Strategic planning and risk management can sometimes feel like overwhelming business practices. How do we identify and plan for risk? There are ways to organize a strategy for the many “what ifs.” But first, internal audit departments, working closely with leadership and other key stakeholders, must define precisely what risk means for their organizations.
Defining strategic risk
A business’ strategic risk refers to the threats that could prevent it from achieving its current and future strategies, objectives and goals. Evaluating your strategic risk is critical to ensuring success and longevity in your industry.
Internal risks are decisions that a business makes internally that could have a considerable impact on its performance and outcomes. Examples of internal risks include marketing choices, communication methods, technological advances, sales protocols and other operational processes.
A company tends to have some control over internal risks since they usually develop them within a business strategy. However, unplanned obstacles can also occur, such as a manufacturing or technical breakdown, inadequate management and labor shortages, to name a few.
Alternatively, external risks are factors that exist outside the business. These risks are generally beyond a business’s control and predominantly include aspects of the purchasing climate within which they provide their products or services.
In an environment with a declining economy, unexpected technological advancements, unanticipated competition and unfavorable consumer behaviors, among other elements, a business could face significant potential risk.
What is Strategic Risk Management (SRM)?
Strategic risk can disrupt a business in manners that range from minor roadblocks to all-out collapse. While some threats are impossible to foresee, there are ways to stay proactive and in control of your company regarding strategic risk.
Strategic Risk Management (SRM) involves identifying risks and consequences, developing strategies to lessen their impacts, and implementing those plans for the company’s benefit.
As a business discipline, SRM is exhaustive and ever-evolving. The aspects contributing to a comprehensive SRM plan must be dynamic to keep a company relevant, stable and prosperous.
The significance of SRM
A business that fails to implement an SRM plan exposes itself to catastrophic and often avoidable damage. A company might stay afloat following a preventable event. However, it might harm its reputation within its consumer base, cause hesitation amongst potential customers and make its employees feel less than confident in the company’s future.
The practice of SRM has become a hallmark of top-performing companies. The American Productivity & Quality Center’s (APQC) 2022 Enterprise Risk Survey states that organizations that perform in the 75th percentile devote 75 percent of their time to activities designed to help mitigate strategic risk.
If you need more than the above statistics to convince you of the direct relationship between business success and SRM, consider the following: that same survey by the APQC shows that corporations resting in the bottom 25 percent dedicate only 20 percent of their efforts to SRM.
Suffice it to say spending time on SRM is a commitment businesses cannot afford to overlook. However, when you consider the dizzying amount of types of risks that can impact your organization, SRM can feel like an overwhelming practice.
Breaking down the strategic risk assessment process
A practical approach to SRM requires action from internal auditors, company staff and your stakeholders to minimize risk and maximize success. This approach involves the following steps:
- Collect your data. Compiling information from numerous data points is a crucial initial practice that requires much planning and forethought. Take the time to define your business strategy, strategic objectives, key performance indicators, target audience, competition and purchasing climate.
Contemplate both financial risk and operational risk. Gathering this data will take a good chunk of time, but its importance cannot be overstated. The more data points you have to glean information, the more robust your final result will be.
- Prompt staff dialogue sessions. The idea behind this step is perspective. You want to approach your SRM plan from a multitude of angles to evaluate as many different scenarios as possible. Gather your staff members and initiate conversations that start with “what if.”
Rather than keep these sessions arranged by departments, shake things up and get staff from different departments together. Encourage stream-of-consciousness discussions to get their creative juices flowing.
Finally, create a list of all the scenarios they come up with, and do not leave any ideas out. You want as long a list as possible to capture all conceivable “what ifs.”
- Regard the needs of your stakeholders. Internal auditors and other staff will have a specific goal regarding your company’s strategic risk and how to mitigate it. Even conducting inter-departmental dialogue sessions will only give you so many perspectives.
Therefore, it is also beneficial to have input from customers, suppliers, partners, investors, community members and any other group that would have interest in your business’s success.
Strategic Risk Management best practices to follow
Devising a list of possible risk scenarios is incredibly beneficial. But auditors need solid numbers behind their ideas to make them less abstract and more tangible. Develop key risk indicators (KRIs) for your business to gain quantitative metrics and flesh out your strategic decisions. You can determine your KRIs by calculating if the possibility of each scenario, combined with the outcome, will exceed the risk culture within your organization.
KRIs are helpful because they not only help auditors create an SRM plan, they help you take calculated risks as well. After all, not all risks are bad. Taking risks is how many businesses get ahead of the competition and gain significant advantages. With a substantial and evolving set of KRIs, you can put math on your side and make your risks advantageous and appropriate for your company.
Finally, develop action plans for each risk scenario with the intentional use of your KRIs. These step-by-step guides can help you navigate rough waters if you encounter any of the events for which you have planned. You will have a measure of control over each situation when things seem complicated, and your stakeholders will feel confident with you at the helm.
Avoid obstacles to success with Caseware’s Internal Audit solution
Do you need help developing your SRM plan? Partner with Caseware today to see our range of strategic risk management solutions. We can help you guide through the process of SRM to help you drive your business forward with confidence.