The Ten Domains of Risk
Building a Framework for Safeguarding Your Organization
©
Organizations face a myriad of risks that can threaten their operations, reputation, and bottom line. Understanding and managing these risks is crucial for long-term success and sustainability.
In the past, risks were managed in separate silos—physical risks were handled independently from reputational risks, for example. However, this outdated risk management approach easily allows things to slip through the cracks. A lapse in one area might set off a chain reaction of problems in others, escalating the risk of major disruption and loss.
Modern risk management is more like maintaining a highly tuned machine, where each component affects another.
As an antidote to historical siloed risk management methods, we investigate the Ten Domains of Risk framework, which all organizations should consider incorporating into their risk management plans
Avoiding the Domino Effect of Unmanaged Risk
Because risks to all organizations are interconnected, they have the potential to cause a domino effect if not managed thoughtfully, increasing the likelihood of significant disruptions to your organization. A single point of failure in your risk management plans, can trigger a crisis that affects multiple aspects of your organization (whether a publicly traded company or a single family office), leaving you vulnerable to both internal and external threats.
Consider a scenario in which inadequate risk policies in an organization lead to neglected maintenance of critical IT systems. This hypothetical organization fails to conduct thorough background checks and verify supply chain security policies, resulting in a subpar IT vendor relationship (Strategic and Operational Risk).
That IT vendor, who has lax controls and unwittingly employs someone with a relevant criminal background, suffers a cyber breach (Technical Risk). This breach may result in camera and physical security system failures (Physical Risk), allowing unauthorized access to sensitive office areas. The cyber breach may also cause the organization to be duped into sending wires to cybercriminals (Financial Risk). The cyber breach may also expose confidential information, resulting in legal liabilities (Legal & Regulatory Risk), attention from policymakers due to the nature of the organization's business (Political Risk), or negative media exposure as a result of information leaked by hackers (Reputational Risk). In addition, the cyber breach crisis may cause the organization to lose focus on the completion of a company acquisition, which could lead to missed investment opportunities (Financial Risk) or to the perception of the organization as an unreliable business partner. This perception may lead others to believe that the organization is being run haphazardly and is a risky business partner.
Handling interconnected risk management can be challenging. Furthermore, many firms lack the necessary expertise, procedures, or resources for comprehensive enterprise risk management, which increases their exposure.
Why should you care about cross-domain risk management?
Organizations that continue to view risk in silos face challenges in measuring and prioritizing risks, developing effective risk policies with stakeholder buy-in, stress testing and war gaming relevant risk scenarios, maintaining risk awareness training standards across an enterprise, staying current on risk management developments and best practices, and developing a robust risk lesson learned program.
The goal of the Ten Domains of Risk framework is to shift from tackling individual risks in isolation to developing a resilient strategy that takes into consideration the interactions across all risk domains.
To avoid confusion, it is essential to adopt a clear, integrated risk mitigation strategy. First, we must understand the full scope of the ten domains of risk.
Understanding the Ten Domains of Risk
Privacy Risk
Privacy risk refers to unauthorized access to personal and/or sensitive information your organization aims to keep private. Whether loss or exposure of information is the result, the risk must be mitigated to build your clients’ and stakeholders’ trust, avoid hefty legal fines and legal action due to non-compliance, and maintain your organization’s stellar reputation.
Some examples of privacy risks are data breaches, unsecured networks, and identity theft.
Data collection and protection regulations are on the rise. Therefore, now more than ever, it is crucial to ensure your data is fully safeguarded against privacy breaches.
Why It Matters
Trust Building:
Protecting privacy fosters trust with customers and stakeholders.
Regulatory Compliance:
Non-compliance can result in hefty fines and legal actions.
Brand Reputation:
Data breaches can severely damage an organization's reputation.
Mitigation Strategies
01.
Implement robust data encryption protocols.
02.
Establish and maintain clear access control policies.
03.
Develop and regularly update a data breach response plan.
Reputational Risk
Your reputation can make or break your business. Any actions or interactions that negatively affect your organization’s image can be considered reputational risk. This type of risk arises when stakeholders or clients develop a negative perception of your business, and can be a result of factors such as poor customer service, bad publicity, or ethical breaches.
Some examples of reputational risk are a senior team member getting caught doing something illegal, such as insider trading, a cashier refusing service, or a leak of your customer base’s private personal data.
Why It Matters
Customer Retention:
Reputation has an impact on everything from internal stakeholder relationships to customer loyalty and acquisition.
Investor Confidence:
A strong reputation attracts investors and partners.
Competitive Advantage:
Upholding a positive image differentiates an organization in the market.
Mitigation Strategies
01.
Monitor brand perception through surveys and social media.
02.
Establish a crisis communication plan.
03.
Foster transparent stakeholder relations.
Technological Risk
Technological risk can be attributed to any failures or disruptions in the technology systems that support your organization’s operations.
Some examples of technological risk are cyber-attacks, sensitive data breaches, service outages, unscalable software, human error related to data leaks, and software or hardware malfunctions.
For many companies, technology is the operational heartbeat that keeps everything else running smoothly. Operational continuity is essential in maintaining standard business processes, while data security and regulatory compliance ensure protection against data loss.
Why It Matters
Operational Continuity:
Technology is integral to many business processes.
Data Security:
Cyber threats can lead to data loss and privacy breaches.
Legal and Regulatory Compliance:
Industries have specific legal and compliance requirements.
Mitigation Strategies
01.
Develop comprehensive cybersecurity, supply chain, and insider threat risk policies.
02.
Ensure regular system maintenance and updates.
03.
Implement robust incident response plans.
