Types of Risk in Organizations

No matter the type of business, there are always risks that come along, and some are more detrimental than others. When it comes to managing risk, it’s important to know about the different kinds of risks that an organization can face.

  • Economic risk – With every passing day the economy changes as markets shift. It’s important to monitor the market and plan for economic boons and downturns.
  • Financial risk – Money is at the forefront of every organization. Financial risks can also be categorized as internal or external and include unexpected costs, employee turnover, rent increases, taxes, cash flow, and credit.
  • Operational risk – This refers to day-to-day operations and what internal, external, or combination of factors could affect those. Examples include a natural disaster, property damage, server outage, and loss of power.
  • Compliance risk – From the Occupational Safety and Health Administration (OSHA) to the Environmental Protection Agency (EPA) to state and local laws, companies face many regulations they must comply with.
  • Security risk – As more business moves online, it’s important to manage and protect personal data from hacking attempts.
  • Reputation risk – There’s always the risk that an unhappy customer or disgruntled employee can leave a bad review, or that a product fails to meet expectations. These can lead to negative press and even lawsuits and, in the end, hurt an organization’s reputation.
  • Competition risk – Competition is always a risk. Competitors may be offering better solutions for your customers, so it’s important to stay on top of their products and initiatives.
Each of these risks they fall under one of three “knowability” levels.

A known risk is a risk that has been mentioned by a stakeholder or an employee. It could have been mentioned in passing or by an industry expert and should be analyzed and documented.

An unknown risk is one that isn’t known so it is unable to be managed, such as weather or a sudden death.

An unknowable risk is a risk that no person is expected to foresee. Examples include system failures or a market crash.

The Role of HR in Risk Management

HR risk management focuses specifically on the risks that employees pose to the business. This includes poor employee management, poor behavior, hiring, and terminations. The focus is on all employees, from seasonal to C-suite, and it helps HR measure and plan for associated problems.

Compensation and benefits could face financial risk. Hiring could face legal and compliance risk. The workplace could have safety issues and environmental risk.

All of these potential risk areas make it important for HR to have a thorough understanding of how to address and prepare for them as much as possible.

How Poor Risk Management Can Affect Business

When risk is misunderstood, mismanaged, or ignored, there are numerous consequences that can greatly affect business operations.

Projects can become delayed. Unforeseen risks can slow projects down as workers need to analyze them and begin to develop a plan to move forward. This wastes time and could cause a decrease in the project’s overall value.

Not properly planning budgets is a large factor of poor risk management. By not accounting for and identifying probable risks, budgets can be overrun easily.

Customers and shareholders don’t want to be part of something that is seen as high risk. They’ll want information up front to ease their concerns, and information about backup plans and contingencies if things go wrong. If they aren’t given that, they could become unhappy and take their business elsewhere.

Even if you have a plan in place, there is the possibility that the employees won’t buy into it. Not following an established process or using the proper tools will result in a poorly managed situation where risk is involved.

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