How to manage risk correctly in your company

Risk management is an essential process to ensure the stability and growth of a company within its strategic planning.

It refers to the practice of identifying, assessing, and prioritizing risks, followed by the application of resources to minimize, control, and monitor the probability or impact of unfortunate events.

This process is crucial to protect assets, ensure business continuity and achieve your organization's strategic objectives.

Therefore, we will talk about the identification of risks and how to manage them correctly to avoid the impact on your company's resources.

Types of risks in a company

The first thing to do before embarking on a risk management strategy is to identify what we are facing and how best to address them. Although there are many types of risks, we will discuss the 7 most important ones.

1. Financial Risks

These risks are related to the company's finances. They may include fluctuations in the markets or internal financial processes. Among the most common are:

• Market Risk: Changes in market prices, such as fluctuations in interest rates, exchange rates, stock and commodity prices.
• Credit Risk: Inability of customers or counterparties to meet their financial obligations.
• Liquidity Risk: Lack of liquidity to meet short-term obligations.

2. Operational Risks

They are related to the internal processes and daily operations of the company, among them we can mention:

• Process failures: Inefficiencies or errors in operational processes.
• Technology risks: Computer system failures, cyber-attacks, data loss.
• Riesgos de personal: Ausencia de empleados clave, errores humanos, conflictos laborales.

3. Compliance Risks

These risks arise from the need to comply with laws, regulations and internal standards. They include:

• Regulatory Risks: Changes in laws and regulations affecting the company.
• Contractual Risks: Non-compliance with contractual terms.
• Internal Regulatory Risks: Non-adherence to internal policies and procedures.

4. Strategic Risks

Related to high-level decisions that affect the company's long-term objectives. They may include:

• Market Risks: Changes in the competitive environment, consumer preferences, new competitors.
• Reputational Risks: Damage to the company's image or brand due to bad practices, negative publicity or public relations crisis.
• Innovation Risks: Failure of new products or services, investments in emerging technologies that do not work out.

5. Environmental and Social Risks

These risks are related to the environment in which the company operates and its social impact.

These types of risks generally affect any type of company, for example, one of the most affected may be the distribution companies that face constant climatic changes in which they have to adapt their distribution routes or processes.

Let us mention the most common in this area:

• Environmental Risks: Natural disasters, climate change, pollution, weather states.
• Social Risks: Demographic changes, community conflicts, corporate social responsibility.

6. Legal Risks

Associated with litigation and legal compliance. Examples include:

• Litigation: Legal claims against the company.
• Legal Changes: New laws affecting the operation of the company.
• Contractual Risks: Disputes arising from contracts.

7. Security Risks

Focused on the protection of the company's physical and digital assets:

• Physical Security Risks: Theft, vandalism, damage to facilities.
• Cybersecurity Risks: Cyber attacks, data breaches.

Steps for risk management in your company

Once a company has identified the risks it faces in the management process, it must follow a set of structured steps to assess, prioritize and mitigate those risks. A general approach is detailed below:

Step 1. Risk Assessment

This first step in risk management involves analyzing and understanding in detail the risks identified to determine their probability of occurrence and their potential impact on the organization.

Risk assessment allows us to prioritize risks effectively and develop appropriate strategies to mitigate them. In this step it is necessary to determine:

A. Probability and Impact Analysis

• Probability: Determine the likelihood of the risk occurring.
• Impact: Assess the potential impact on the business if the risk materializes.
• Rating: May be classified into levels such as low, medium and high, or assigned a numerical score (e.g., on a scale of 1 to 5).

b. Evaluation Tools

• Risk Matrices: Use probability and impact matrices to classify risks into levels (high, medium, low).
• Scenario analysis: Develop scenarios to understand how different factors can affect risk.

• Management software: With the advent of technology, many processes that used to be done manually can now be digitized with the help of tools that allow us to prevent and streamline methods.

Step 2. Risk Prioritization

It involves classifying and ranking the risks identified according to their probability of occurrence and the potential impact they could have on the organization.

This phase helps companies focus on the most critical risks and allocate resources efficiently for their mitigation.

The following are common steps and methods used in risk prioritization:

• Risk Mapping: Create a heat map to visualize and prioritize risks according to their likelihood and impact.
• Prioritization Criteria: Focus first on risks that have the highest likelihood and significant impact.

Step 3. Development of Mitigation Strategies

It is the process by which an organization plans and executes specific actions to reduce the probability of occurrence or the negative impact of identified risks.

