Risk is a significant part of every business, be it an MNC or an SME. Would you like to reap the rewards without risk being a part of the equation at all? Then that would make your business progression pretty mundane.
Although on the other hand, too much risk can expose your company to liabilities. Hence, finding the perfect balance between leveraging certain risks for revenue growth and mitigating the ones that can truly harm your business is essential.
That is where the Risk Management Framework (RMF) comes into the picture. Integrating an effective RMF will add significant value to the company, allowing you to protect and grow your capital base while finding the perfect balance between reducing risks and taking them on.
Moreover, a particular survey suggests that “risk and compliance” make it to the top of the list of risk categories that 57% of senior executives find challenging to address. Hence, the integration of an RMF, irrespective of the size of your organization, is now a necessity.
So what exactly is this Risk Management Framework, and how will it help your organization scale new heights? Read on to find out!
What is Meant by Risk Management Framework?
A practical RMF framework refers to the organization’s various guidelines or templates to identify risks and then leverage or mitigate them.
Initially developed and designed by US federal agencies, RMF is now being adopted by almost every company in the private sector. In fact, 36% of independent organizations have already adopted a comprehensive risk management framework.
Moreover, a similar study also suggests that 87% of organizations have a siloed risk management system. That means an appropriate RMF must be put in place for it to transform into a function that is uniform organization-wide.
An RMF is especially important for organizations that are a part of the investment sector since they can perform significant risk mitigation and save themselves in a market crash.
So what does this Risk Management Framework comprise of? How is it going to help your organization? Read on to know more!
What are the Various Components of the Risk Management Framework?
Now that you know the basic ideology of a Risk Management Framework, time to delve into its functionality. RMF comprises 5 essential components crucial for its effective implementation and risk mitigation. They are as follows:
1. Risk Identification
The primary step to any risk mitigation effort would be first to identify the risk and define the risk universe. But what is a risk universe? It lists all the risks your organization could possibly be exposed to.
That might include legal risks, compliance risks, political risks, strategic risks, credit risks, etc. Once you have clearly defined the risk universe, the next logical step would be rating these risks according to their severity to the organization.
Accordingly, these risks are further split into core and non-core risks. Now, core risks would be those your company should be willing to take because there is definitely light at the end of the tunnel. By this, we mean that core risks, if handled well, can result in significant revenue growth and push long-term growth.
On the other hand, non-core risks would not offer any value to your organization and should either be minimized or mitigated completely. Gauge the risk universe accurately and segment risks accordingly.
But one thing you mustn’t forget is that risk identification isn’t a one-stop shop. You have to understand that with the volatility of your respective industry, the risks will always keep changing and demanding the same from you. Timely and repeated risk mitigation must be done to avoid issues in the future.
2. Risk Measurement
The step succeeding in risk identification involves quantifying risk, allowing your organization to create an accurate risk profile. Now that the risks are being measured and assessed, you can obtain accurate information about specific or aggregate risk exposure and how it will affect the overall organization.
Some of these risks might offer benefits; others might lead down to a road of losses, with multiple ways and scales leveraged by different organizations to quantify their risks.
Some might simply calculate how much loss the organization might bear in revenue and capital. An example of this is market risks since risk quantification, in this case, generally depends on observed market prices.
In other cases, risk measurement might not be that easy. For instance, any organization in the field of information security will take a much more complex route for risk quantification. Since security breaches are their primary concern, they might as well quantify the magnitude of risk posed by a particular security breach based on the cost of security measures required to fix it.
Another example of a complex risk measurement process would be the measurement of operational risk, which is both science and art at the same time.
3. Risk Mitigation
Now that you have identified and measured your risks, the next step is mitigation planning. In this step, you essentially determine whether the risks are worth mitigating instead of risks that are acceptable and might benefit the company in the long run.
Essentially, this is the step where you segment your risks under the core and non-core categories.
Once you have segregated these risks, next is formulating mitigation strategies to eliminate the non-core ones. That can be done by buying insurance, diversification, hedging with derivatives, selling the liabilities, etc.
4. Risk Reporting and Monitoring
Now that you have mitigated the risks, the next component of RMF entails keeping tabs on the risk level. Risk monitoring and reporting involve re-examining risks to ensure that your leveraged risk mitigation strategies have been effective.
Essentially, this component involves ensuring that risk levels are at an optimum capacity, enough to drive revenue but not enough to jeopardize your organization.
For instance, a financial institution ideally should produce risk reports daily due to the volatile nature of the market, making sure that the risk levels don’t cross the ideal threshold. Organizations in other industries might not need such stringent monitoring, and it can be done repeatedly over fixed intervals.
One last thing to remember is that the risk reports produced must be passed on to the respective risk personnel since they have the authority to adjust various risk exposures.
5. Risk Governance
The final piece of the RMF puzzle, risk governance, essentially relies on various systems and practices to ensure that the risk levels are ideal while ensuring that all employees adhere to its underlying policies.
That can be done by properly defining the role of all employees, assigning authority to concerned individuals, appropriate segregation of duties, the appointment of a board for approval of risk limits, leveraging core risks, and so on.
Steps of Risk Management Framework
Now that you have a comprehensive idea about the core functionality of RMF and its applications in an organization, time to look at the various steps you can leverage to implement it successfully.
The various steps of a practical Risk Management Framework are as follows:
This is the primary stage of RMF adoption, where you have to get your organization ready for an efficient RMF integration. Here risk identification takes place to prepare for the risk universe.
This is where the segmentation of risks takes place. The risks are vetted and categorized based on their intensity. The risks that need immediate attention are given high priority.
This stage involves choosing the right tools and controls you plan on using to mitigate or diminish the identified risks. These controls are system-specific and change in nature as the system is changed. For instance, these controls can be leveraged to adopt monitoring solutions and bring about change in policies to address certain concerns.
This is the stage where the chosen controls and solutions are leveraged to initiate the risk mitigation strategy.
This is the stage where the implemented solutions and controls are thoroughly assessed. Their results are quantified and checked, and it is made sure that they are successfully mitigating risks without adding new ones.
This is the stage where there is executive-level intervention in your overall risk mitigation strategy. It involves vetting the results of mitigation strategies and making sure they comply with your organization’s policies and laws.
This is the phase where deeper insights into the ongoing functioning of the risk mitigation strategies are obtained. It evaluates whether everything is still in place and is functioning as it is supposed to.
1. What constitutes a good Risk Management Framework?
Ans: A good RMF must comprise the following objectives:
- Risk Identification
- Risk Measurement
- Risk Mitigation
- Risk Reporting and Monitoring
- Risk Governance
2. How to improve your Risk Management Framework?
Ans: You can improve on your current RMF by adopting the following practices:
- Prioritize risks
- Automate monitoring of risks
- Make sure the risks are visible
- Increase the involvement of stakeholders in risk discovery
3. Why is the integration of an RMF vital?
Ans: An efficient RMF can offer many benefits, including data management optimization, reputation management, asset protection, etc.
4. Which is the most popular RMF?
Ans: The most popular RMF happens to be the COBIT ERM Framework.
Risk mitigation serves as an integral part of the growth of your business. Offering a plethora of benefits, the currently volatile technological landscape and the constant risk of security breaches demands the successful integration of a Risk Management Framework.
If your business hasn’t hopped on the Risk Management Framework adoption trend yet, it is high time you do so. Leveraging or mitigating said risks is the only way your business will survive.