How do I Create a Risk Management Program?

M. Lupica
M. Lupica
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Businessman giving a thumbs-up

Risk management, the process by which various threats to a company are reduced to a manageable level, is important no matter the industry in which a company operates. There are several steps to creating a risk management program that may be boiled down to three main stages. First, the company must identify all possible risks. The second part of developing a risk management program involves assessing those risks and determining the extent of the threat. Last, the company will need to take the appropriate steps toward lowering the various risks they have identified.

The first step in developing a risk management program is to identify all possible sources of harm to the company. A company identifies risks by looking at the context of the company’s assets and determining events that could cause harm to those assets. For example, a company who runs a data storage business has several threats they need to consider. Not only do they have to consider the threat of unauthorized parties accessing the information with ill intent, but depending on the physical location of their servers, they may have to worry about environmental threats as well. If the company stores its information in an area prone to earthquakes, those earthquakes are a threat to the company that may be identified through a risk management program.

The next step in building a risk management program is to assess the identified risks. Risk management assessment is a process by which the company considers the likelihood of the occurrence of a harmful event as well as the extent of the harm that is likely to result. These two factors, considered along with any special circumstances under which the company operates, will give those conducting the risk management program an idea of which threats are the most important to address.

Based on the information reached in the second step of the risk management program, the company may then decide which of the identified risks must be addressed to protect the company from irreparable harm. This process simply involves a cost-benefit analysis whereby the members of the company who control its spending decide which risks to reduce. They make these decisions based on the relative cost of the methods of reducing the risk contrasted with the reasonable expectation of loss based on the likelihood and extent of harm.

Continuing the previous example, the data storage company may increase digital security if the information they store is particularly sensitive since the likelihood of attempted hacking would be heightened. Investing funds in extra security measures outweighs the costliness of leaving the information less-protected. Conversely, a company whose data storage facility is located in a desert is not likely to have to address the risk of a flood, as the cost would likely outweigh the risk given the location.

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