This step is crucial to minimize potential threats and ensure the company's operational continuity. The key components and steps involved in developing mitigation strategies are described below.

a. Types of Strategies

• Prevention: Implement measures to prevent the risk from occurring.
• Reduction: Minimize the probability or impact of the risk.
• Transfer: Transfer the risk to third parties, such as insurance or outsourcing.
• Acceptance: Accept risk when mitigation costs are greater than the potential impact.

b. Examples of Strategies

• Prevention: Improve personnel training to avoid operational errors.
• Reduction: Implement additional quality controls to reduce product defects.
• Transfer: Acquire insurance for financial and property risks.
• Acceptance: Maintain a reserve fund to cover possible minor losses.

Step 4. Implementation of the Action Plan

It consists of carrying out the strategies and measures previously developed to mitigate the identified risks.

This process is essential to translate planning into concrete actions that reduce the probability of occurrence or impact of risks in the organization.

Here are the key elements of the implementation of the action plan.

• Assignment of Responsibilities: Designate responsible parties for implementing each mitigation measure.
• Implementation Schedule: Establish a detailed schedule for carrying out the measures.
• Resources: Ensure that the necessary resources (financial, human, technological) are allocated to implement the strategies.

Step 5. Monitoring and Ongoing Review

Ongoing monitoring and review involves constantly monitoring the risks identified, the mitigation strategies implemented and the overall business environment.

This activity allows the organization to adapt to changes, evaluate the effectiveness of its actions and continuously improve its ability to manage risks. Here we detail what this process consists of:

a. Follow-up

• Key Risk Indicators (KRIs): Define and monitor indicators that alert about potential problems.
• Regular Reports: Generate periodic reports on the status of risks and mitigation measures.

b. Review and Adjustments

• Internal Audits: Conduct audits to evaluate the effectiveness of risk controls.
• Periodic Reviews: Review and update risk analysis and mitigation plans regularly.

Step 6. Risk Culture Communication and Training

Finally, this last step involves educating and sensitizing all members of the organization on the importance of identifying, assessing and managing risks effectively.

This involves not only imparting knowledge of risk management techniques and tools, but also fostering a proactive mindset and behavior about risk management at all levels of the organization.

Let's look at the phases of this process.

a. Communication

• Risk Reporting: Provide clear and regular reports to senior management and key stakeholders.
• Transparency: Maintain open communication about risks and strategies adopted.

b. Risk Culture

• Continuous Training: Educate employees on the importance of risk management and how they can contribute.
• Encouraging Participation: Encourage employees to report risks and participate in creating solutions.

Implementing these steps will help you effectively manage risks and ensure that your company is prepared to face future challenges.

Now let's look at a case study.

Practical example of effective risk management

Suppose you have a manufacturing company. One identified risk is the possibility of disruptions in the supply chain. To manage it, you could:

1. Identify: Key suppliers and points of failure in the supply chain.
2. Assess: Probability of disruptions and their impact on production.
3. Prioritize: This risk is high due to critical dependence on certain suppliers.
4. Mitigate.
5. Diversify suppliers.
6. Maintain safety inventories.
7. Develop contingency plans.
8. Train: Hire specialists to help you assess your areas of opportunity and train you and help you execute an action plan to streamline your risk management processes.
9. Implement: Hire new suppliers and adjust inventory levels.
10. Monitor: Periodically review supplier performance and inventory status.
11. Communicate: Inform the entire team about new policies and procedures related to the supply chain.

How does London Consulting Group help you with risk management?

At London Consulting Group, we understand the importance of effective risk management in the success and sustainability of your business.

Our expertise in strategic planning and consulting allows us to provide you with comprehensive solutions that will help you identify, assess and mitigate risks that may affect your business objectives.

Our approach focuses on working closely with you to gain a thorough understanding of your organization, its competitive environment and the specific challenges you face. Through a customized consulting process, we develop risk management strategies tailored to your unique needs and circumstances.

From identifying risks to implementing mitigation measures, we will guide you every step of the way. Our experts will provide you with the tools and knowledge you need to make informed, proactive decisions that protect your business from potential threats.

At London Consulting Group, we not only help you minimize risks, but also enable you to turn them into opportunities. Our strategic orientation will allow you to make the most of every situation, transforming challenges into competitive advantages.

Contact us to receive expert advice and start developing your team's skills.