Try as we might, there really is no way to have a completely risk-free business.
Risk, as it applies to business, is defined by Investopedia as anything that could potentially lower profits, threaten the ability to reach financial goals, or in the worst cases, lead to failure. The causes of risk are wide-ranging and might include anything from socio-political situations, competitor activity, or changing customer expectations.
While it's impossible to conduct business completely risk free, risk mitigation begins by understanding where there could be gaps in your organization. Read on to learn how to conduct a risk assessment, define the seven types of risk, and mitigate their effects without draining on company time and resources.
How to conduct a risk assessment
A risk assessment is the identification, assessment, and prioritization of your risk. This means looking at your assets, people, and IT; understanding weaknesses where they are exposed; and identifying threats that could exploit those vulnerabilities. The goal of risk assessment is to uncover the information necessary to reduce the risk of potentially damaging events in the future.
Which risks are greatest for your company will depend on the specifics of your business and industry. That’s why it’s vital to regularly conduct risk assessments. “In our experience,” notes Lizzie Whetstone, director of customer success at Strike Graph, “companies are usually only conducting a risk assessment when looking to implement various compliance frameworks.” At Strike Graph, we advocate for being proactive in your risk mitigation efforts, which we’ll dig into later.
In the meantime, let’s discuss some of the different types of risk that might be exposed during an assessment.
7 types of risk
What is economic risk?
Economic risk refers to the amount of risk your organization is at due to shifts in macroeconomic forces. This includes everything from inflation or policy changes to interest rates or even employment levels.
Depending on your operating geography, these forces may be local, regional, national or even global.
What is legal or compliance risk?
Legal or compliance risk refers to any situation where an organization’s actions might violate state, local, or federal laws or regulations. Such violations might be due to data security breaches, product liability, or illegal actions taken by employees.
Compliance risk management involves identifying potential risks before they occur. For example, if a company has a new product line, it should immediately consider potential compliance frameworks that might apply. From there, your team should take steps to understand what those requirements are and how to meet them.
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What is security and fraud risk?
Fraud or security risk relates to any event where persons internal or external to the organization cause harm through deliberate deception. This might include embezzlement, theft, or other loss of material or reputation.
The most common cases of fraud risk these days are data breaches by a hacker infiltrating a server, sending a phishing email, or using other malicious tactics. Verizon’s 2021 Data Breach Investigations Report (DBIR) noted that “82% of breaches involved the Human Element, including Social Attacks, Errors and Misuse.” That means the best way to combat these sorts of data breaches involves consistent, continuous training of your employees against the most common tactics.
What is financial risk?
Also sometimes known as downside risk, financial risk is any potential loss of money or other assets. A common type of financial risk is market risk, which occurs when the value of an asset drops because investors' expectations about future returns differ. Another type that might occur involves currency fluctuation.
For instance, if your business is heavily invested by way of a foreign currency that is fluctuating wildly due to out-of-control inflation, you might mitigate the risk by figuring out a way to transition over to a more stable currency. Dealing with financial risk involves a multi-fold approach: minimizing debt, maximizing cash flow, and diversifying your client-base.
What is reputation risk?
Reputation risk is the risk that people will lose confidence in your brand or product. If customers believe that your company has acted dishonestly or irresponsibly, it can cause irreparable harm to your organization’s brand in the market.
Reputation risk could be the result of deliberate action by an organization, but one of the more common causes, especially lately, is from data breaches. There were 52 million data breaches reported in Q2 2022 alone, says Statista. Data breaches are a surefire way to break trust in the public eye. Security compliance, meanwhile, is a way to protect data and build trust before it is lost.
What is operational risk?
Operational risk involves anything that could put a halt to business-as-usual. This can include everything from a natural disaster, like a hurricane taking a huge swath of your operations offline, to many key employees being out sick and unable to contribute their expertise. The best way to manage operational risk is to have a business continuity plan (BCP) in place for all of the most likely events that could strike your organization (and maybe even a few that are less likely but still possible). This way, you’ll already have a plan in place should something devastating occur.
What is competitive risk?
Competitive risk refers to the potential loss of customers due to competition. It's also known as market share risk because it's related to how much of the market you control. No matter how popular your product or service, technology and consumer expectations change over time, and in order to reduce competitive risk, you must be always looking to maintain your competitive edge.
Invest in setting a strong security posture now.
There’s an old aphorism that “the best time to plant a tree was 100 years ago, and the second best time is today.”
Organizations that focus on security as early as possible can avoid running into problems down the road as their footprint and headcount expand. Providing reassurance that your customer, partner, and vendor information is safe within your technological infrastructure also builds trust and helps drive revenue growth.
Managing many of these types of risks can be done by fulfilling the requirements of one or more compliance frameworks that are available today such as SOC 2, ISO 27001, or others.