Financial Risk
Financial risk involves potential losses due to market fluctuations, credit defaults, liquidity issues, or mismanagement of financial resources.
Some examples of financial risk are market volatility, loss of funds due to cybercrime, property damages, loss of income, or credit risks.
Why It Matters
Profitability:
Effective financial risk management sustains profitability.
Investor Relations:
Sound financial practices attract and retain investors.
Survival:
Financial instability can threaten the organization's existence.
Mitigation Strategies
01.
Diversify revenue streams and investments.
02.
Implement strict expense and fund movement control measures.
03.
Conduct regular financial audits and forecasts.
Legal & Regulatory Risk
The legal and regulatory risk domain encompasses the threats to a company’s standing by any and all actions or penalties caused by neglecting to comply with applicable laws and regulations.
Some examples of legal and regulatory risk are fines and sanctions for non-compliance with laws, disputes from failing to meet contractual obligations, and sanctions or criminal charges in more severe cases.
Why It Matters
Avoiding Penalties:
Non-compliance can lead to fines and sanctions.
Business Continuity:
Legal issues can disrupt operations.
Reputation:
Legal troubles can harm public perception.
Mitigation Strategies
01.
Stay updated on relevant laws and regulations in your industry.
02.
Conduct regular compliance audits.
03.
Provide regular and ongoing legal requirements training for your entire team
Strategic Risk
When adverse business decisions are made, or strategies are not appropriately implemented, your organization is in danger of strategic risk. The potential for your business’s strategies to not work according to plan, or even threats from internal or external events, can have a serious impact on your ability to survive and thrive as a company.
Some examples of strategic risk are falling behind faster-innovating competitors, delays in implementing organizational, supply chain issues, patent expiration, negative market reputation issues, trade agreements changes, or technological shifts that render existing programs obsolete.
Managing strategic risk is essential to ensure your organization’s activities align with business objectives, maintain your position in the market, and foster long-term sustainability and growth for your company.
Why It Matters
Goal Alignment:
Ensures organizational activities align with objectives.
Market Position:
Affects competitiveness and market share.
Long-term Success:
Impacts sustainability and growth.
Mitigation Strategies
01.
Conduct regular market trend analyses.
02.
Perform SWOT analyses to inform strategy.
03.
Develop flexible strategies adaptable to change and crises.
Operational Risk
Operational risk involves failures in internal processes, people, or systems that can disrupt daily business activities.
Operational risk is often associated with potential loss due to failures in normal business operations. Some examples of operational risk are employee errors, insider threats including internal fraud, poor business practices that alienate customers, or supply chain weaknesses.
Why It Matters
Efficiency:
Impacts productivity and cost-effectiveness.
Customer Satisfaction:
Affects service delivery and quality.
Compliance:
Operational failures can lead to cyber breaches and legal problems.
Mitigation Strategies
01.
Implement robust quality assurance programs.
02.
Streamline processes with automation where appropriate.
03.
Invest in employee training and development.
Physical Risk
Physical risk refers to threats to physical assets, infrastructure, and the safety of employees and customers, which can include criminal activity such as theft, natural disasters, and accidents.
Why It Matters
Safety:
Protects the well-being of people.
Asset Protection:
Safeguards physical resources.
Operational Continuity:
Prevents disruptions from physical incidents.
Mitigation Strategies
01.
Develop comprehensive emergency preparedness plans.
02.
Conduct regular safety audits and drills.
03.
Ensure adequate insurance coverage.
Political Risk
Political risk involves changes in the political environment that can affect operations, such as new regulations, political instability, or international relations.
Organizations must pay close attention to regulatory compliance altered by political changes, as well as changes to market access in certain regions and investment security due to instability threatening your business and assets.
Why It Matters
Regulatory Compliance:
Political changes can alter legal and regulatory obligations.
Market Access:
Affects ability to operate in certain regions.
Investment Security:
Political instability can threaten assets.
Mitigation Strategies
01.
Monitor legislative changes and political developments.
02.
Diversify markets and supply chains.
03.
Engage in policy advocacy through industry groups.
Health Risk
Health risk refers to the factors that affect the physical and mental well-being of an organization's employees. This includes ensuring workplace safety, addressing public health crises, and avoiding physical hazards.
Managing the dangers of health risks is critical for keeping your employees healthy, productive, and engaged at work in a safe environment.
Why It Matters
Employee Well-being:
Healthy employees are more productive and engaged.
Legal Compliance:
Obligations to provide a safe working environment.
Reputation:
Demonstrates an organization’s commitment to supporting it employees.
Mitigation Strategies
01.
Implement workplace health and safety programs.
02.
Develop pandemic response and business continuity plans.
03.
Offer health benefits and wellness initiatives.
Protecting Your Organization from Risk
In an era of unprecedented challenges and complexities, organizations must take a proactive and comprehensive approach to risk management, rather than treating different risks separately.
Organizations must stay vigilant and adopt proactive methods to predict and manage risk across various domains. By understanding and addressing the Ten Domains of Risk, organizations can not only protect themselves from potential threats but also position themselves for growth and success in a competitive marketplace.
Developing a comprehensive risk management strategy is critical for more than just avoiding pitfalls. It is about creating an organization that is resilient to internal and external threats while remaining agile enough to adapt to changing risks.
© 2024 Presage Global. All Rights Reserved.
Why Presage Global?
When you partner with Presage Global, You will benefit from our seasoned, highly effective, and multifaceted risk management specialists and programs, which may be effortlessly integrated with your existing business operations. Contact us today to obtain access to our risk management experience and innovative tactics, ensuring that your firm is prepared and risk-aware for whatever the future holds