Measuring and quantifying risks are inherent to organizations. They basically fall under risk assessment, which is imperative for businesses that have complex structures and processes.
Risk quantification allows you to analyse the critical nature of risks and allot adequate resources to manage them. Risk management is deeply dependent on risk metrics. Risk management objectives, improvements in risk control, the success or failure of a risk measure can all be figured out through risk metrics.
Risk metric heat maps are created considering certain parameters, which are:
Which risk assessment approach do you choose?
Residual or net risk assessment and inherent or gross risk assessment are the two different risk assessment methods used. Either one or both may be used in an organization depending on how one perceives the business situation.
Net risk assessment is used to evaluate risks that persist even after controls and mitigating measures have been implemented. Gross risk assessment is used to assess risk levels before enforcing treatments and mitigating controls.
Risk assessment best practices suggest that both the approaches have to be combined to develop effective risk assessment programs.
Wondering where to start?
Assessments are performed differently in different organizations.
A few organizations take account of the processes at first, while others focus on strategic risks. The latter method when used as an initial risk driver, works effectively to align processes and operations in line with business objectives. This practice is preferable to tuning organizational strategies based on business functions, which is the model followed in process risk assessment.
So, what is the next step?
You might have a clear perspective of the risk management approaches and established the focal area in your enterprise. There are two components of risk assessment that need enough time and thinking to plan appropriately.
- The control measures carried out have to be monitored to identify defects and drawbacks. It is attained through reviewing and evaluating the effectiveness, design and performance of action plans executed in governance, compliance and risk management in your organizational system.
- Identify the individuals accountable for managing each risk. They are the owners of the risk controls as well.
Time to score…
Risk scoring has changed considerably since the early days. It used to be one-dimensional and risks were ranked depending on criticality.
With risk management evolving, we have learnt to analyse risks and risk controls based on their probability and impact.
There are different styles of scoring risks; an uncomplicated method is to score risks as low, moderate or extreme.
Treat risk events and risk controls individually A risk event is the core focus of risk and control assessment.
Risk causes and consequences can vary in each situation, but risk events remain constant. Build controls to manage risk events instead of administering controls over altering factors.
Similarly, with risk controls, it is better to segregate each control technique and analyse the effects. Assessing an assemblage of controls working towards the same or different objective can be complex. Each control may function at different levels and for different risks. Looking at controls individually helps in generating clearer understanding about their effectiveness.
Author Bio:
Ameera Tabassum is an ACCA Affiliate. She has diversified experience working as Business Process Consultant for an Audit solution company in the Uk. She has over 4 years of experience in ERM risk solutions and as a practicing manager of Business analysts successfully executing several projects in terms of Risk management strategies, ORM Software solutions and Governance risk compliance.