What is business risk management?

To become and remain successful, all organizations must manage the risks they will encounter every day. Modern businesses tend to implement management systems to govern one or more critical aspects of their operations. These are often built on the requirements of management system standards such as ISO 9001 (Quality), ISO 14001 (Environment), ISO 45001 (Occupational Health and Safety), ISO/IEC 27001 (Information Security) and ISO 22301 (Business Continuity). All the ISO standards include requirements that support effective business risk management, helping companies identify, assess, and manage their operational and strategic risks.

Business risk management - definition

Business risk management is a structured, disciplined approach that organizations use to identify, assess and manage risks. It is sometimes confused with enterprise risk management, but the two approaches are slightly different. Both provide a framework for risk management, which typically includes risk identification, risk analysis, risk evaluation, risk treatment, and the monitoring and review of the risk management process.

However, enterprise risk management (ERM) is a comprehensive, sometimes technology-enabled, approach that looks at risk from a strategic, company-wide perspective, while business risk management tends to be more focused on immediate, operational risks within specific areas of the business.

Business risk management: why is it important?

The importance of business risk management cannot be overstated, especially in the context of today's dynamic and unpredictable business landscape. Developing a solid business risk management plan is now a critical component of a robust strategy for several reasons, including the fact that many contracts and insurance agreements require solid evidence of good risk management practice.

Business risk management is also important for several other reasons:

Provides a structured approach to identifying and assessing risks, supporting informed decision-making and contributing to a business risk management plan.
Ensures that business decisions are made with a clear understanding of potential risks and their impact on organizational objectives.
Focuses on risks that directly affect day-to-day operations, covering specific business units or projects, and highlighting company risk examples.
Allows organizations to identify potential risks early and implement measures to protect physical and intellectual assets, supporting business continuity risk preparedness.
Safeguards an organization’s reputation by preventing incidents that could lead to negative publicity.
Supports compliance with complex regulatory requirements, helping avoid legal penalties, fines, or other regulatory actions, and ensuring alignment with risk management insurance standards.
Builds stakeholder confidence, including investors, customers, and employees, by demonstrating a commitment to effective company risk management.
Enhances investment opportunities, customer loyalty, and employee satisfaction through demonstrated risk awareness.
Minimizes the potential for significant losses and operational disruptions, promoting a stable and sustainable path to growth and profitability.

In addition, risk management is a requirement of ISO and other scheme owners and must be implemented by companies seeking third-party certification. ISO has also developed the ISO 31000 Risk management – Guidelines. It is a complementary standard that provides principles, a framework and process for managing risk. Although not a certifiable standard, it provides detailed guidance and can be used to compare one’s risk management practices with an internationally recognized benchmark. Companies can further strengthen their expertise and credibility by pursuing business management certifications offered by DNV.

Business risks: types and examples

The categorization of business risks into several types helps organizations to systematically approach risk management by understanding the unique challenges and potential impacts associated with each type. These groups also provide clear business risk examples that illustrate how different threats can affect operations.

Strategic Risks

Can affect the organization's ability to achieve its strategic objectives. Stem from changes in the market environment, technological advancements, shifts in consumer preferences or competitive pressures, for example. A company might face strategic risk if a new competitor enters the market, offering disruptive technology that renders its products or services obsolete.

Operational risks

Risks related to the day-to-day operations of an organization. Can involve supply chain disruptions, system failures, human error or events disrupting business processes. For example, if a factory fire impacts a critical supplier, this may lead to a shortage of key components.

Compliance Risks

Associated with the need to comply with laws, regulations and standards. Non-compliance can result in legal penalties, financial forfeiture and damage to reputation. Introduction of new data protection laws may require changes to how a company manages and protects customer information.

Reputational Risks

Can damage an organization's reputation and public image, often resulting from negative public opinion, media coverage or customer dissatisfaction. A social media scandal involving a company's product could lead to a boycott or loss of customer trust.

Business risk management strategies

Having identified and analyzed the risks likely to be encountered, businesses must decide how they will respond to them. Because business risk management is generally considered to be risk-averse, organizations typically focus on strategies that reduce exposure. Common approaches include the following:

Risk avoidance involves taking steps to avoid a risk altogether even if this may prevent the business from gaining benefits.
Risk reduction aims to reduce the likelihood or impact of a risk.
Risk sharing is where the burden of a risk is shared with other parties, such as through partnerships or joint ventures.
Risk transfer involves transferring the risk to another party, typically through insurance or outsourcing.
Risk acceptance is when the cost of avoiding, reducing or transferring a risk may outweigh the potential impact. This decision is often made for risks that are unlikely to occur or have a minimal impact on the organization's objectives.

Each of these strategies plays a vital role in strengthening an organization’s overall company risk management framework. The choice of strategy will depend on the specific risk, the organization's risk appetite, and the potential impact on its objectives. By employing a combination of these strategies, organizations can create a robust defense against the myriads of risks they face in the business world.