A Definitive Guide to Proactive Risk Management
By Indeed Editorial Team
Published November 30, 2021
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.
Ensuring that a business or system is operating in the most successful way possible requires effective management and a constant evaluation of practices. Implementing proactive risk management can produce many benefits. If you are interested in the management of business operations, it may benefit you to explore proactive risk management methods and how to implement them. In this article, we define proactive risk management, its importance, how it compares to reactive risk management, and its various methods.
What is proactive risk management?
Proactive risk management is a method of preventing risks by identifying potential challenges and examining the factors that may cause them. This method seeks to recognize conflicts before they appear and establish solutions that lessen the risk. Proactive risk management constantly analyzes and evaluates each factor involved in a business to ensure that there is as little risk as possible.
Related: Risk Management: A Definitive Guide
Why is proactive risk management important?
Proactive risk management is important in helping businesses achieve the following goals:
Lessening the amount of risk that exists within a business ensures the full maximization of time, money and resources. Maximizing the use of these factors leads to an increase in profits by reducing loss and increasing efficiency. Reducing risks and incidents also allows managers and employees to direct more time and energy to subjects and practices that generate profit.
Implementing proactive risk management also improves the overall safety of a business. Identifying procedures that have the potential risk of injury allows for the addition of safety measures before implementation. Evaluating every activity for potential challenges reduces the rate of accidents and ensures a comfortable and safe environment for customers, clients and employees.
Being proactive about correcting risk factors also improves a business' reputation. Businesses that avoid waste and hazards before they occur are more likely to gain the trust and respect of customers and clients. Consumers and business partners place value in knowing that the company they support practices safety and efficiency in handling risks and processes. Avoiding events that could cause public relations problems ensures that stakeholders and customers continue their relationships with a business and are secure in their investments.
Proactive risk management vs. reactive risk management
Both proactive and reactive risk management methods deal with the risk involved in a business, but the two methods have varying components and processes. Here are some of the different elements of proactive vs. reactive risk management and their use:
Proactive vs. reactive
The term proactive means taking action prior to issues or events occurring. Proactive risk management assesses and prevents challenges before they transpire. Maintaining proactive solutions allows for the planning and preparation of a company's response to potential challenges.
The term reactive refers to the action that is taken after an occurrence. Reactive risk management assesses risks and their consequences after they have already taken place and prevents them from repeating. Using a reactive response adds the need to problem-solve promptly to ensure that challenges don't persist or repeat. Reactive methods require a manager to adapt quickly and with little preparation. Many companies may use both proactive and reactive methods when handling risk.
Root cause vs. event
The primary function of proactive risk management is identifying and analyzing the procedures and variables that are the root cause of the potential risks. Finding the components of this cause allows for making changes to the basic operations and preventing further challenges. Addressing the specific cause of one risk may also help in lessening risk in similar areas or processes.
Reactive risk management focuses solely on the details of a past event. It states the factors that led to the event without addressing the previous procedures and causes of the incident. Reactive risk management is specific to the circumstances of each occurrence.
Hypothetical vs. circumstantial
Proactive risk management requires the ability to visualize and predict hypothetical events and variables. Since the procedures being evaluated have not yet been executed, there is no record of the risks that it may cause. Creating solutions that prevent these risks also requires simulating hypothetical scenarios to ensure that the changes are effective.
During reactive risk management, the risk has already occurred. The managers can view the records of the event and the circumstances that allowed it to materialize. Identifying the physical circumstances of the operation that caused the risk can be easier in a reactive capacity. Reactive processes require a less conceptual consideration of future events and a greater analysis of current situations.
Methods of proactive risk management
Here are some common methods of proactive risk management:
Using closed-loop feedback
Proactive risk management typically uses a closed-loop feedback model. A closed-loop model adds customer feedback to developing procedures. A closed-loop analyzes feedback to identify risks and concerns that are faced by customers and clients. The manager can then create solutions that mitigate the risk of a negative customer experience.
A closed-loop model may also calculate and monitor the effectiveness of proactive risk management. This model uses established parameters of acceptable risks to simulate potential scenarios and shows which steps are causing the highest amount of risks. It can also predict the effect of potential changes and solutions.
Related: How To Get Feedback from Customers
Implementing a risk management technology
Companies may use outside sources that monitor risk factors. These are typically artificial intelligence systems that perform vulnerability and security tests to identify breaches or gaps in security. These systems monitor risks associated with system security and technology risks by running constant analysis and suggesting solutions. The automation of this security analysis can increase accuracy and safety and decrease risk.
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