- What is risk management?
- The Principles of Risk Management
- The Basic Framework of Risk Management
- The Process Needed for a Risk Management Program
- What is Gained from Successful Risk Management Programs?
- Why are risk assessments important?
- The Five Steps of a Risk Assessment
- Risk Assessment Methods + Tools
Risk assessments are the process of identifying, analyzing, and evaluating risks within the workplace. Understanding the role risk assessments play can be a lot of work for the employer, stakeholders, and employees alike. These types of assessments always begin with a risk management plan that will ultimately try and prepare for various threats imposed on the workplace. For clarification, threats are uncertainties with negative impacts. With such a broad definition of a threat and the risks pertaining to them, these can in fact cover anything regarding the potential for natural disasters, accidents, financial risks, legal liabilities, etc.
While this may not be an all-encompassing article on risk assessment and risk management, it will go over the basics of a risk management program’s infrastructure by touching on the three essential core concepts as well as how and why risk assessments are needed and used in the workplace.
What is risk management?
Risk management follows the process of identifying, evaluating, and prioritizing various risks found within a business and then systematically works to minimize, control, and monitor the probability in which those risks may come to pass. Or, in some cases, to maximize the company’s understanding of positive risk opportunities within reach. ISO states that risks are uncertainties regarding objectives that deviate from the expected outcome. Risks can be positive, negative, or both, and have the ability to result in threats or opportunities within the scope of the business’s values and objectives.
One of the most important things to note about risk management is the difference between risks and hazards. These two concepts are easily misidentified in any business needing either, or both, a job hazard analysis and risk assessment. Risks are uncertainties, and the related consequences are measured by the probability of the event occurring. On the other hand, hazards pose immediate physical danger to those in the vicinity. Essentially, hazards are a part of the existing risks in a workplace, but risks are not solely defined as physical dangers/hazards. This logic can be compared with the priori belief that “all squares are rectangles but not all rectangles are squares.”
The Principles, Framework, and Process of Risk Management
ISO 31000 defines risk management as solely relying on three aspects—its principles, framework, and process. These three concepts work together to clearly communicate the following:
- Establishing context for risk identification, analyzation, evaluation, and treatment
- Consistent monitoring of consequences for any activity, function process, or product created.
The goal of a successful risk management program is to be able to report the results of the company’s findings, and then work to continuously improve uncertainties that may manifest into physical dangers or financial/liability threats over time.
The Principles of Risk Management
To further explain how risk management aims to protect the value of a company, the principles of the method must be defined. Those are:
- Integrated: Risk management is a base for all activities within the organization.
- Structured and comprehensive: This type of approach aims to accomplish consistent and comparable results.
- Customized: A risk management framework and process should be completely proportionate to the company’s external and internal context put forth by its objectives.
- Inclusive: An improved awareness and informed risk management system must involve stakeholders and their knowledge, views, and perceptions.
- Dynamic: as the organization’s internal and external context changes with time, the risk management program must anticipate, detect, acknowledge, and respond to those changes as soon as they can.
- Best available information: Future expectations and data from the past and present must be taken into account when reviewing limitations and uncertainties (risks) within a process. Information should also be available for any and all stakeholders involved with the organization.
- Human and cultural factors: These factors influence most all aspects, stages, and levels related to risk management.
- Continual improvement: Through the process of learning and gaining more experience, the management tool will be improved upon continuously.
The principles of risk management are the building blocks to the following framework and process developed at an organization.
The Basic Framework of Risk Management
Designing a framework is necessary for successful risk management processes because it assists the business in correctly integrating risk management ideals into the appropriate functions and activities of an organization. The following characteristics are essential for any risk management framework:
- Strong leadership: Upper management and all relevant stakeholders have a responsibility in providing strong leadership. Without this, the risk management program will not be able to align its ideals with the organization’s objectives, culture, and strategic plans to lower uncertainties that exist. Without a strong leadership infrastructure, communication and monitoring protocols will suffer from a muddled chain of command.
- Integration: Integration within a risk management framework is wholly reliant on the understanding of organizational context and structure. ISO 31000 states that risk management should be a part of the organizational process, governance, leadership and commitment, strategy, objectives, and operations.
- Design: Designing a risk management program requires understanding an organization’s goals and objectives, this includes the internal and external context elements. Top management members should write out a policy or statement that clearly outlines their objectives for risk management. The design phase is the building block of risk management programs and will ultimately determine if the program is set up for success.
- Implementation: Implementing a risk management plan requires an organization to develop an appropriate time frame with needed resources, they must identify how, when, and where decisions are being made, be prepared for possible change, and make arrangements for putting the practice into action. Success requires the attention and engagement of any and all stakeholders that are relevant to the objective, whether that be financial gain or protecting employees from safety hazards.
- Evaluation: To adequately evaluate a risk management plan, those with the responsibility must measure the framework performance against the purpose of the plan, the status of implementation, and expected behavior and its indicators. Then, they must decide if the plan is still suitable for achieving the organization’s objectives.
- Improvement: Continual improvement is the root of risk management. The company must adapt to internal and external context changes within the organizations because those often alter the company’s objective. If done correctly, the value of the company will increase.
The Process Needed for a Risk Management Program
The last integral concept that needs attention within a risk management program is the process. The process is interlinked with both the principles and framework of risk management. In fact, it depends on those two concepts to be created and organized well to be able to implement any needed changes within the working community of the organization.
The first step in developing a risk management process is the requirement of good communication and consultation. This step involves upper management assisting stakeholders involved within the relevant decision-making process to clarify how and why decisions are made to then gather feedback (consultation) and promote the awareness of the risk (communication).
