Operating a business has always involved risks, but the modern world presents more complex and interconnected threats than ever before. From viral pandemics to climate change, cybercrime to political conflicts, organizations today face a diverse array of dangers that can interrupt operations, damage assets and destroy value.
Effective risk management has become crucial for organizational resilience and survival. By identifying key risks and implementing mitigating strategies across people, processes and technology, companies can become more agile, adaptable and crisis-ready.
This comprehensive guide provides an overview of risk management while exploring six major risk domains demanding attention right now. For each, you’ll find insights into the risk along with tangible, research-backed strategies your organization can act on.
An Introduction to Risk Management
Risk management is the practice of identifying potential threats, assessing their likelihood and potential impact, and developing strategies to control, mitigate and respond to them. The goal is to minimize downside risks while capitalizing on upside opportunities.
According to Deloitte‘s 2022 Global Risk Management Survey, the top risks occupying executive attention today include:
- Cyber risks including data breaches, IT outages and ransomware
- Regulatory changes and compliance requirements
- Economic conditions like inflation, volatility and supply chain issues
- Operational/infrastructure disruptions and resilience
- Environmental issues and climate change
Effective risk management requires both a bird‘s-eye and ground-level view. Leadership must take a strategic approach to prioritizing risk focus areas and resource allocation. At the same time, cross-functional collaboration is key to provide comprehensive insights into day-to-day operations.
With proper risk assessment and planning, companies can not only mitigate downside outcomes, but also capitalize on opportunities for value creation. The following sections explore key risk areas and strategies to master them.
1. Natural Disasters
Natural disasters like earthquakes, hurricanes, floods and wildfires are increasing in frequency and severity due to climate change. The physical impacts and business interruptions can wreak havoc on organizations.
According to FEMA, 40-60% of small businesses never reopen after a disaster. And for those that do, over 90% fail within a year unless they can resume operations within 5 days.
Image: Earthquake risk zones in the United States. Source: USGS
To build resilience to natural disasters:
-
Purchase insurance covering property damage, inventory losses and business interruptions. Ensure adequate coverage limits.
-
Assess locations using tools like FEMA and USGS hazard maps. Factor risks into site selection.
-
Harden infrastructure through structural bracing, flood barriers, fireproofing, and other measures.
-
Create contingency plans detailing emergency response and long-term recovery procedures. Test them annually.
-
Implement early warning systems linked to emergency services to provide alerts of impending threats.
-
Digitize operations and establish work-from-home capabilities to maintain continuity if facilities are damaged.
-
Diversify suppliers across geographies to mitigate regional disruptions.
-
Increase inventories of critical materials to withstand supply chain turmoil.
With climate models projecting increased extreme weather, organizations must make natural disaster preparedness core to their risk strategy.
2. Cyber Threats
Cyber risks also continue to grow in scale and sophistication. According to Accenture, cyberattacks increased by 31% in 2021 compared to 2020. Data breaches, network disruptions and ransomware can cripple operations and cause major financial damage.
The impacts go far beyond immediate costs like ransom payments and data recovery. Downstream consequences include:
- Lost income due to outages
- Fines and legal liabilities
- Reputational harm and loss of customers‘ trust
- Stock value decline
Image: The costs, both short and long term, of a successful cyber attack. Source: AIMultiple
Steps to bolster cybersecurity and manage risks include:
-
Obtain cyber insurance covering extortion payments, network damage, data loss, business interruption and liability costs.
-
Implement security best practices like multifactor authentication, network segmentation, system monitoring, and staff security training.
-
Conduct vulnerability assessments to identify and remediate security gaps.
-
Adopt a zero-trust model to dynamically verify all users and devices before granting access. Utilize technologies like ZTNA, SD-WAN and SWG.
-
Develop an incident response plan detailing roles, reporting procedures, forensic support retention, communications protocols and system recovery. Test it annually.
With cyber criminals growing more sophisticated, ongoing vigilance and adaptation is key to managing cyber risks.
3. Supply Chain Disruption
Global supply chains continue to face unprecedented turmoil and delays from pandemics, climate disasters, geopolitical conflicts and more.
These fulfillment lags leave businesses unable to meet customer demand or production requirements. Out-of-stocks and line stoppages cripple revenue and strain customer relationships.
UPS reports that supply chain disruptions cost large enterprises an average of $184 million in lost revenue annually. And half of small businesses say supply issues are negatively impacting operations.
