For global businesses to execute sound enterprise risk management processes, they must be focused on being proactive – versus merely reactive when it comes to addressing unexpected or unwanted events from impacting the organisation.
According to MetricStream, proactive risk management involves careful analysis of a situation, or assessing processes to determine the potential risks, identifying drivers of risks to understand the root cause, assessing probability and impact to prioritise risks and accordingly preparing a contingency plan.
In simpler terms, proactive risk management is what occurs before a risk becomes a threat.
Reactive risk management does have its place, as humans learn quite well (for the most part) from past events, learning from them to ensure they do not occur again, going forward. Over the pre-Covid years some of these events have been quite large and required systemic changes across the world, most notably the financial crisis of 2008, that sent the world economy on a crash course. From this historic catastrophe, laws and policies were developed to ensure it would never happen again. This is a direct benefit of reactive risk management.
For this article we will focus on how enterprise risk management should become more proactive in treating risk sources before they develop into threats or problems for an organisation. With advancements in risk-based technology and continuous improvement in the risk management discipline, 2021 is the year global risk leaders become more proactive and less reactive. Below are three ways businesses can become more proactive in addressing problems that simply have not occurred yet (but someday will).
Leverage Risk Analytics
Risk analytics is a booming business. The global risk analytics market is projected to increase from $22 billion in 2019 to $54.9 billion by 2027.
Risk analytics allows businesses to integrate data from multiple sources to create a “mission control” view of enterprise risks. Risk management information systems, for example, can collect data from multiple data sources and convert it into valuable insights that promote improved decision quality. Risk analytics also allows businesses to have automated reports pushed to them containing valuable risk management data to support decision making processes.
Have a Contingency
If 2020 taught us anything, it was your business must have a contingency plan.
An unprecedented economic shift sparked by the COVID-19 pandemic took many global businesses into uncertainty territory, forcing changes to survive the storm.
Proactive risk management helps educate senior leaders on what risks the business is focused on and how these could impact the business. These risk management processes allow for contingency plans to be formulated to pivot when things do not go as planned.
Every business should possess a business continuity plan which outlines how the business will stay moving and avoid disruptions to continue servicing customers. Seeing risks before they become problems allows business leaders to formulate backup plans just in case the world again gets tilted on its axis.
Changing the Culture
A sound risk identification and management process, practiced daily, will over time change employee behaviour involving risks.
Once these individual changes reach a certain level, a culture is built where employees are risk-aware and striving to continuously improve decision making processes. Lowered costs and added value for shareholders are two major benefits from a proactive risk management approach.
A more risk-aware culture is agile to change and always sees risks as challenges, and not obstacles to success. A proactive approach to risk management will provide the roadmap to changing mental models involving decision-making with risk in mind.