Next, the scope, context, and criteria must be defined. These are essential for a business to create a customized risk management program that works best for them.
Risk assessments come next. The organization must identify risks that may have a positive or negative affect on the company and then analyze them to understand the level of risk involved. When analyzing the risk, things such as the likelihood of events and consequences, magnitude of the consequences, complexity, time-related factors, sensitivity, and the effectiveness of controls must be taken into account. Evaluation comes last to determine whether or not to leave it alone, treat it, analyze further, maintain controls, or reconsider the organization’s objectives.
Based upon the evaluation of the risk, it must them be treated. The process requires selecting risk treatment options, planning and implementing the treatment option, assessing the effectiveness, asking whether the remaining risk is acceptable, and taking on further treatment if the level of risk is not acceptable.
The risks in a risk management program must then be monitored continuously to see if the plan is working.
Lastly, recording and reporting monitored results allows for clear communication between all stakeholders, upper management, and employees. This improves decision making skills and activities.
What is Gained from Successful Risk Management Programs?
If the ISO 31000 risk management standard is followed correctly and sustained, then the company will benefit immensely. They should be able to achieve the following:
- Improvements regarding safety, financial reporting, corporate governance, and loss reduction
- Increased awareness for when to treat and manage risk
- Compliance with legal and regulatory requirements nationwide and internationally
- Confidence in decision making and planning as well as defined controls to correctly make decisions and plan accordingly
- The appropriate allocation and use of resources for risk treatment
- Improvement in identifying threats and opportunities
- Improvement regarding proactive vs reactive management and prevention
- Increased stakeholder confidence and trust
- Improvements regarding operational effectiveness and efficiency
Why are risk assessments important?
Risk assessments are important because they measure the likelihood in which a severe negative occurrence is probable, whether that be injury, illness, damage to product and property, or monetary loss within the company’s objectives. With that being said, risk assessments are important to any business or industry that deals with dangerous equipment, chemicals, biohazards, ergonomic hazards, and everyone else that deals with monetary profit. The main purpose for performing a risk assessment includes:
- Identifying health, safety, and financial risks within the workplace and then evaluating those risks
- Effectiveness of existing control measures
- With the remaining risk, additional controls must be implemented if the risk is still too high
- Prioritizing resources to make sure everything above is running smoothly
Without a proper risk assessment, companies have the potential to incur costly consequences like financial loss, longer production times, damaged equipment, and most importantly, the safety of employees being compromised.
The Five Steps of a Risk Assessment
There are five steps involved when looking to perform a risk assessment and those are:
- Identifying the hazards or risks: This is the first step that needs to be taken in any organization when performing a risk assessment. Doing a thorough examination of the area as well as asking employees for more information on potential risks is essential in preventing injury, death, and loss of company value, whether that be your standing with stakeholders or value of product.
- Defining who is at risk: Defining who will be the most at risk is an important step to be able to identify the correct measures needed to eliminate the risk.
- Analyzing the risks and brainstorming appropriate control measures: The employer is responsible for trying everything they can, within reason, to eliminate or mitigate risks.
- Documenting findings: If the organization has more than five employees, the findings must be documented on paper and filed. The paperwork should show that the employer made a reasonable effort in checking for risks, decided who was affected, dealt with the obvious hazards and risks, the precautions made were reasonable and continued to have low risk for employees, and staff were involved in the risk assessment process.
- Reviewing and updating the assessment as needed: Any significant changes within the facility requires an updated and re-evaluated risk assessment. Some other reasons may include if an employee noticed something new, improvements that still need to be addressed, and if there were any near misses or accidents that were learned from in the new changes made.
Risk Assessment Methods + Tools
There are several different methods and tools that an organization can use when looking to perform a necessary risk assessment. Some of them are risk matrices, decision trees, and the method of Failure Modes and Effects Analysis (FEMA). These are some of the most popular methods that you may see when performing risk assessments as a part of any standard risk management program.
Utilizing a risk matrix means the organization is performing what’s called a qualitative risk analysis. In other words, the risk matrix is used to define the severity of a potential risk by ranking the probability against the potential impact. An employer can choose from three different sized charts; 3x3, 4x4, and 5x5. With the increase in size comes with an increase in detail, for example, a 3x3 matrix is much simpler and sometimes not as useful as a more in depth 4x4 matrix or 5x5 matrix. The knowledge applied to a risk matrix is subjective data which can be anything from a premonition to historical knowledge of risks and consequences.
Decision trees are another option when it comes to decision-making in risk management processes and risk assessments. Decision trees are flowchart-like structures that work on a notation system using nodes. There are decision nodes, chance nodes, and end nodes that each have their own symbol within the chart. Those nodes branch off from theoretical decision paths that an organization can take when weighing the risks of certain actions. This tool can be seen in operations research within decision analysis to identify strategies for reaching objectives within the company’s goals.
Lastly on our list of risk assessment tools is Process FEMA. This technique, known as Process Failure Modes and Effects Analysis is one of the more common renditions of FEMA. It focuses on assessing and improving specific processes within the company’s goals and in turn gives upper management a structured approach to the analyzation of potential failures and the subsequent impact. This is done by using a process map that measures severity, occurrence, and detection aspects which are then scored and rendered into a risk priority number (RPN). This is a good tool for prioritizing risks that need attention.
Overall, with the correct tools and a strong risk management program, assessing risks and having the ability to rid the company of them is essential for companywide success. Hopefully this article was able to give you to a basic understanding of risk assessments and risk management to help you on your way with improving your own risk management program.
- ISO 31000:2018 – Risk Management
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