Strategies to enhance supply chain resilience include:
-
Purchase insurance policies like contingent business interruption and supply chain disruption coverage to offset financial losses.
-
Diversify suppliers so no single vendor failure can halt operations. Balance cost efficiency with resilience.
-
Increase safety stock levels of critical components to maintain production through short delays.
-
Improve supply chain transparency through track-and-trace technology, supply chain control towers and partnering with suppliers.
-
Perform stress tests modeling demand spikes, production halts, shipping delays and other turmoil. Identify weak points.
-
Establish long-term contracts with force majeure clauses to add flexibility for unavoidable delays.
With volatility the new normal, supply chain risk management must become a competitive advantage.
4. Pandemics
The COVID-19 pandemic provides a sobering case study on the massive disruptions a viral outbreak can unleash, both on public health and business operations.
Absenteeism, remote work mandates, facility closures and safety procedures strain continuity. Healthcare costs and employment lawsuits also mount.
According to MetLife‘s 2021 US Employee Benefit Trends Study, 56% of employers experienced increased employee health benefit costs due to COVID, averaging 14%.
To strengthen pandemic readiness:
-
Allow remote work wherever viable to minimize virus transmission.
-
Equip on-site staff with masks, sanitizer, barriers and updated ventilation systems.
-
Survey workers to identify health vulnerabilities and make accommodations if possible.
-
Develop contingency plans detailing procedures under varying operating capacities.
-
Cross-train employees to fill essential roles in case of absences.
-
Digitize operations via cloud platforms, e-commerce and automation to reduce on-site needs.
-
Track government mandates and adjust protocols to maintain compliance.
While the future course of COVID-19 remains uncertain, organizations must use lessons learned to enhance operational flexibility and emergency preparedness.
5. Sustainability Demands
Societal attention on environmental issues like climate change and plastics pollution is driving pressure for companies to adopt sustainable practices that reduce ecological impacts.
Governments are also enacting stricter regulations on issues like carbon emissions and wastefulness. NGO campaigns and public sentiment demanding corporate social responsibility are intensifying.
Failing to take meaningful climate action or demonstrate environmental stewardship brings reputation and regulatory risks that can hurt customer and investor relations, trigger lawsuits, and decrease valuation.
To get ahead of the sustainability imperative:
-
Measure and report on metrics like emissions, energy usage, water consumption and waste.
-
Set and make progress on goals for emission reductions, renewable energy use, recycled content and other KPIs.
-
Align strategies and operations with circular economy principles like reduce, reuse, refurbish, recycle.
-
Engage stakeholders through thorough ESG disclosures and communications on improvement efforts.
-
Perform product life cycle assessments to identify eco-design opportunities.
-
Partner with supply chain to improve environmental practices across the value chain.
Environmental performance is becoming pivotal to competitive advantage. Leaders get ahead of the curve to manage risks and find value.
6. Insurance Risks
On the flip side, providing risk protection to other companies also comes with hazards for insurers. Climate change, natural disasters, financial market swings and catastrophes like viral outbreaks or wars can wreak havoc on insurance companies‘ underwriting models.
Major widespread losses beyond anticipated levels lead to ballooning claims obligations that overwhelm premium revenue. Insurers‘ income statements, balance sheets and solvency take a hit.
To keep risks to themselves in check, insurers can:
-
Refine underwriting risk models using technologies like AI and machine learning to sharpen actuarial accuracy.
-
Diversify insurance pools across industries, geographies and risk factors to minimize correlated losses.
-
Purchase reinsurance to transfer a portion of liability to other providers.
-
Partner with insurtech firms to enhance underwriting, claims and customer experiences through technology.
-
Offer usage-based coverage enabled by IoT devices to base premiums on real-time monitored risk levels.
Just like their clients, insurers must recognize changing risk landscapes and adapt through technology, analytics and innovation.
Looking Ahead
This overview of key organizational risk domains and management strategies provides an actionable blueprint to start strengthening operational resilience. While risks cannot be eliminated, their likelihood and impact can be reduced through preparation, technology adoption and vigilant monitoring of the business environment.
As conditions continue evolving at an accelerated pace, risk management must become a competitive advantage rather than afterthought. Companies that invest in identifying and mitigating risks today will be rewarded with the agility and durability to successfully ride out whatever storms tomorrow brings.
