In today's complex regulatory and safety environment, businesses need risk management to survive. Being aware of and planning for risk helps with compliance (which, these days, can include compliance with global standards as well as local ones, even for smaller businesses).
Every business faces risk, a fact highlighted by the pandemic. Another growing risk involves cybersecurity, with data breaches affecting small to medium-sized businesses.
In Utah, businesses in many areas need to worry about the danger of wildfires, which can damage a physical plant or result in employees having to evacuate. Without risk management, these things can cause significant profit loss and even force businesses to close.
What is Risk Management?
Risk management is the process of identifying threats to your capital and earnings and then assessing those threats so you can control them.
A risk management plan identifies the specific risks your business faces and establishes ways to reduce those risks ahead of time. This differs from a disaster recovery plan (which you also need). Risk management is what you do before an unexpected event, while disaster recovery is what you do afterward. However, the knowledge gained from disaster recovery fuels future risk management improvements.
Companies face a number of different types of risks:
- Strategic: Strategic risk is the risk that your company's overall business plan will be rendered outdated quickly and that your company will not adapt.
- Compliance: The risk of non-compliance can lead to fines or even being shut down. It can also result in safety hazards.
- Operational: This is risk that comes out of your internal day-to-day operations, whether caused by natural disasters or employee error.
- Financial: While all risk management is about preserving capital and income, financial risk is more direct.
- Reputational: Your business' reputation is as crucial as its capital. A damaged reputation can cause you to lose customers and hemorrhage talent.
Why is Risk Management Important?
Risk management is ultimately about spending a little bit now to save a lot of money later. A failure of risk management results in substantial costs, regulatory problems, and the potential loss of your company.
Unfortunately, too many companies engage in no, or insufficient, risk management and open themselves to significant costs.
The Cost of Risk
The primary cost of an unexpected event is financial, directly or indirectly. One significant risk involves compliance. Lack of proper compliance can lead to large fines, sanctions against your company, and can even result in somebody going to jail.
Workplace injuries are another huge piece of the cost of risk. While accidents happen, risk management can minimize both the frequency and severity of incidents. Workers' comp pays out when an employee is injured, but insurance premiums then go up.
The best way to reduce injuries is to have a world-class safety program. Safety programs should be designed with input from senior employees and start with a proper safety audit to establish where you might be coming up short.
Failure to manage risk can even result in the forced shutdown of your company. Companies can be shut down for non-compliance or the cost of an incident can push a company into bankruptcy.
What are the Steps in a Risk Management Process?
There are five basic steps in risk management.
- Identify: You need to do a solid audit that allows you to list all of the risks your company faces. These vary by industry, location, and company size.
- Analyze: Each risk needs to be analyzed to establish its severity and scope.
- Evaluate: Then, each risk needs to be ranked and prioritized. Risks that impact the entire company are more important than those that only inconvenience a few employees.
- Treat: Each risk then needs to be contained as much as possible. Some risks can be eliminated, but most need to be mitigated so that their impact and frequency are minimized.
- Monitor and review: Risks that cannot be eliminated need to be monitored. These include market and environmental risks.
Risk management is an ongoing process; new risks need to be identified as they show up and then properly analyzed and evaluated.
Four Ways Utah Companies Can Reduce Risk
There are four basic strategies used to reduce risk in the "treat" and "monitor" phases. They are:
- Avoidance: This means establishing policies and protocols that completely avoid potential risk. However, this can sometimes have the side effect of missing an opportunity.
- Reduction: This is implementing small changes to reduce the impact of a specific risk.
- Sharing: Sharing is spreading out risk as much as possible.
- Retention: This is absorbing the cost of risk completely; that is to say, understanding that the risk is unavoidable and that the loss is small and easy to handle.
Why Outsource Your Risk Management?
Risk management is a lot of work. It also often involves high expertise levels, especially if you have to comply with multiple regulatory levels.
One good solution for small companies is to outsource your risk management to a Professional Employer Organization (PEO). Outsourcing human resources, for example, helps you avoid risks associated with FMLA and ERISA (retirement) compliance. Outsourcing risk management can help save time and money and can even save your business from being shut down.
Utah companies have an opportunity. Outsourcing HR saves a lot of time and money for small businesses. The best way to maximize your ROI is to work with a Professional Employer Organization, which can also mitigate risk by sharing workers' comp and other benefits across a number of companies. To find out more, download our free eBook "What is a PEO?".