Risk Management Process: 5 Crucial Steps [with Examples]

Read it in 15 Mins

Published
27th Jan, 2023
Views
9,859
Risk Management Process: 5 Crucial Steps [with Examples]

Completing a project without any risk and complication is next to impossible. It requires developing project management skills and following standard procedures to eliminate and handle the risk. Sometimes code does not work as expected and creates risky situations.  

The best way to manage any risks is to face them, try to troubleshoot the root cause, and implement the best solution to avoid such risks in the future. Every company has a dedicated team that manages all types of project risks. The team must work proactively and plan strategies to implement during uncertain events. This procedure is called risk management. It will help your project to steer well through the rough phase.  

Some companies still do not know the importance of risk management and how it can help the business to save time and effort for developers and enhance quick delivery.  

Those who have not even heard of risk management and do not know how to implement it must go for Project Management Certification for beginners. Such certifications are prevalent among project managers who deal with all such risks. 

This article will explain the meaning of risk management, how it helps the business, why one should implement it, and the process involved.  

What is Risk Management Process?

Risk management is the collection of procedures, standard rules, and practices that helps the business to minimize and handle risks in different ways based on the situation. The risk situation may vary from business to business and can mitigate in different project areas. So you must prepare or hire a dedicated team to help your business sail in hard times.  

The main concern of risk management is to maintain the business's consistent operation without impacting the entire system. The risk management process involves finding the issue, analyzing it, and finding the solution to prevent the issues from occurring again.  

It would be best if you had a plan that you could execute in that situation. But it is not possible without being prepared for the situation. With proper risk management strategies, teams can handle the situation effectively.  

Different Types of Risks 

Risks are generally categorized into different groups, so it will be easier to troubleshoot them. 

1. Regulatory (local, federal, company-specific) regulations are imposed by the government and must be followed by the company.  

2. Security- such risks are data breaches, impersonation, and unauthorized access. Minimizing security risks will keep your crucial information safe. 

3. Personnel- such risks are related to staff who are not proficient in their work. So make sure to have a cross-skilled workforce for smooth execution of the business processes. 

4. Market- such risks can mitigate globally, affecting many businesses. Any company must be able to work correctly despite being affected. 

5. Financial- such risks are related to credit and debit amounts. It can impact the company's reputation in the market. So be aware of such risks and eliminate them asap. 

Why is Risk Management Process Important?

Every business does its best to keep its business function, but risks are uncertain and can impact anyway. So, businesses have to prepare themselves with proper methods to implement. By learning from mistakes, businesses are improving their methods to minimize risks. They are also getting aware and adapting themselves accordingly. 

Thus, understanding the importance of risk management process has become a necessity for every business to run smoothly. 

  • With risk management practices, you can create policies and procedures per your business requirement to avoid potential risks. 
  • For every business, it is necessary that they understand the nature of the risks and to what extent they can go to impact your business. Thus, with risk management, you can control the damage at all levels within the business. 
  • Risk management helps businesses make confident decisions as they know the scope of risks within their business. 
  • You can prevent your brand reputation in the market with proper risk management strategies. 

Thus, ensure that you take time and make efforts to create a full-proof risk management strategy for your business. Every business must explain the risk management process and what the risk management process includes to their team member. 

Let us now jump to the risk management process with example. 

Examples    

Several examples are there that explain where you can implement risk management. Some very common risk management process example is mentioned below. 

  • Risk avoidance 

Suppose an investor has invested in a company and is trying to minimize the risk associated with that company. If the company is facing a huge loss and they are consistently selling its stocks. You can avoid investing in that company. It is called abiding risks. 

  • Customer's credit risk management 

A retail company could have risks due to external factors. One of those factors is customer credit which can degrade the company's reputation. If a customer's credit score is not good, they can stop that customer's extension on invoices to reduce the risk. 

  • Company-specific procedures. 

Considering a manufacturing company that has decided to create a new product. Before that, they conduct a risk analysis to understand if they can handle the risk associated with that product. In that way, the company can take preventive and proactive measures accordingly. 

  • Compliance risks 

For any company, following the imposed regulation is necessary. Local authorities or the Govt can impose those regulations. Companies should take care of those regulations and place monitors to ensure the regulations are being followed. To implement this, you need a proper risk management system. 

  • Safety risks 

Every operation within the company needs to be analyzed to check for the scope of risks. There should be frequent audit needs to be carried out to check for any human error within the process. If you have a proper risk management system, you can handle all the processes quickly and with proper reporting. 

