If risk is not managed, there will be more problems, greater benefits and greater chances of project success. It minimizes threats, maximizes opportunities and optimizes the achievement of project objectives. The result is that more opportunities are proactively captured and converted into positive benefits for the project. Risk management is the process of identifying, evaluating and controlling threats to an organization's capital and profits.
These risks come from a variety of sources, including financial uncertainties, legal liabilities, technological problems, strategic management errors, accidents, and natural disasters. Risk management encompasses the identification, analysis and response to risk factors that are part of the life of a company. Effective risk management means trying to control, as far as possible, future results by acting proactively rather than reactively. Therefore, effective risk management offers the potential to reduce both the possibility of a risk occurring and its potential impact.
As risk expert Josh Tessaro told Lawton: Many processes and systems weren't designed with risk in mind. Risk management standards establish a specific set of strategic processes that begin with the objectives of an organization and are intended to identify risks and promote risk mitigation through best practices. The former work in companies that see risk as a cost center and risk management as an insurance policy, according to Forrester. The field of risk management uses many terms to define the various aspects and attributes of risk management.
Risk management also examines the relationship between risks and the cascading impact they could have on an organization's strategic objectives. Traditionally used as a means of communication with employees, investors and regulators, risk appetite statements are starting to be used more dynamically, replacing checkbox compliance exercises with a more nuanced approach to risk scenarios. As Cobb points out in his comparative article, the updated version of COSO highlights the importance of incorporating risk into business strategies and linking risk to operational performance. Organizations must move at a rapid pace to address risks as they evolve, and this cannot be achieved if risk management is isolated somewhere in the back office.
Consequently, it is important to understand the basic principles of risk management and how they can be used to help mitigate the effects of risks on business entities. At the broadest level, risk management is a system of people, processes and technology that allows an organization to set objectives in line with values and risks. They focus on the brand reputation of their companies, understand the horizontal nature of risk, and define ERM as the right amount of risk needed to grow. In addition, risk management provides the company with a basis on which it can make wise decisions.
For example, the ISO 31 000 standard on risk management is an international standard that provides principles and guidelines for effective risk management. Risk models can give organizations the false belief that they can quantify and regulate all potential risks.