Risk management is all about being prepared in the face of uncertainty, and there’s no better way to do that than by identifying what causes risk and how to deal with it appropriately.
For this reason, understanding risk drivers, why they’re important, and how to discover them when you can’t see them are all critical components of risk management.
This article will give you an overview of risk drivers, how to identify them, and how they’re used in risk management strategies.
What Are Risk Drivers?
Risk drivers are fundamental to understanding how complex risks impact business. Risk drivers are intangible factors that increase, change or decrease a risk’s likelihood or severity.
Many risks don’t exist in isolation—they may be a combination of several factors, including natural, technological, and human-based threats. That means they have multiple causes as well as multiple impacts.
The first step in assessing your company’s risks is identifying every potential driver behind them. Here are some examples of common risk drivers.
Environmental
Natural disasters, such as hurricanes, tornadoes, or earthquakes, can significantly impact your business. If you’re in an area prone to these events, you should be prepared for what could happen if they occur.
Technological
Technology is changing rapidly, and businesses are becoming increasingly reliant on it to function efficiently—and profitably.
Whether it’s a cyberattack or a new technological innovation that threatens your market share, technology is one of today’s most common risk drivers.
Human
Human error is a major risk factor for businesses of all sizes, from large corporations to small family-owned shops
A single employee can impact your business in many ways, from leaking sensitive information to violating health and safety regulations—and that’s just scratching the surface. The best way to minimize human risks is through training, education, and awareness.
Competition
Competition is an ever-present force in today’s business world, so it should be no surprise that it’s a common risk driver for companies of all sizes.
If you don’t have a competitive advantage over your competitors, they could easily overtake you with superior products or services at lower prices—or drive you out of business entirely!
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How to Find Risk Drivers
A risk driver is a person or aspect of your business that can significantly influence risk. A thorough understanding of all these drivers—and which ones need special attention—is important for effective risk management.
When you’re identifying them, there are five key questions to keep in mind:
- Who could be negatively affected by something going wrong?
- What aspects of the business make certain risks more likely?
- Where might new risks come from?
- What other factors could change how the risk management strategy is approached?
- What are the best driver risk management solutions you have at hand?
Once you’ve figured out who is at risk and what kinds of things might threaten them, you can develop strategies for mitigating risk. For example, if your business relies on a large number of customers or suppliers in a particular region, you may want to have contingency plans in place should something happen to that area.
At any rate, understanding your risk drivers will help make your overall strategy more effective—and it will also help keep you from overlooking anything important. After all, as they say: To know all is to forgive all.
Why do they exist?
If you’re managing risk, chances are it’s for a reason. A business might take on more risk because it wants to try something different from what its competitors are doing, or it might have suffered from losses in the past and wants to prevent them in the future.
Sometimes, companies are just trying to expand into new markets or go global, but they know their current strategies aren’t working there; taking on new risks is sometimes necessary to grow your business globally.
Whatever your reasons for introducing a new type of risk into your organization, if you want to manage that risk well, you need first to figure out exactly why you want to manage it.