industry, including healthcare, finance, accounting, technology and supply chain, effectively managed risks provide pathways to success. But like any path, you need to know all the divots, detours, and dangers along the way.
Even though risks are a part of doing business, we must find ways to identify and manage those risks swiftly and effectively since they can often develop out of nowhere, creating the possibility for greater risks and damages. It is crucial to find ways to manage risks with the goal of minimizing their threats and maximizing their potential.
Risks come from a variety of sources, which include the following:
- Uncertainties in financial markets and the economy.
- Threats associated with project failures at any phase, which includes design, development, production, or maintenance of life cycles.
- Legal liabilities.
- Credit risk.
- Threat of natural or man-made disasters.
- Security and cybersecurity risk.
- Impact of uncertain or unpredictable events, such as a pandemic.
- Competitive risk.
- Fallout from a company’s damaged reputation.
- Compliance risk.
- Third-party risk that comes with relying on external suppliers and vendors.
To help you better understand various risks, there is a set of international standards for information security that can help. Together, the International Organization for Standardization (ISO) and the International Electrotechnical Commission (IEC) create and publish the ISO 270000 standards cooperatively for better guidance.
What Is the Difference Between Risk Assessment, Risk Management and Risk Analysis?
It can become confusing trying to sift through the different terms dealing with risk, including risk assessment, risk management, and risk analysis. The main difference is breadth.
- Risk management is the macro-level process of assessing, analyzing, prioritizing, and making a strategy to mitigate threats to an organization’s assets and earnings.
- Risk assessment is a meso-level process within risk management. It aims to breaks down threats into identifiable categories and define all the potential impact of each risk.
- Risk analysis is the micro-level process of measuring risks and their associated impact.
Let’s take a closer look at what differentiates these terms.
“The purpose of risk management is not to change the future, not to explain the past.” – Dr. Dan Borge, a financial expert and former aeronautical engineer who designed the RAROC risk-management system and wrote The Book of Risk.
Instead, risk management is the overarching umbrella when it comes risk. It includes both risk assessment and risk analysis.
Management involves the identification, analysis, evaluation, and prioritization of current and potential risks. This allows you to address loss exposures, monitor risk control and financial resources in order to minimize possible adverse effects of potential loss. Further, a solid risk management strategy gives you the ability to maximize the realization of available opportunities to avoid risk.
Risk assessment helps you identify and categorize risks. Plus, it provides an outline for potential consequences.
Performing a risk assessment involves processes and technologies that help identify, evaluate and report on any risk-related concern. According to NIST 800-30, risk assessment is a “key component” of the risk management process and is primarily focused on the identification and analysis phases of risk management.
If we take the example of a security risk assessment, it involves the following steps:
- Identify the critical assets and sensitive data,
- Build a risk profile for each asset,
- Determine cybersecurity risks for each asset,
- Mapping how critical assets are linked,
- Prioritize which assets to address in case of a security threat,
- Create a mitigation plan with security controls to eliminate or mitigate the impact of each risk,
- Continually monitor risks, threats, and vulnerabilities.
Risk analysis is the crucial evaluation component within the broader risk management and assessment processes. Risk analysis determines the significance of identified risk factors identified in the risk assessment process and provides. Plus, it qualifies risk, measuring the likelihood of hazards occurring and tolerances for certain events. One example is when an auditor calculates the probability and magnitude of a potential loss.
Scoring the risks identified takes into account the likelihood of occurrence and the estimated extent of possible impact. Together, this makes it possible to prioritize risks and set a strategy for mitigating them.
Related article: Business Leaders’ Top Concerns as Enterprise Risk Rises in 2021.
Do You Feel Confident About Your Organization’s Risk Management Strategy?
Are you confident that your risk management strategy is sound? Do you worry that there are risk factors that you are missing during the risk assessment and risk analysis phases of risk management? Our team at I.S. Partners, LLC. can help you get up to speed on any lurking risks to help you find ways to prevent and mitigate them.