Need for Risk Management Process in Project Management

A risk management system is a must for every business with a small scope for risk. It helps the company to streamline the process to avoid potential risks. This way, the entire company runs on a system, and a single deviation from that can be handled easily. 

Not only this, a risk management system can help any company in the following ways reflecting the importance of project risk management. 

  • Reduce additional costs- taking proactive actions to reduce risks can save you a lot of money. For example, if you install security software on your system, that will cost you less as compared to removing the virus afterward. 
  • Saves you time- a risk management system will save you time dealing with unexpected issues. If you already have preventive measures and have worked proactively, you can take less time to deal with risks. 
  • Protects from security issues- with risk management, you can safeguard your client's or crucial personal data. If implemented, prepare risk management procedures to secure your data, such as encryption, two-factor authentication, and others. 
  • A risk management system helps the company adhere to regulations imposed by different organizations. Companies do not have to check the regulations implementations manually, as the risk management system will manage everything. 
  • Risk management is not a single-person task; everyone within a company has to be involved. Thus, create a robust environment where everyone collaborates on a single topic with the single motivation of eliminating risks. 

What Are the Benefits of a Risk Management Process?

Risk can occur anywhere and anytime without giving an intimation. With a reliable and detailed risk management plan and strategies, you can easily control risks from mitigating to other fields. With a risk management system, companies can take better and more confident decisions that will help them to scale. 

Below are the benefits a business can leverage using a risk management system. 

1. Effortless risk identification and response. 

Identification is crucial as it can save your business from degrading. A risk management system helps quickly identify the risk at an early stage. Once you catch the risk, you can work on it and eliminate it before it spreads and damages the system. 

2. Optimize the risk strategies. 

The right risk management system can help managers and others curate effective risk management strategies. It helps everyone to work together to stop the risk as soon as possible. 

3. Optimize risk reporting and communication. 

You can improve the risk reporting method with a systemized risk management system. You will get detailed information about the risk, where it can occur, and how it can impact the system. It also enhances communication as it sends out a notification to the appropriate team, instantly marking the priority of the risk. The team can collaborate to eliminate risk. 

4. Improves the company's reputation. 

Using a risk management system helps businesses make confident decisions that also impact the customers connected to them. It increases customer trust, resulting in a good reputation in the market. For example, if a company is known for its secure payment system, its customers will feel safe adding their details to their websites or apps. 

There are eternal benefits of including a risk management system in your business.  

5 Steps of Risk Management Process

Managing risk involves several steps. If any step goes wrong, it will be challenging to debug the risk. With proactive risk assessment, you can handle the risk efficiently. Below are the simple and practiced steps of the risk management process that any business can carry out effortlessly for the smooth execution of their business. 

1. Identify the risk   

The first step in the risk management process is to effectively identify risks, and for that, you need to create a plan with a list of all potential risks that can impact the system. So bring out the risk event list and take proactive measures.  

You can identify risk in various ways, such as. 

  • Discuss with clients and stakeholders to understand what type of risks they have seen, their potential, and what actions they have taken to eliminate them. Also, if you do not find anything relevant, then you must ask them if they have not missed any point for the project risk management that can lead to risks. 
  • You need to brainstorm and find out potential risks. This understanding grows better with experience working on different projects. If you do not come up with all possible events, you must consider your seniors, who might have an idea about risks. 
  • Assumptions open several options. Make sure you document all the assumptions made regarding the potential risks and ratify them. Without documenting it, you might end up with more risks. So make sure you consider every possible event for risk. 
  • Identifying risk is not a single-person task; every team member is involved. Everyone has their checklist of risks, and then they should have an open discussion to understand the broader scope of risks. 
  • Run a risk assessment matrix that will help the team categorize risks based on their severity so you can handle them as per their priority. 

After you identify the risks, you must maintain a risk register template where you store all the project risks. This register will help you with the following questions.  

  • Likelihood of this risk event. 
  • Probability of occurrence 
  • Impact and severity  
  • Risk response plan? 
  • Priority level 
  • Who owns this risk?

Identify the risk

2. Analyze the risk    

Now that you have created a detailed list of all potential risks that may occur, it would help if you analyzed their likelihood, severity, and response plan. If your project is more complex, discuss the plan with top management and stakeholders, so you do not miss any point.  

To get the severity, you must analyze how severe an impact can be on the system due to a particular risk. Create a response plan for every risk that you have mentioned. Well, the response plan does not matter if you delay implementing it.  

