Risk Assessment Process- 6 Steps to Follow
Hospitalizations, equipment repairs, and work stoppage add up to thousands of dollars of lost revenue each year. All of these unforeseen events and errors are why a risk assessment process is vital for any organization.
With meticulous preparation and risk management, organizations can protect their employees from harm and shield their operations from compliance problems and unnecessary expenses.
What Is a Risk Assessment?
Risk assessment encompasses the overall process of identifying the hazards and risk factors in an organization and implementing safety management practices. Hazards describe processes and situations that can be harmful to employees or operations, while a risk is the possibility of a hazard causing harm.
It is also essential to determine the likelihood of such a hazard, as well as the potential severity of the occurrence. Using this information, businesses can create a plan of action to prevent the danger posed by the hazard or control the risk when the threat is unavoidable.
One of the main goals of the risk assessment process is to maintain workplace safety and compliance. Due to the changing government laws and regulations, organizations should be vigilant and up to date when setting the criteria for their risk assessment plan.
Main objectives of a risk assessment include-
- Increase awareness of potential hazards and risks that could cause harm
- Create a budget for risk mitigation
- Ensure compliance with all legal requirements
- Prevent workplace injuries and implement a control measure
- Produce analyses of potential threats and evaluate risk
Risk Assessment Process - 6 Steps
The specifics within a risk assessment process will vary depending on the industry of the organization, as well as the risk being analyzed. However, there are 6 general steps businesses can follow to ensure their assessments are foolproof.
1. Identify the Organization's Risks
Define what the company considers to be a risk. Generally, risks include any events that negatively influence a company's ability to reach its business objectives, such as natural disasters and third-party vendor violations.
2. Create a Risk Library or Knowledge Base
With the risk identified, businesses can begin to compile this information in an easily accessible knowledge base. This risk library breaks up potential threats into separate categories and serves as the framework for assessing risks. The knowledge-based should contain standardized names and terms, as well as the agreed-upon definitions and descriptions.
Potential categories include-
- Operational Risks
- Market Risks
- Strategic Risks
- Insurance Risks
3. Delegate Responsibility & Determine the Right Risk Owners
With a proper risk database or library, it's easier to delegate responsibility and assign a decision maker or owner to monitor and manage each risk. As owners, they have to assess the threats, identify associated controls, and implement and maintain such controls to their area of responsibility.
This step is the whole risk assessment process on a micro level - a person or group is responsible for a specific risk to ensure that it is given proper attention and addressed in a timely and efficient manner. Through this process, feedback for each risk is communicated quicker, as risk owners can report breaches as they occur.
It's possible to designate many owners for an individual risk, primarily if it affects multiple departments in the organization. For example, companies can designate risk owners from human resources, business operations, and finance for business continuity during a global pandemic.
4. Identify the Controls to Mitigate and Reduce Risks
Collaborate with specific risk owners to identify what controls are currently in place to reduce or mitigate potential threats. Ask questions such as, When was the most recent business impact analysis conducted? Is there a recovery strategy?
Just as the previous step identified risk owners, it's also important to assign a responsible party for each control. This can be assigned as a functional responsibility for a department or task force.
5. Carefully Assess the Risk Potential and Impact
Before proceeding to the next step, it is crucial to understand the organization's risk tolerance level or the evaluation of the tradeoff between the risks and returns. The goal of this step is to determine if the business is operating within the determined risk appetite and if it should accept, reject, or reduce the risk in question. To do this, companies need to assess the likelihood of a certain threat, as well as its estimated financial impact.
Collaborate with designated risk owners to consider the following aspects-
- Likelihood - Determine the likelihood of a risk occurring after risk controls and mitigation efforts have been implemented. Depending on the availability of information and confidence in a particular approach, the evaluation can either be quantitative or qualitative.
- Financial Impact - Consider the extent of damage or impact on a business' finances if the risk should occur, taking into consideration the effectiveness of mitigation strategies.
6. Revisit and Review Annually
By this stage, businesses should have the following-
- Established risk libraries and risk owners
- Clear mitigation controls
- Evaluation of risk likelihood and its financial impact
- Business Impact Analysis- Guide to Uncovering Risks in an Organization
- Risk Assessment Process- 6 Steps to Follow
- Risk Mitigation Plan- 5 Strategies to Consider
- Creating Business Resilience- 4 Things to Remember
- The 3 Components of Reputational Risk Management
- Business Recovery Plan- Checklist for Small Businesses
- 7 Types of Business Risks and How to Counteract Them