Integrating Risk Management in Strategic Planning

After the global financial crisis that the world suffered in 2008, companies from different industries considered adopting enterprise risk management strategies to mitigate risks that could threaten their survival.

There is a wide range of risks that can threaten a company’s success and hinder its growth if not mitigated and dealt with proactively; including financial risks, vulnerable cybersecurity, political changes, reputation threats, health crises, and many others.

In order to avoid the potential losses of enterprise risks and minimize their impact, organizations will need to formulate an effective risk management framework that gives decision-makers access to key risk information and contributes to selecting a robust strategy to deal with enterprise risks. Some companies haven’t realized yet that there is no way to establish an effective strategy to prevent business risks without integrating risk management in strategic planning tools to better define the potential risks and set measurable key risk indicators.

In this article, we’ll introduce the most successful ways in which Risk Management can be integrated into strategic planning to minimize enterprise risks.

Key Steps to Integrate Risk Management in Strategic Planning

Integrating risk management in strategic planning helps companies predict and take proactive actions toward potential risks. Here is how to start and what to start with:

Phase 1: Prior risk strategy formulation

The first phase includes identifying objectives and major business risks, measuring risks’ impact and probability, and objectives decomposition into KRIs.

Phase 2: Post-risk strategy formulation

The second phase is to consider risk assessment, choose the best risk mitigation strategy, monitor the planning tools, and analyze the insights your key risk indicators provide for the current and potential future risks.

Now let’s visit those in more detail:

Phase 1: Prior risk strategy formulation

In order to set the most successful strategy, risk managers will first need to give a definition to their risk management strategy and analyze the business threats associated with their industry and business.

Step 1: Risks and Objectives Identification

In this early stage, companies need to identify all possible risks that could inherently impact company operations and consequently, avoid or minimize unfavorable events before they arise. Risk identification is an ongoing process that needs to be repeated frequently. Companies also need to identify their desired objectives to prepare a clear and tailored risk management framework with achievable goals.

Step 2: Risks Measurement

Companies that start by defining their potential risks can proceed with the measurement process is through the quantification of impact intensities to their business and the likelihood of the risk’s occurrence.

Risks can be assessed on various levels, including the organization or department level, and for projects, individual activities, or the strategic impact of specific risks. To figure out their uncertainties, risk managers need to set assumptions to perform further risk analysis using financial modeling, budget modeling, and business planning.

All possible factors should be considered in the business assumptions, for example, the expected rate of returns, selling rate over a period of time, costs of external financing, operational costs, or any other factors associated with the business.

Step 3: Objectives Decomposition to Tactical KRIs

This is a vital step to be done by risk managers; to make high-level objectives achievable and measurable, it’s important to break them down into smaller components, tactical Key Risk Indicators “KRIs”.

Key Risk Indicators predict harmful events and the potential risks associated with them. By doing so, organizations can reduce or terminate future risks before threatening company viability and continuity. Developing effective KRIs requires a thorough understanding of the business objectives and possible events that might hurdle the achievement of those objectives.

Phase 2: Post-Risk Strategy Formulation

Now that the risks and objectives are identified and assessed, the second step is to periodically monitor, assess, and review each strategic risk during the strategic plan timeline. Throughout the process, companies should be able to identify risks with a negative impact on growth and achievement.

Step 1: Strategic Risks Assessment

In order to facilitate the risk analysis process and identification, it’s important to categorize risks by strategic topics, such as reputation, budget, economics, competition, etc. The categorization is changeable based on the industry or business nature.

Risk assessment also includes identifying potential events that can harm organizations and the possible scenarios that could occur as a result of those events.

Step 2: Strategic Risk Mitigation

After discussing the objectives, identifying the risks, and finishing the assessment process, senior management will need to discuss and establish the suggested mitigation strategies in cooperation with risk managers.

Treatments for risks with negative impact vary based on the type of risk, for example, some risks can be tolerated, treated, or terminated, while others can be transferred completely or partially to third parties. Companies can also choose to only deal with some risks when they occur and prepare the company for their impact.

Step 3: Observe and review of strategic risks

Observing the strategic risks after setting business objectives and KRIs allows the company to identify conditions that could lead to a threatening event. The company’s internal and external risks are prone to changing as the environment changes constantly. Thus, risks should be reviewed and monitored periodically.

Aside from the Key Risk Indicators, other factors should be considered to prevent any type of risks, similar factors include analysis of trends, global changes, or political instability.

Conclusion

Due to the constant changes in the world of information technology, economics, and politics, companies can be exposed to a wide range of threats and risks.

After suffering from financial loss, reputational threats, and many other forms of risks, more companies have developed proactive and resilient plans to meet the demands of evolving threats. Especially after the COVID-19 pandemic, organizations started to integrate risk management into strategic planning to reduce or terminate risks with high impact and focus on business objectives and achievement.