Below is the risk management template for Asana that will help you to plan risk management process.

Analyze the risk

Source - Create a risk management plan template

Prioritize  

The team also sets the priority. They need to ask themselves to understand how risk can impact your system. Consider the risk register, go through it in detail and understand which risk has more probability of occurring and what potential damage they can do to understand the risk control process better. 

The primary attention must be given to those risks that are more probable to occur and has high severity. So, you need to monitor the entire system and respond to crucial risks at the topmost.  

Below is the severity of risks in Asana.

Prioritize

You can even use color codes to depict the severity so that anyone within the team can start working accordingly. 

3. Assign     

Well, this step can be optional if you want. But, make sure to make it a practice to assign for better teamwork. Make sure that you assign a specific person for different categories of risk. So whenever a risk occurs, that particular person will be notified and can assign the task to any of their team members to work on.  

The dedicated person will monitor and create documentation that includes all the processes and steps taken to solve the risk. 

You can see in the below image that each risk has an associated assignee and priority.

Assign

4. Monitor    

Make sure you are keeping a tap on your entire process and documenting each step for better identification and analysis of the risk. Make sure to send regular updates to the team and stakeholders, so everyone will know what is happening within the project. Please ensure the risk managers monitor their risk events for any red flags, so you will be ready to work instantly. Also, keep an eye on the risk register to check if there is any update. 

To monitor the risk, you must have consistent and frequent communications.  

5. Respond     

Always remember that risk management is about preventing risks. Suppose any of your assumed risks occur; you must be ready with a quick response. This is where you can take the help of your risk register and risk management plan. 

Different companies might have different ways of eliminating the same risk, so make sure that you keep monitoring different companies' forums and online sites where you can find the easiest way to respond even faster. Risk management in project management is a practiced methodology. 

This is the primary task for managers. But if a manager has a Project Management Professional (PMP) Certification, they know the better ways to deal with risks. 

The Basics of The Risk Management Process 

There are some crucial basic things that are common to consider while using risk management systems.  

  • Make sure that you implement risk accountability for each team member. It will help in incorporating risk-based thinking. This way, everyone will keep the tap on the process and find the risk areas. 
  • Make sure the top management is constantly looped in on such critical issues for better stakeholder engagement. Also, it is always better to take experienced advice in some cases. 
  • Make sure that you conduct regular or frequent risk assessments to keep the risk profile updated. This will help the top management to make confident decisions without impacting the company’s profile. 
  • Always remember to prioritize the risks sot hat attention will be given to those risks that are highly accountable for damaging the system. 

Conclusion

Every project is prone to risks. No project is free from risks. Thus, every business in the market must have a risk management system that caters to all types of risks within the business. An early stage of planning can help a business to stop the risk from mitigating and impact the entire business and its reputation in the market.  

So, managing such risks needs high-end skills. If you are a beginner, you must go for KnowledgeHut Project Management Certification for beginners to better understand how to deal with such critical risks.   

Frequently Asked Questions (FAQs)

1. What are the four ways to manage risk?

There are four significant ways that help you to manage the risks more professionally, irrespective of the type of industry you are in, which include the following steps involved in risk management process.  

  • Avoid occurrence of the crucial risk. 
  • Reduce or mitigate the occurred risk. 
  • Transfer the risk. 
  • Accept risk. 

2. What are the five principles of risk assessment?

Below are primary principles that must be taken care of while working with the risk management process. 

  • Identify the risks. 
  • What areas are at risk? 
  • Evaluate the risks and document possible actions to be taken.  
  • Document each step and implement them for testing purposes.  
  • Keep a tap on your risk assessment and update it timely. 

3. What does the risk management process entail?

Risk management consists of three parts: risk assessment and analysis, risk evaluation, and treatment. 

4. How crucial is the risk management process for small IT projects?

Risk can impact any section of your business. So make sure you cover each section under the risk management system and prepare a plan for each. Even though you are a small IT company, risk can also impact you. Also, their reputation is more at stake, so make sure to have a risk management system as your priority. the success of whole process of risk management depends on how you take proactive steps.

Profile

Aashiya Mittal

Author

Aashiya has worked as a freelancer for multiple online platforms and clients across the globe. She has almost 4 years of experience in content creation and is known to deliver quality content. She is versed in SEO and relies heavily on her research capabilities.

Looking for the top courses in project management?

Avail your free 1:1 mentorship session.

Select
Your Message (Optional)