A Complete Guide to the Risk Management Process (With Steps)

By Indeed Editorial Team

Updated 23 December 2022

Published 2 May 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Many business actions involve risks, and companies often find that mitigating these risks proves beneficial. Risk management is the process of analysing risk factors and creating a plan to reduce the chances of these risks occurring. If you're considering a career in risk management, thoroughly understanding this process can help you avoid hazards or respond to them effectively when appropriate. In this article, we describe the risk management process, explain the actions involved and discuss the benefits of having a plan.

Related: What Is an Actuary? Stepped Guide on How to Become One

What is the risk management process?

The risk management process encourages organisations to identify, evaluate and prioritise safe practices that help mitigate potential dangers. Businesses use a variety of resources, including financial resources, to perform these steps in hopes of decreasing the likelihood that something occurs. Once an organisation identifies a risk, it can determine how it wants to react by designing strategies to help reduce these occurrences and ensure safe working conditions. A risk management plan allows organisations to respond to unanticipated events and feel confident about handling risks if they arise.

A risk is typically the chance of losing something valuable. Some risks can occur during financial transactions or other exchanges. Other risks can occur during projects, unexpected environmental changes, product development, interpersonal conflicts and other scenarios where uncertainty exists. Risk management solutions recognise these scenarios and use planning and reasoning to reduce the impact of harm on the relevant parties.

Related: What Is a KYC Analyst? Duties, Requirements and Salary

How to complete the risk management process

The risk management process generally consists of five steps. It begins with identifying the risk, analysing the danger, prioritising the risk, implementing a solution and monitoring the results to ensure the risk remains neutralised. Many people document their experiences with these steps in reports or notes for future reference. The following are the major steps in risk management:

1. Determine the risk

The step in the process is to identify any concerns that the company may face. Companies may review their legal, environmental, commercial and regulatory interests to assess the level of risk that exists. Risks may include events, such as fires or accidents, employee turnover, supply issues, economic recession, industry rivals and brand popularity. Identifying risks are often the most important step because knowing a risk typically means you can confront it.

Risk management professionals can identify a company's risks by looking through history, consulting with experts and conducting external research. Rather than ignoring or missing potential issues, it is often better to identify as many risks as possible to help protect the interests of a company or person. If a company employs risk management software, a manager can enter this information on their computer for easier identification and monitoring. Writing down any perceived risk can help companies share their findings with stakeholders and other interested parties. Below are some additional methods for identifying risks:

  • Interview stakeholders: Managers can speak one-on-one with important project stakeholders, sponsors or subject matter experts to discuss their concerns. These individuals can offer a professional perspective based on their understanding of the issue and help identify possible dangers.

  • Organise a risk workshop: Some managers may sit down with their stakeholders to brainstorm and discuss upcoming projects and foreseeable challenges. Since people often represent distinct perspectives and offer diverse opinions, letting people talk during a workshop may lead to unique ideas and concerns.

  • Examine the assumptions about the project: Project assumptions reflect what a company thinks it knows about a project before starting it, and these predictions are often formed from past experiences and can pose their own challenges because projects often differ even if they seem similar. It's often important for managers to review the assumptions they make to help ensure they remain open to all possible outcomes of the project and examine ways in which things may diverge from what they know.

Related: What Is Talent Management? (With Processes and Strategies)

2. Conduct a risk assessment

After a company detects a risk, team members typically examine it through the lens of their organisational structure. The severity of risk often relates to how many processes the risk affects. Many companies use a risk management system that allows them to track and analyse this data efficiently once it's set up to understand the company's various procedures, rules, documents and business processes.

Related: Risk Manager Skills: Definition and Examples

3. Assess or rate the risk

Once a company collects information about how the risk may affect its processes and structure, you can make assessments. Many businesses use a risk map, which is a tool that typically shows which dangers are common, which are serious and which may require the most resources. This map can help determine whether a company wants to focus on the risk based on its likelihood of occurring and its impact on the business.

Businesses typically view risks with limited repercussions as low priority, whereas risks with lasting implications often receive a higher rating. The ability to grade risks is often important because it allows the business to become aware of its risk exposure. Knowing the severity and frequency of risks can also help a company prioritise their resources and show them where to invest time and money.

4. React to the risk

Organisations typically try to accept, avoid, control or transfer the risk. Accepting the risk involves acknowledging that maintaining the business outweighs a particular risk. Avoiding risk typically means refraining from engaging in that activity. A business that tries to control the risk often attempts to adopt preventative measures, reduce the possibility of the risk or mitigate the effects. Lastly, risk transfer often involves assigning the responsibility of the risk to another party, such as an insurance company.

Companies may try to eliminate or reduce concerns by enlisting the assistance of experts. They may convene meetings with stakeholders to allow everyone to address the problem. If the company uses risk management software, the system may notify all relevant stakeholders and alert them to potential remedies. Company leaders may choose some of the proposed remedies and watch whether their implementation improves the situation.

5. Watch and analyse the risk

Businesses often experience constant change, which means that concerns often change too. It's often difficult to eliminate all dangers, and some companies experience certain risks often or continually. Environmental hazards and market risks are two examples of continual risk creators. Risk management systems may help companies that experience continual risks because they monitor the whole framework of a company in a digital environment and allow multiple people to receive updates regarding any risks to the whole company.

Often, companies try to update and revise their risk management system to help ensure they are well prepared for unexpected events. If the risk assessment team realise that their established approach is ineffective, they may try a new procedure. Over time, companies gradually formalise their risk management approaches and create a culture among their employees. Adapting the plan as risks and operational environments change can help a company perform better overall.

Related: What Is the Role of a Risk Manager? (With Duties and Skills)

Reasons to practise risk management

Risk management helps businesses and investors prepare for unexpected situations so they can protect their investments, revenues and reputation. A good risk management strategy allows a company to stay operational, define its goals and capitalise on new possibilities. Limiting risks may help investors retain favourable returns. Below are some additional benefits of risk management:

  • Forecast potential issues: One of the advantages of risk management is that it often transforms the culture of a company organisation. Companies that place a greater emphasis on risk management are more proactive than those that are reactive.

  • Prevent catastrophic events: Risk management prepares businesses for several different problems by attempting to anticipate minor disruptions to a company's daily operations. If problems arise, businesses with strong risk management systems can often cope without suffering major losses.

  • Enable growth: Managing risk often helps ensure the safety of a company's data and assets. With this level of security, companies may find it easier to use their resources to improve their products and grow their business.

Example of risk management

Here's an example of how risk management can benefit a company:

Better Way Designs has significant liabilities and invests most of its assets in the stock market. This has implications for the company's long-term viability, especially if the investments provide lower returns.

If the company takes on large risks without a risk management strategy in place, there may be consequences that slow the business growth and eliminate funding options. The risk management team decides to use a comprehensive risk assessment. This helps them take on risks that they can safely manage. They discover the company can increase profits while exploring other products or services.

Explore more articles