Risk management is something that most companies do to an extent. But it’s not carried out in a holistic manner. Sometimes, some critical areas are overlooked. A good integrated risk management model helps with identifying, monitoring and avoiding risks without losing agility, speed and efficiency. In this post, we will discuss integrated risk management in more detail.
Risk Management Integration: All You Need To Know
What is risk management?
Every business regardless of its size is exposed to potential risks. Risks are future events of both an internal and external nature that can have adverse effects on the company and therefore harbor the risk of loss. Successful risk management does not eliminate potential dangers and uncertainties, but you can prepare for them and take countermeasures in good time. A company, including its economic environment, benefits when it can react quickly to threats within and outside the industry and thus remain successful in the long term.
Many companies have already recognized this and have established a risk management system both organizationally and procedurally. However, risk management is often only carried out as a separate process, which is sometimes perceived as a nuisance and which is poorly integrated with other company processes. However, the lack of holistic integration means that risks that may not appear relevant to all areas of the company or are classified as significant are not reported or remedied. Ultimately, this poses a threat to the company and can have harmful (overall) economic consequences in the long term. In some sectors, such as the financial sector, for example, sophisticated risk management is even required by law against this background.
Risk management summarizes all of a company’s actions and decisions relating to the correct handling of risks. This begins with recognizing possible dangers and extends to their analysis and evaluation through to the introduction of risk elimination measures. Risk management is therefore used to analyze and react to acute, negative events, including rare or even hypothetical events. Very pragmatically this means things like the creation of an emergency plan in the event of disrupted supply chains, the design of measures for the loss of key markets, emergency plans for natural disasters or terrorist attacks.
What is the risk management cycle?
For efficient risk management, integrated risk management programs use the risk cycle. It makes it clear that risk management should not be understood as a one-time activity, but as a continuous task to ensure the long-term existence of a company. Accordingly, targeted risk management takes place in five steps, with detailed documentation of each step (as an overarching step six) being of great importance. The documentation helps the company to systematically demonstrate and ensure risk identification, analysis and assessment as well as responsibilities in the event of damage.
In order to ensure the greatest possible transparency of the company’s situation, each step of the risk cycle should be run through at regular intervals, the entire process at least once a year.
One of the most important steps in risk management is the identification of risks: What uncertainties does the company face and which sources can be attributed to these uncertainties? All uncertainties that can affect company goals are listed. The identified risks are then classified into categories, documented and assigned to the respective departments.
The identified and systematized risks are evaluated: Are there critical / non-critical risks? What are the effects and probability of occurrence of the respective risks? Which risks do you have to take care of in detail? The result of the assessment of the probability of occurrence and possible consequences is a systematic list of all risks that are critical for the company.
All risks classified as critical (risks with a high probability of occurrence or serious consequences) are analyzed in detail and documented with KPIs (Key Performance Indicators) and parameters that indicate when reaction or intervention is required.
Measures are defined as to how the risks can be avoided or eliminated. KPIs and metrics are also defined for this purpose, which show how the measures work in an emergency.
The conclusion is a targeted monitoring of all documented risks and defined measures. For this purpose, the KPIs and measured variables are compared with the target values at regular intervals.
Overarching step 6
Each of the process steps must be documented in detail, with all important aspects being recorded, such as the method of risk identification, the methods used to record and assess risks, the organization of risk management (responsibilities, processes), measured values for KPIs and measures implemented.
What is Integrated risk management?
As elementary as the identification and documentation of risks is, it will remain ineffective if risk identification, recognition and elimination is not integrated as a fixed activity within all company departments involved. The Con Mendo approach of integrated risk management builds on the risk wheel and includes the integration of risk management throughout the company. Four dimensions are crucial here:
Structural organizational and procedural integration across all business units
The organizational anchoring is about integrating risk management into the processes of the various business areas such as e.g. to integrate controlling, governance or corporate planning. This supports both the monitoring and identification of risks as well as forward-looking management advice based on balanced information. The quality of decisions can be increased if transparency about the future viability of the company is created with the help of integrated risk management.
Anchoring of tasks, responsibilities and positions
Systems for integrated risk management must be based on clearly defined and communicated responsibilities – and this does not only affect the heads of the risk department. Only if all departments see themselves as part of risk management and every employee knows what they have to do, to whom risks must be reported or how they must be tracked, can the desired transparency for risk protection be created.
Technical support through the targeted use of risk management systems and tools
Efficient tools and systems must be available in order to be able to measure, evaluate and document risks. The format of the tools can be adapted to the size of the respective company, since it is primarily about recording and documenting the right KPIs and metrics. The decisive factor is that the selected tool is regularly filled and monitored; because a holistic view of the risks through integrated methods, systems and processes allows the generation of information and increases transparency – also for important company decisions.
Embedding a risk culture
Risk management should be an integrated, living part of the corporate culture. If it is found to be helpful and useful in all areas of the company and by all employees, it develops a high degree of effectiveness in the company and thus increases the added value for securing the company’s existence.
Of course, the optimal way of integrated risk management for a company is not ready in a drawer. Fundamental to successful implementation is the belief that it is helpful to the organization to know what risks exist and that integrated risk management is an integral part of the corporate culture. An adequate way must be developed and lived individually for each company. Integrated risk management programs help find this path and link it to the requirements of different stakeholders such as owners, employees, customers or authorities. When this path is devised and implemented, the company is not only better equipped to deal with potential risks, but can also identify opportunities and thereby realize economic benefits. A decision-oriented, integrated risk management approach offers a variety of opportunities to increase the effectiveness and efficiency of the company.