7 Tips for Effective Strategic Risk Management (With Steps)
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Strategic risk management is the process in which professionals plan how to address situations and events that may affect a company's business goals. Companies use this process to help promote the success of their new endeavors. If you work in the business field, it's helpful for you to understand this concept. In this article, we define strategic risk management and provide examples, steps and tips to help you learn how to use it effectively.
What is strategic risk management?
Strategic management is the process of identifying decisions and factors that may harm a business and finding a solution to balance that risk. This process also includes prioritizing business goals by deciding if a possible negative outcome outweighs the possible reward. For example, a car dealership may issue loans to consumers even though there's a risk that the consumer doesn't repay the loan. Still, it's a valid strategic risk for the business model because it allows the company to expand its customer base.
To understand strategic risk, you might consider these other examples:
Releasing a new product
Starting a partnership with a different company
Upgrading company software
Promoting a social cause
Allowing for consumers to use payment plans
Strategic risk management process
To determine whether possible outcomes might influence certain business decisions, professionals use this strategic risk process:
Set a clear goal
To begin the strategic risk management process, it's important to set a clear goal for the company and the process. To do this, consider the company's values and mission statement and the desired outcome for the specific business decision in which you're evaluating. For example, a company's goal may be to appeal to a new target audience by releasing a new product. By setting this specific goal, you can evaluate the decision's success based on the extent to which the company reaches this goal.
Perform an analysis
Gather information on the risk for analysis. Consider using risk analysis software and involve both internal and external professionals in the research. This can help to consider all aspects of the risk and analyze the possible outcomes. Using automation tools can help collect and organize data at a faster rate, so you might want to consider integrating the use of these tools in your analysis.
Create a strategy
Using the research from your analysis, create a strategy to manage the risk that addresses the company's goal. Create an outline and a plan for how to overcome, mitigate and navigate the risk. For example, when issuing loans, banks often mitigate the risk of clients not repaying the loans by creating payment contracts and collection services. It's important to apply your initial analysis to your strategy, as it can help you consider all factors that the risk may affect.
Implement the strategy
Implement the strategy and ensure each professional understands the procedures within your plan. This can help ensure that you can control the outcome of the risk as much as possible, though, by nature, risks often involve unforeseen circumstances. Making sure that each professional understands the company's goal and strategy allows companies to handle a factor of the risk.
Having a plan for various outcomes of the risk is also helpful because it allows professionals to feel better prepared for those circumstances. It can also ensure that the company has time to react effectively in situations when a risk doesn't go as planned. For example, if a company releases a new product that doesn't sell well, they may inform the marketing team to create more effective advertisements.
Evaluate its effectivity
Observe and evaluate the outcome of the risk strategy the company implements. This can help you decide how well the outcome matches the company's goals. It can also allow you to notice factors of the risk management strategy that functions efficiently. This approach ensures that you can analyze the plan and refine the strategy where necessary, improving the possible outcome.
7 tips for effective strategic risk management
To help you perform the strategic risk management process, you might consider these tips:
1. Communicate business goals
Communicate business goals with your colleagues to ensure each professional on the team understands what outcome the company is working toward achieving. This can help them adjust their actions accordingly. Having clear communication throughout the implementation of the risk management strategy can help ensure the plan operates as expected. To ensure great communication, consider hosting a meeting, creating a group message or frequently updating other professionals on the progress of the risk management plan.
2. Agree on analysis methods
Before you complete the planning stage of the strategic risk management process, agree on which types of analysis to use when evaluating its success. This can help you and your colleagues set more specific goals and reach clearer analysis results. For example, if the risk is updating the company's computer systems, the company may face the outcome that professionals won't work as efficiently until they're comfortable with the new software.
In this case, it might be helpful to agree on which outcomes indicate the success of the strategy, such as a timeframe in which professionals become comfortable with the software or a certain quota of productivity. Establishing standard analysis methods can help ensure you can perform clear and effective analysis later in the strategic risk management process.
3. Acknowledge risks
Acknowledge the possible outcomes of the risk the company is taking. This can help you create your strategy and prepare for success. Understanding the risks and incorporating your acknowledgment of them into the strategy can help create more specific steps within your plan and ensure that you prepare for multiple outcomes. This can help the company react quickly to any issue that may arise. This can also allow you to consider if the risks for the particular decision are too high or the possible positive outcome is worth the risk.
4. Consider the company's resources
Consider the company's resources when performing a risk analysis. This can help you determine how much risk the company can handle. Examine the budget, employee capability and timeframe of the company to ensure that the company has adequate resources to complete the strategic risk management plan. This can also help when brainstorming ways to address risk. For example, an obstacle the company may face when taking a risk is its employee's capabilities, so it can commit to implementing better training programs.
5. Refine the strategy
When evaluating the progress of the strategic risk management plan, consider ways to refine the strategy. Think about outcomes or factors the plan doesn't address or ways you could improve the plan's performance. This may help to ensure better outcomes.
6. Understand your current status
To implement a risk management plan and accurately forecast the risk, it's helpful to have a strong understanding of the company's current status. This can include its resources, goals, performance and other indicative aspects. Consider performing a SWOT analysis to gain a better understanding of the company's position, as this type of analysis can help identify weaknesses and strengths.
7. Use risk management software and tools
Using risk management software and tools can help you perform a more efficient risk analysis. Consider automating repetitive or administrative tasks when gathering data, as this can save on time and effort. You might also want to research templates to help you perform more thorough analyses. Risk management software most commonly helps companies during the analysis step of the risk management process, but as this step is often the most extensive, it's beneficial to use software and other tools.
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