Organisations encounter a variety of risks that can have a substantial impact on its operations and overall success. Aligning Risk Management strategy with organisational goals is imperative for effectively mitigating these potential threats and achieving sustainable growth objectives. This approach, known as Strategic Risk Management, not only contributes to the organisation’s capacity to identify and manage risks but also to capitalise on hidden growth opportunities due to increase in competitive position.
Strategic risk harms the organisation’s ability to achieve its strategic objectives. Yet, the concept of Strategic Risk Management allows an organisation to move from the “defensive” and towards an “offensive” position, with regards to risk. Focus is always inherently on the downside of risk and therefore, how to minimise its impact by prioritising resources to resolve the most significant risks and supporting key objectives. But to pursue growth aspects, businesses must take on more risks and pursue new products development, market channels, customer segments, and re-engineer their business models.
The key to managing strategic risks is knowing how to address and respond to them by embracing change, with thinking more systematically. Then, a new view of the relationship between “risk” v. “reward” emerges and organisations begin to visualise that creative Risk Management (along with a sound business model) provides progressive insights – the right mind-set, the use of the countermeasures to manage their risks, and evaluation of the right risk / reward spot for them.
What are the 12-Key elements in the Strategic Risk Management Framework?
The Strategic Risk Management Framework contains your complete vision for the direction of your organisation. An inclusive process that references the organisation’s strengths, processes, technologies, customers, resources, reasons for past successes, and much more to mitigate risks and losses caused by internal or external forces.
The framework creates a shared organisational language for strategic thinking, planning, and execution of deliverable objectives. It provides clarity (and prioritises) for your Executive Management Team to broaden their decision-making when creating budgets, isolating new projects, choosing annual initiatives, and developing Action Plans.
The Strategic Risk Management Framework is a step-by-step approach and encompasses the following twelve (12) steps:
1. Understand your current business position and capabilities
With any implementation of a Risk Management Plan and to accurately forecast the risk, it is crucial to have a strong understanding of the current organisation’s status. While conducting this step, use an established strategy framework to provide segmented structure to the activity and assistance with planning the strategy.
SWOT Analysis
Then, consider performing a SWOT Analysis (Strengths, Weaknesses, Opportunities, and Threats) to obtain a better understanding of the organisation’s position. This type of analysis can help identify strengths, weaknesses, strengthen your vulnerabilities and turn them into opportunities, and mitigate threats you face within your market.
2. Define your business strategy and goals
This area is where you clearly outline your business strategy, objectives, and goals. Many businesses fail to integrate risk, acknowledge risk, or plan countermeasures when defining their business goals. In this stage, it is crucial that you outline the types of risks that can threaten your organisation.
This critical step establishes a solid foundation for integrating Risk Management with your business strategy. Without undertaking this initial preparation, the Risk Assessment will only result in a list of your potential risks and without showing why they matter or how they should be prioritised.
When evaluating the progress of the Strategic Risk Management Plan, ensure that you consider alternative ways to refine and bolster the strategy. By thinking about additional outcomes or factors the plan does not address or diverse ways you could improve the plan’s performance, this may lead to better outcomes.
Balanced Scorecard (BSC)
Another strategy performance management tool is known as a Balanced Scorecard (BSC). This provides the basis for a well-structured report used to keep track of the execution of activities by staff and to monitor the consequences arising from these actions. It also provides more accurate insights into the state of your business by overseeing your organisation from four (4) perspectives – financial, customer, internal process, and learning / growth.
3. Communicate your business goals and objectives
Clear and regular communication throughout the implementation of the Risk Management strategy can help ensure the successful integration of the plan. By communicating business goals with your employees and to ensure each member understands what outcome the organisation is working toward achieving, this can help them adjust their actions accordingly.
It is an initiative-taking approach with keeping the Communication Plan and the collaborative language consistent with the end goal, with sharing frequent updates on the progress of the Risk Management Plan.
4. Acknowledge risks to help deliver better outcomes
Acknowledging the possible outcomes of risks and the direction the organisation is taking, this can help you create your strategy model and prepare for the possibility of multiple outcomes. With understanding the risks and incorporating your acknowledgment of their existence into the strategy, this enables the creation of more specific steps (within your Strategy Plan) and ensure that its progression leads to success.
Notwithstanding, this foresight helps organisations to react quickly to any issues that may arise. This assists with consideration if the risks for a particular decision are too high or the possible positive outcome is worth the risk involved.
5. Identify risks that can impact operational productivity, performance, and growth
The next step is to gather data about the strategic risks that could drive variability in enterprise performance or hinder the organisation from achieving its goals. These factors alone may not be as apparent as other factors, since risks are unknown situations that can affect variability in your KPIs and their performance.
