What is risk identification? Organizations must first identify the sources of the risks, which includes identifying potential sources of information, data, research, and reports that can assist risk owners in identifying their relevant and applicable risk sources. This enables organizations to categorize their risks to analyze the effect and likelihood of the risks.
What Is Risk Identification?
Internal audit reports, regulator inspection reports, historical loss data, financial information, customer complaints data, news database, recorded hazard events, penalty data, etc., are examples of risk sources. The organization structures its risk identification process around these sources, and all departments and process owners understand these sources to identify their related risks.
New, emerging, and changing risks can either arise from a change in business objectives. For example, the entity adopts a new strategy supported by business objectives or amends an existing business objective); develop from a change in a business context for a better changes in consumer preferences for environmentally friendly or organic products that have potentially adverse impacts on the sales of the company’s products); or pertain to a change in a business context that may not have applied to the entity previously for instance, a change in regulations that results in new obligations to the entity).
They may also have been previously unknown such as the discovery of susceptibility for corrosion in raw materials used in the company’s manufacturing operations; or were previously identified but have since been altered due to a change in the business context, risk appetite, or supporting assumptions. For example, a positive increase in the expected sales forecasts affecting production capacity.
Emerging risks emerge as the business context shifts, and they can potentially influence the entity’s risk profile in the future. It should be noted that emergent risks may not be sufficiently understood enough to effectively identify and assess them from the outset, necessitating more frequent identification. Organizations should also disclose new information about developing risks as they arise. Identifying new and emerging risks and changes in existing risks allows the organization to plan for the future, allowing them time to analyze the possible severity of the risks and capitalize on these developments. This could allow the organization to anticipate the risk response or, if necessary, revise strategy and business objectives.
Some risks may remain unknown; therefore, the company would not consider during this risk identification. These are usually associated with changes in the business situation. For example, competitors’ future actions or intentions are frequently unclear; however, they may constitute new threats to the entity’s performance.
Organizations aim to identify the risks that are likely to interrupt operations and endanger the reasonable expectation of accomplishing strategic and business goals. These risks reflect a major shift in the risk profile and might be particular occurrences or developing conditions. Examples of such risks include: emerging technology, this being advances in technology that may affect the relevance and longevity of existing products and services.
Big Data And Data Analytics
Expanding the role of big data and data analytics, this being how organizations can effectively and efficiently access, transform, and analyze large volumes of structured and unstructured data sources; depleting natural resources, such as the diminishing availability and increasing cost of natural resources that affect the supply, demand, and location for products and services; the rise of virtual entities that influence the supply, demand, and distribution channels of traditional market structures
The mobility of workforces, where mobile and remote workforces that introduce new activities to the day-to-day operations of an entity; and labor shortages, which concerns The challenges of securing labor with the skills and levels of education required by entities to support performance.
Discovering risk is connected with identifying opportunities. That is, opportunity can arise from risk. Changes in demography and aging populations, for example, may be viewed as both a risk to an entity’s existing strategy and an opportunity to refresh the workforce to pursue development better. Similarly, technological advancements may provide a risk to retailers’ distribution and service methods and a chance to modify how retail consumers receive goods, such as through an online service. When opportunities are identified, they are shared throughout the organization to be considered when developing strategy and defining corporate objectives.
A risk inventory is simply a listing of the risk an organization faces. Depending on the number of individual risks identified, organizations may structure the risk inventory by category to provide standard definitions for different risks. This allows similar risks to be grouped, such as financial, customer, or compliance (or, more broadly, obligation). Organizations may choose to further define risks into more detailed sub-categories within each category. The risk inventory can be updated to reflect changes identified by management.
Because the impact of risks cannot be limited to specific levels or functions, identification activities should capture all risks. Regardless of where they are identified, all risks form part of the entity’s risk inventory. For example, an entity that recognizes risks related to board governance and meeting diversity targets at the strategy level should equally assess similar risks at the business objective level. Similarly, if an organization detects the risk of missing a customer billing deadline at the business objective level, it should analyze the implications of that risk at the entity level.
Comprehensive Risk Identification
To demonstrate that a comprehensive risk identification has been carried out, management should identify risks and opportunities across all functions and levels, those risks that are common across more than one function, as well as those that are unique to a particular product, service offering, jurisdiction, or other function.
Use Capability Evolution To Manage Risk
If specific requirements are driving the implementation of high-risk capabilities due to unique development, edge-of-the-envelope performance needs, or other factors, the requirements should be discussed with users to determine their criticality. It’s possible that the need can be postponed, and the development community should determine when it will be met.
Assist users and developers in determining how much risk (as well as the impact on schedule and cost) a particular capability should bear in comparison to the requirements for receiving less risky capabilities sooner. Consider technical feasibility and knowledge of related implementation successes and failures when developing your recommendations to assess the risk of implementing now rather than later.
Risk can come from a variety of places. The project team should examine the program scope, cost estimates, schedule (including critical path evaluation), technical maturity, key performance parameters, performance challenges, stakeholder expectations vs. current plan, external and internal dependencies, implementation challenges, integration, interoperability, supportability, supply-chain vulnerabilities, ability to handle threats, cost deviations, test event expectations, and safety. Furthermore, historical data from similar projects, stakeholder interviews, and risk lists provide useful insight into risk areas to consider.