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Risk Management

By: Margaret Rouse
| Last updated: January 18, 2023

What Does Risk Management Mean?

Risk management is the process of identifying, assessing, and prioritizing risks to an organization's capital and earnings and taking steps to minimize, monitor and control the impact of those risks.

The goal of risk management is to balance risk with reward by minimizing the negative impact of risks on an organization's financial performance and reputation, while also maximizing the potential opportunities that may arise from taking risks.

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Techopedia Explains Risk Management

Risk management involves a number of activities, including identifying potential risks, assessing the likelihood of a particular risk occurring, assessing its potential impact and implementing strategies to manage the risk.

Why is Risk Management Important?

Risk management is important because it helps organizations operate more effectively and efficiently, while also protecting their assets, earnings and reputation. In addition to identifying and governing potential risks that could lead to financial loss, risk management supports:

  • Compliance: Many industries are subject to strict regulations. Organizations are able to comply with regulations with greater ease when they proactively identify and manage potential compliance risks.

  • Reputation management: Organizations can help preserve their reputation by identifying and managing risks that could lead to reputational damage.

  • Decision-making: Organizations can make better decisions when they have a clear understanding of the potential risks vs. benefits associated with different options.

  • Research and Development: Proactive risk management can also help organizations to identify potential business opportunities by understanding the risks associated with different actions.

  • Continuity: Effective risk management can help an organization continue to operate and survive during a crisis by identifying and mitigating risks that could lead to the failure of the company.

How is AI Changing Risk Management?

AI is changing risk management by providing new tools and techniques for identifying, assessing, and mitigating risks. It allows organizations to analyze large amounts of data and identify patterns and trends that can indicate potential risks.

AI-powered risk management solutions can also be used to automate and streamline risk assessment processes, making them faster and more accurate. Additionally, AI can be used to develop predictive models that can help organizations anticipate and prepare for potential risks in the future.

Unfortunately, the use of AI can also introduce new risks, including:

  • Bias: AI systems can perpetuate and even amplify existing biases in the data they are trained on, which can lead to inaccurate and unfair decisions.

  • Security: AI systems are vulnerable to cyber attacks that could disrupt operations or compromise proprietary or personally identifiable data.

  • Job displacement: As AI systems become more capable of replacing human workers, the risk of job loss increases for certain occupations.

  • Lack of explainability: Complex AI systems can be difficult for humans to understand and interpret, which raises the risk that nobody will be able to explain an AI system's decisions.

  • Dependence: If an organization becomes too reliant on AI systems, it raises the risk of fostering a culture where there is a lack of accountability, which in turn can make recovery difficulty in the event the system fails.

  • Misuse: AI systems are powerful and can be used for harmful purposes. As AI applications become easier to develop and deploy, it raises the risk of them being used to conduct malicious activities such as cyberattacks and disinformation campaigns

Risk Management Frameworks

A risk management framework is a set of guidelines and procedures for identifying, assessing and prioritizing risks, and for implementing risk management plans and controls.

A risk assessment framework provides organizations with a systematic approach for dealing with risk in a consistent and repeatable way. The ultimate goal of a risk management framework is to help organizations make informed decisions that balance risk with opportunity. Popular risk management frameworks include:

ISO 31000
ISO 31000 provides guidelines and general principles for initiating, implementing, maintaining and improving risk management. It helps organizations to:

  • Understand the context in which an organization operates and identify risks that could impact objectives.
  • Communicate and consult with stakeholders to establish a common understanding of risks and risk management.
  • Implement appropriate options for identifying and managing risk appetite.
  • Monitor and review the effectiveness of risk management activities and make any necessary adjustments.
  • Continuously improve risk management with a repeating cycle of risk assessment, treatment, monitoring and review.

COSO
The Committee of Sponsoring Organizations of the Treadway Commission provides a framework for using internal controls to manage risk. The COSO framework helps organizations to:

  • Identify the objectives of the organization and the related risks that could impact those objectives.
  • Assess the likelihood and potential impact of identified risks.
  • Implement controls to manage risks to an acceptable level.
  • Monitor and evaluate the effectiveness of the controls and the overall risk management process.

NIST Cybersecurity Framework
The National Institute of Standards and Technology Cybersecurity Framework (CSF) framework was developed by the U.S. government to help organizations manage cybersecurity risks. The CSF helps organizations to:

  • Understand their cybersecurity risks by identifying which assets they need to protect most, what threats they are facing and which vulnerabilities could be exploited.
  • Prioritize their cybersecurity initiatives by assessing the likelihood and potential impact of different types of cyber threats.
  • Implement controls to manage cyber risks to an acceptable level.
  • Continuously monitor the effectiveness of their cybersecurity controls and evaluate their overall cybersecurity risk management process.

COBIT
The Control Objectives for Information and related Technology framework provides guidance and best practices for IT governance and management. COBIT helps organizations to:

  • Understand what IT-related risks could impact an organization's overall business objectives.
  • Assess the likelihood and potential impact of identified risks.
  • Implement controls to manage risks to an acceptable level.
  • Continuously improve the IT risk management process.

ITIL
The Information Technology Infrastructure Library framework provides guidance and best practices for managing risks related to IT services. ITIL helps organizations to:

  • Understand the IT-related risks that could impact the delivery and management of IT services.
  • Assess the likelihood and potential impact of identified risks.
  • Implement controls to manage risks to an acceptable level.
  • Continuously improve the IT service risk management process.

PMBOK
The Project Management Body of Knowledge helps organizations manage risks related to project management. PMBOK helps organizations to:

  • Identify what project-related risks could impact the success of the project.
  • Assess the likelihood and potential impact of identified risks.
  • Implement controls to manage risks to an acceptable level.
  • Continuously improve the project risk management process.

Six Sigma
The Six Sigma framework uses statistical analysis to help organizations identify potential sources of risk and develop strategies to reduce or eliminate them. Six Sigma is often used to help organizations identify and mitigate risks related to quality and safety, as well as compliance.

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CybersecurityData ManagementRisk ManagementIT Business AlignmentArtificial Intelligence

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