Every company has risks. Examples include a delayed delivery from a vendor or a full-blown cyberattack. The best risk managers can do is avoid some risks. A risk management framework helps you avoid threats before they impact your company.
Managing risks is no different than following a recipe. A good recipe helps you create something yummy. Managing risks using a framework helps you create a successful business. You can avoid threats to your cash flow, good name, and well-being using a framework.
This article will show you the top 10 risk management frameworks that every business should know. We will explain each one in simple terms. Therefore, you can find the best fit for your company.
Understanding Risk Management Frameworks
What are the risk management frameworks? They are systematic and organized ways to manage risks. For example, they promote a common risk language. It makes a huge difference that the finance risk management is positioned the same as the operations risk management. It helps create the culture that risk management is the responsibility of everyone in the enterprise. Smart risk management should drive the enterprise to achieve its growth objectives.
The Value of a Good Framework
Selecting an appropriate framework is beneficial. A well-designed framework will almost certainly do more than identify issues. It will integrate into your business strategy. It will provide insights into potential opportunities that others may be too scared to pursue because of the risks.
Properly managing risks will foster trust among your customers, investors, and partners; they will see you as responsible and well prepared. Effective risk management can even influence major decisions, such as how to sell my business, ensuring you minimize potential financial losses before an exit.
That confidence will give you an edge. Let us review some excellent frameworks for risk management.
1. COSO Enterprise Risk Management Framework
COSO (Committee of Sponsoring Organizations of the Treadway Commission) ERM is one of the most recognized frameworks one could use for business risk management globally. The framework is designed to help businesses integrate risk management into business strategy and performance.
Their focuses are split into five categories:
- Governance and Culture: Executive management must demonstrate the importance of risk management by “setting the tone from the top” and incorporating risk into the overarching corporate strategy.
- Performance: You must foresee and measure the risks that may impede the organization from hitting desired milestones.
- Review and Revision: You must evaluate the effectiveness of your risk management and modify it to improve.
- Communication and Reporting: You disseminate risk-related information to aid in better decision-making throughout the organization.
COSO is suitable for companies of any size. It offers a thorough perspective on organization-wide risk.
2. ISO 31000
This is one of the few risk management frameworks that has no certification, as ISO is known for creating certification programs. ISO created the International Standard for Risk Management Framework, and because no certification is involved, the organization has the liberty of adopting it as they see fit.
The main objective of the ISO 31000 standard is to embed risk management within every aspect of the organization. Risk management is not a separate activity. It is woven into the organization’s leadership, strategy, and daily activities.
The key principles include
- Creating and protecting value.
- Being an integral part of all organizational processes.
- Being part of decision-making.
- Being systematic, structured, and timely.
- Being based on the best available information.
Using the ISO framework, the organization can create a risk management system that meets the specific needs of the organization.
3. NIST Risk Management Framework (RMF)
The National Institute of Standards and Technology (NIST) developed this framework. It is most famous for its use within the U.S. federal government. However, many private companies use it too, especially for cybersecurity.
The NIST RMF is a seven-step process:
- Prepare: Get your organization ready to manage security and privacy risks.
- Categorize: Figure out how important your systems and information are.
- Select: Choose the security controls to protect your systems.
- Implement: Put those security controls in place.
- Assess: Check if the controls are working correctly.
- Authorize: A senior leader formally accepts the risk.
- Monitor: Continuously watch your systems for new risks.
4. The COBIT Framework
The acronym COBIT means Control Objectives for Information and Related Technology. COBIT focuses on the governance and management of business information and the business’s associated technology (IT). The global professional association for the IT governance community (ISACA) developed it.
With the right balance of benefits, risks, and resources, it assists companies in fully realizing the value of their IT. It offers a comprehensive IT risk management guide and helps ensure that technology achieves business objectives. This risk management framework is amongst the most useful for a business that relies on technology.
5. The Casualty Actuarial Society (CAS) Framework
CAS has its own framework for enterprise risk management, and it is considered one of the more practical and easy-to-use frameworks. The CAS framework sees risk management as a process with defined steps.
The steps are as follows:
- Establishing Context: Assess the internal and external environments of the business.
- Identifying Risks: Consider the possible scenarios that could go wrong.
- Analyzing and Quantifying Risks: Assess the likelihood and potential impact of each risk.
- Integrating Risks: Assess the interconnectedness of various risks.
- Assessing and Prioritizing Risks: Rank the risks that require immediate attention.
- Treating and Exploiting Risks: Devise strategies on how to mitigate the key risks.
- Monitoring and Reviewing: Continuously track risks and your risk management strategies.
This framework works very well for businesses that prefer an easy-to-follow and structured approach.
6. The Factor Analysis of Information Risk (FAIR) Framework
FAIR isn’t an all-encompassing risk management framework. Rather, it is one framework among many for understanding, analyzing, and quantifying information risk in monetary terms. This allows you to communicate cyber risk to business executives in terms they are familiar with: dollars and cents.
FAIR answers questions such as
- What amount of loss could this security gap result in?
- What is the ROI on this new security control?
FAIR allows you to better evaluate and prioritize your cybersecurity spend by turning abstract tech risks into quantifiable monetary figures.
7. The Three Lines of Defense Model
This model can be used along with other risk management models. It outlines the different roles within the risk management process.
- First Line: Operational management. These are managers and staff who interact with risks on a daily basis.
- Second Line: Risk management and compliance functions. This team supports the first line with subject matter expertise, policies, and tools. They are responsible for managing the risk process.
- Third Line: Internal audit. This function provides external assurance to the board and senior management that the risk management processes are functioning as intended.
This model works best because everyone understands their responsibilities, which limits ambiguity and blind spots in your risk management processes.
8. The OCTAVE Allegro Framework
OCTAVE Allegro is a more recent example of a risk assessment framework developed by Carnegie Mellon University. Allegro is a more simplified version of what is called Operationally Critical Threat, Asset, and Vulnerability Evaluation.
Allegro is intended for use by individuals who do not have extensive training in security. It supports a small team in determining the firm’s critical business assets and the risks associated with them. It is a very hands-on approach that is workshop-oriented and addresses the critical issues that need to be solved.
Choosing the Right Framework for Your Business
Not all frameworks fit all businesses. Each industry has different needs, and each company has a different size, culture, and risk profile.
Understanding your business is the best starting point, and what are your most critical objectives? Integrating a risk management framework into your business growth plan ensures that expansion strategies are realistic and secure.
What stands as the biggest risk for those objectives? From these answers, you have been drawn towards the risk management frameworks that fit you best.
Keep in mind that the journey of the framework you choose is a journey, and a business will need to be committed to a great deal of flexibility in the framework as the business grows and the outside environment changes.
