Managing a company comes with many responsibilities. To run your business successfully, you have to look over multiple operations simultaneously such as finance, marketing, human resources, technology, equipment, etc. Since a business requires different operations to function smoothly, it is crucial to ensure you have the proper tools to identify, remove, and minimise organisational risks. Risk Management Framework (RMF) provides your business security, efficiency, and effectiveness.
What is Risk Management Framework?
Risks are an inevitable part of every business. Taking risks is like flipping a coin; you will hit the jackpot or miss the mark. With RMF, you find a balance between taking risks, forecast the consequences of taking risks, reduce the chance of operational risks. According to The State of Risk Management Report 2021, globally, cybersecurity is the top risk organisations face. A risk management framework offers an effective method that allows companies to control the security required to protect their business, employees, tools, and operations.
Created by the National Institute of Standards and Technology (NIST) in 2010, RMF’s initial use was to “improve information security, strengthen risk management processes, and encourage reciprocity among federal agencies.” The risk of cyber threats, finances, and legal issues comes with every business, and while you cannot truly get rid of these risks, you can surely minimise them, and that is where RMF comes in. A risk management framework’s guidelines are based on increasing your company’s protection and privacy by enhancing efficiency and reducing limitations.
What are the Five Components of RMF?
A risk management framework consists of five components: Identification, Measurement and Assessment, Mitigation, Reporting and Monitoring, and Governance.
1. Identification: Identifying the risk is the most crucial component of a risk management framework. It is vital to understand the risks a company can face such as litigation, cybersecurity, security, strategies, and systematic risks. Since there are various potential risks, identification allows you to classify those risks according to their risk level, importance, and their effect on your operations. Risks that rank higher are known as core risks, and risks that can be prevented and reduced are called non-core risks.
2. Measurement and Assessment: The second component of RMF is measuring and assessing the risk. Once you have identified the risks, the next step is to measure and observe the magnitude of those risks. Measuring allows you to understand the potential damage risks can bring to your business. Assessing helps you know how risk exposure affects your company in terms of quantitative and non-quantitative damage.
3. Mitigation: Risk mitigation determines your plan of action regarding core and non-core risks. Mitigation requires developing techniques to deal with high-level risks and risks that aren’t immediate threats. The way your company mitigates risks directly affects the future of your business, potential risks, and your risk management guidelines.
4. Reporting and Monitoring: Constant vigilance and monitoring of risks allow you to develop risk management plans accordingly. Having regular reports on the status of potential risks helps you build contingency strategies to ensure the risk is minimised or removed. Constant reporting gives your company reform policies and techniques to reduce the negative impacts of taking risks.
5. Governance: The final component of an RMF is governance. Risk governance ensures all the other components — identification, assessment, mitigation and reporting — have been executed correctly and smoothly. Governing allows you to ensure employees adhere to the prescribed guidelines, identify the risks, assess them, create strategies to eliminate them, and regularly report new potential threats.
What are the Steps of a Risk Management Framework?
A risk management framework follows six main steps:
- Risk Identification: It is impossible to eliminate or reduce risks if you cannot identify them. To identify risks, you need to compile a list of projects that could carry a potential risk with them and affect your operations. You could use your past projects with risks as your reference points to identify other potential threats. Additionally, consult your team and employees to find the root cause of the risk.
- Risk Analysis: Risk analysis requires quantitative and non-quantitative data to determine the effect of a risk on your productivity, finances, and security. Using security and management tools, you can get real-time data, allowing you to look over your project by monitoring the risk.
- Prioritising the Risks: Each risk has a different threat level, and not all risks require the same amount of resources to eliminate them. Prioritising risks helps you allocate the resources according to their urgency.
- Assigning an Owner: An effective way to eliminate any potential risks quickly is by assigning a risk owner in the initial stages of a project. The risk owner monitors and creates plans to minimise the risks.
- Risk Response: Risk management does not prevent risks, as it is nearly impossible for a project to remain risk-free. Instead, an RMF prepares you to handle risks and develop a response strategy that allows you to remove or minimise the risks. Therefore, creating risk contingency strategies is the next step in a risk management framework.
- Monitoring the Risk: The final step of an RMF is monitoring the risk. Regularly updating your software, organising meetings and tracking the progress allow you to identify and look out for new risks. Monitoring helps you identify new threats, giving you the time, planning and resources to tackle them in the initial stages of your project.
How Does Risk Management Framework Benefit a Business?A successful and effective risk management framework allows a business to reduce risks, contain any risk exposure, enhance productivity, and increase profits. With a risk management framework, companies can:
- Protect Operations: An effective RMF identifies the risks and develops strategies that protect your business operations and assets against the identified risks and potential threats.
- Decrease Business Liability: A risk management framework reduces the chances of litigation risks, which improves your company’s authenticity and brand value. It makes your business come off as a lucrative investment opportunity.
- Enhances Growth: A proper RMF will help your company make calculated decisions to increase your business’ growth and give you a better insight to take intelligent risks.
- Stay Ahead of Your Competitors: A risk management framework will allow your company to stay several steps ahead of your competitors by containing extreme losses and producing fruitful results.
A risk management framework is essential for a company’s growth as it helps you take calculated risks. While you cannot run a business without taking risks, risk management allows you to identify, assess, and deal with risks that improve your efficiency, security and productivity.