The Key to Successful Risk Management Preparing for Internal and External Risks
Preparing for internal and external risks is the key to successful risk management. Learn more about each type of risk and how to identify them here.
Preparing for internal and external risks is the key to successful risk management. Learn more about each type of risk and how to identify them here.
Organizations must follow a structured and proactive approach to ensure successful risk management and prepare for internal and external risks. There is one thing that all businesses have in common, regardless of the type of business you run: risk. The source of risk determines its type, with internal risks originating from within an organization and external risks from external sources. No matter where the risks come from, it’s critical to be aware of them and manage them when you develop your strategy and tactics.
Less than two-thirds of senior finance leaders think their company’s risk planning needs to be fit for the modern world. It is why so many are seeking experts in risk management to handle these dangers. Risk management is a dedicated way of learning about and preparing for any problem that could impact your organization. It separates these into internal and external risks, allowing you to assess how to reduce their consequences. In most regulated industries, this can help with regulation compliance, data security and preservation of client or public trust.
If you do not ensure your preparedness, you may face issues that could end your organization. These could be anything from business disruption to a loss of shareholder confidence or even direct financial losses. This article will elaborate on internal and external risks and how risk management can give you the tools you need to handle them.
Internal business risks are problems your business may face inside the organization. You will find them in areas such as internal systems and processes, employee actions, equipment and devices and finances. They become risks when they might cause significant disruption or affect your business’s financial or reputational health. Examples of such risks might include the following:
Employee misconduct. It would include when workers make mistakes or become negligent, leading to poor product quality. It could also mean that they cause a human resources issue or publicly disparage the company, yielding a reputational hit.
IT security vulnerabilities. If you do not have good enough data protection processes, you may become a data breach victim. It will harm not only your intellectual property but also your reputation and the trust clients have in you to keep their data safe.
Lack of efficient processes. You must audit and improve your processes over time to avoid experiencing delays and increased costs. In the modern world, this is compounded by the possibility of using automation to save time and effort.
Noncompliance with policies and laws. Follow your own organization’s policies or even legal regulations to avoid litigation. Either the government or employees may sue if problems arise related to regulatory expectations.
By not facing these possibilities, you could be impacted by direct financial losses, disruptions to standard workflow, legal consequences and fines, tarnished reputation and client drop-off, investor distrust and lower employee retention. Instead, by actively mitigating these risks, you can prevent a hit to your business. You can use your active efforts to reduce risks in external communications, increasing public trust.
Unlike internal risks, external risks originate in areas outside of a company’s discretion and control. They may relate to changes to laws, a country’s more comprehensive economic conditions, or even natural disasters. While some of the resulting steps a company takes might be internal, such as disaster response, the originating factor is external. These issues are often hard to plan for, as they occur due to factors outside of the company’s control. Still, there are ways to mitigate them. Examples of external risks might include the following:
Technological advances. The fast progress of technology in the modern world means innovations occur that can make a service obsolete. Other refinements may disrupt a business enough to cause ongoing problems or cause new competition to arise.
Environmental changes. Earthquakes, climate change, and storms can impact offices and supply chains. Damage to a country’s physical infrastructure or a region’s internet access could cause significant problems.
Public health issues. As seen recently as 2019, the modern world is not immune to problems caused by infectious diseases. As a government tries to mitigate risk to its citizens and its economy, it may make choices that impact your company.
Widespread economic problems. Recessions or inflation can impact how much people are willing to spend and your worldwide financial performance. At the same time, international conflict or general political trouble could affect your supply chain and your ability to work.
Public change in perception. It can be tough to deal with market demand or customer preferences if they change due to situations outside your control. If your area of business relates to a product or service that receives a bad reputation due to the actions of others, this could reduce your turnover.
It would be best if you detected risks early before they escalate. It empowers you to respond to them and prevent them from worsening. If this occurs early enough, you can even avoid any serious repercussions that might cause problems for your income in the long run.
Mitigations can also help you long-term, as they are rarely a one-time thing. You can continue to have policies and processes that help you no matter how often similar events occur. Creating a risk management strategy starts with defining the objectives of such a process. You need to ensure your goals align with those of the company stakeholders and that you have bought-in from them to take precautionary steps.
When engaged in risk management for your business, you first need to identify where potential problems lie. Conduct a comprehensive risk audit. It will allow you to identify potential areas of weakness in your company and document them for later analysis. After this, it is essential to assess the danger of each potential risk. Look at both how likely it is and how disruptive it would be for each event to occur, then set a priority for the response to each one. This triage method helps you assign resources to the most problematic areas of your business and gives you the most “bang for your buck”.
Once you complete your internal audit and assessment, you must develop risk management policies and procedures. For every potential risk, find where vulnerabilities and weaknesses might lie that could lead to or exacerbate the issue.
Identifying the gap between your current processes and where you need to be to prepare is essential. When you have this list, you can break it out into workable steps and assign responsibility for every area to an individual in the company. As you do this, make sure to document each step-in detail. You will need to communicate these best practices to your workforce, so having clear documentation means this will be easier. If a problem occurs, people need to have the ability to open a document and follow the steps contained within.
Do not leave it as a simple document, though, as creating such a tool is a waste of time if nobody knows about it. Ensure that you engage your workforce in regular training, so they understand the correct use of these protocols. It will guarantee they have everything they need to respond to problems and clear you of liability if the steps are not followed.
As it is harder to predict external risks, you need to be more vigilant to monitor things external to your company. Delegate the responsibility for monitoring news and updates to specific people in your company. Also, train these people to recognize events they need to pay attention to so they can know where to focus. Concerning external issues, the ceiling for specific events’ impact is much higher. As such, try to have a response plan for everything that could cause the most significant disruption to your company. Make sure also to have steps in place if the situation escalates, which will also be out of your control. When something does occur, make sure to have steps in place to continue communicating with suppliers and other stakeholders. It will prevent you from facing bottlenecks as you continue to work. It would help if you also tried to network with regulatory authorities and industry leaders. This way, you can get insights into upcoming changes and have better access to tools to solve any problems that could crop up.
Quantifying your highest exposure risk areas can be a challenging task without the proper tools to assess the likelihood of citations and their potential financial impact. In a world where internal and external risks are ever-present, and the pace of modern business is relentless, exercising caution is crucial. It is essential to be well-prepared for these possibilities to avert disastrous consequences.
Xybion offers a comprehensive suite of solutions spanning risk management, compliance, and various other facets of contemporary business. Among our offerings, the Compliance Risk Predictor stands out as a formidable tool designed to shield your organization from risks and keep you ahead of potential issues. Our Compliance Risk Predictor employs predictive compliance technology and patented real-time monitoring software to furnish actionable insights. It goes beyond mere awareness, understanding compliance status and risks while prioritizing actions for optimal business outcomes. By proactively monitoring and addressing regulatory requirements with AI technology, Compliance Risk Predictor transforms how you identify and manage compliance risks.
To gain insight into potential issues on the horizon and benefit from the industry’s only quantitative tool for measuring and reporting on risk and compliance, book a demo with Xybion today. Let us guide you on how Compliance Risk Predictor can assist you in staying in compliance, ensuring a proactive and strategic approach to risk management in the fast-paced world of modern business.