Examples of these risks could be Executive Management turnover or unsuccessful M&As or financial challenges or the emergence of new competitors. However, other common ways to identify strategic risks are:
- Interviews with key Executives and Senior Managers
- Analysis of financial reports and investor presentations
- Reports from internal Risk Compliance and external auditors
- Surveys of audit compliance or safety personnel
6. Create, validate, and execute your Strategic Risk profile
Risk and Compliance personnel will assess the identified risks and then prepare a strategic risk profile. The level of detail in the profile depends on the risk culture of the organisation and the requirement for risk-related communications.
The strategic risk profile should clearly communicate to key stakeholders, ideally via Heat Maps or a Risk Assessment Matrix to determine:
- The top strategic risks.
- The potential severity of each risk.
- The expected probability of each risk.
- The Risk Assessment Matrix helps record risk details and when combined with a Risk Ranking (importance) helps score potential risks based on the above parameters.
Your Executive Management Team and Executive Board members should validate the strategic risk profile, which the Strategic Risk Management team should then refine and finalise delivery.
7. Consider your organisation’s resources v. risk tolerance
Consideration must be determined with business resources when performing a Risk Analysis. This can help you determine how much risk the company can manage during the execution phase and when brainstorming ways to address risk. Examine your project budget, milestone(s), employee capability, and scheduled timeframe to ensure that the organisation has adequate resources to complete the Strategic Risk Management Plan.
8. Establish Key Performance Indicators (KPIs) to measure performance and results
Key Performance Indicators (KPIs) are crucial to assess whether the SRM program is working and whether the organisation can meet the objectives of its Strategic Risk Management policies and strategies. In hindsight, KPIs metrics and tangible measures help monitor the program’s progress, provide performance oversight, assists with resource allocation, and explores risk improvement opportunities.
Examples of Key Performance Indicators (KPIs) include the following:
- Number and frequency of risks identified.
- Improvement in risk severity or frequency.
- Number of risks that have not been identified and specifically the reasons (why?).
- Cost of Risk Management.
9. Identify Key Risk Indicators (KRIs) to gauge business tolerance to obstacles
Key Performance Indicators (KPIs) measure the historical performance of the Strategic Risk Management Program. However, Key Risk Indicators (KRIs) are forward-looking indicators that provide an early signal of your increasing risk exposure.
Key Risk Indicators (KRIs) help organisations to anticipate emerging risks and assess the potential impact on their strategic initiatives. But together, KPIs and KRIs enable organisations to understand the past and future impact of risk events on business strategies.
10. Continually monitor your KPIs, KRIs, and their internal processes to chart historical progress
Your organisation’s ability to manage and mitigate strategic risks depends on regular risk assessments and monitoring. The aim is to stay on track and adapt to ensure you achieve your objectives. That is why Risk and Compliance personnel must continually monitor results, KPIs and KRIs, and then selectively amend Strategic Risk Management processes and controls (as required).
- Are problems derived from risks being resolved fast enough?
- Are target customers’ needs being addressed within an appropriate timeframe?
- Are all essential Risk Management Programs, processes, and contingency measures in place?
11. Implement Risk Management software (SaaS) and productivity tools
To help perform a more efficient risk analysis, utilise Risk Management software and productivity tools to automate and simplify processes. The consideration of automating repetitive or administrative tasks or research Risk Analysis ‘templates’ (think Discovery Phase) when gathering risk data, as this saves on time and effort for more thorough analyses.
The most extensive steps in the Risk Management process are the Risk Analysis and Risk Assessment phases. This is where Risk Management software and other tools are the most beneficial.
12. Develop, communicate, execute, and implement your Strategic Risk Management Action Plan
A detailed Action Plan is vital to implement the actions and internal controls required to mitigate strategic risk. This plan must be shared with key stakeholders, employees, and Senior Management to:
- Promote an understanding of risks and business impact.
- Enable Risk Management Teams to focus on critical risks, priorities, and their significance to business performance.
- Streamline Risk Management Programs to deliver efficient processes.
- Build accountability and responsibility into the Strategic Risk Management Program.
- Enhance the risk culture by collaboration with key stakeholder and cross-functionally throughout the organisation.
Summary
Businesses that fail to regularly review and revise strategy represents a significant risk to their operational model. There is simply no better time than right now to evaluate the tools and processes used to leverage and manage your strategic risk!
Strategic risk opportunities can create a positive momentum that drives your organisation to achieve better results and outcomes. Monitoring, evaluating, and modifying the Risk Management strategy enables your organisation to adapt and capitalise on potential growth opportunities. When aligned with the development of Strategic Risk Management processes and capabilities, it provides a solid foundation for improving the overall Risk Management and compliance governance.
Strategic Risk Management requires perseverance and leadership skills. C-Suite Executives, Executive Management Teams and Corporate Boards must challenge themselves and their organisations to escalate their strategic risk learning curve. By taking a disciplined and systematic approach to achieve organisational objectives and maintain a competitive advantage, it is more important than ever to – implement a solid Risk Management strategy that integrates with strategic planning and supports change to your organisational culture.
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