Key types of business risk every leader should plan for

Written by
RMI Team (F)

Regardless of size, all businesses come with risk. That’s why business risk management is key to building confidence in both your internal and external stakeholders – people want to be assured that each business decision is properly vetted before being made, that losses are minimised and successes maximised.

A robust business risk management plan puts in place procedures that can help you identify, pre-empt, and avoid potential threats – or at the very least minimise their impact. Here are five types of business risk that every company should address as part of their strategy and planning process.

1. Security and fraud risk

The types of risks like Data breaches, cyberattacks, identity theft, embezzlement, money laundering, criminal record, and intellectual property theft. These are all examples of how security and fraud risks are growing for businesses, especially as the volume of online transactions increases and trends like remote work are pushing more and more internal processes onto the cloud.

While there may be some technical aspects to this – such as vulnerabilities in software or previously undiscovered gaps in new technology – security and fraud risk is often “human” in nature. The central bank of the Philippines, Bangko Sentral ng Pilipinas (BSP), recently tightened its screening rules for current and prospective bank employees as a means to tackle this. By implementing more rigorous protocols in the industry’s hiring and talent management processes, the new guidelines hoped to ensure that banks had “sufficient understanding of the applicant’s personal background and character, conflict of interest, and susceptibility to collusion, fraud, or illegal activities before making hiring decisions.

2. Compliance risk

How familiar are you with the laws and regulations that apply to your business? Compliance can be tricky for many reasons. For one thing, the legal landscape is ever-evolving. Laws related to occupational health and safety, equipment certification requirements, taxes, and more are constantly being updated, and claiming ignorance of these changes is not a valid defence.

The nature of your business can also change and grow over time, bringing new risks and new compliance requirements. For instance, if you are expanding your team and hiring internationally, you will most likely have to comply with the local employment laws in the candidate’s home country. Another example: if your business has recently moved from offline to online sales, you will need to comply with data security and privacy protection laws that you previously did not need to think about.

3. Operational risk

Operational risks can be internal, external, or a combination of both. Examples of operational risks include a natural disaster that damages your physical premises or equipment, a pandemic that forces people to shelter in place or work from home, or a server outage that causes technical problems like lack of power or disrupted internet connectivity. Internal business risks are often related to human error, such as an accountant entering the wrong payment amount or a developer inputting the wrong code.

Most businesses have a business continuity plan to tackle operational risks, which often details how to respond and recover should something go wrong. It also usually outlines proactive measures like having a backup system to ensure disruptions, if any, aren’t too severe.

4. Financial or economic risk

Managing risk is related to financial and business profits, which is why it is often the most closely scrutinised by investors and shareholders. Financial risks are caused by multiple factors such as market movements, foreign currency exchange rates, commodity price fluctuations, and more.

Strategies to mitigate financial or economic risk usually aim to ease cash flow issues, and common tactics include getting insurance, diversifying income streams, and limiting the amount or tenure of loans.

5. Reputational risk

Faulty products or services, poor customer support experiences, negative publicity about your employees or your leadership, or high-profile failures in the press. These are all reputational risks that will affect your bottom line, and your relationship with customers and partners.

More importantly, failure to address business risks is itself a reputational risk! Security breaches, fraud incidents, non-compliance to laws and regulations, lengthy operational outages, and poor financial performance all damage your business reputation.

The importance of intelligence in minimising business risk

Most business risk management strategies are anchored by four tenets: prevention, detection, deterrence, and response. Proper business intelligence plays a key role in prevention – arguably the most important of the four.

It’s a given that the above business risks are amplified when third parties are involved. Your own reputational, operational, financial, security and compliance risks are extended to include the other party’s procedures and practices – which are outside of your control. And with the majority of most value chains today being outsourced to subcontractors and vendors, it’s understandable that most businesses insist on thorough research and vetting of potential third-party partners before committing to a business relationship.

That’s why companies also have an ethical and legal responsibility to conduct background checks on potential employees. Like BSP’s new hiring guidelines, background checks are meant to ensure adequate intelligence has been gathered in order to manage business risks and avoid the hefty costs of a bad hire.

Understandably, most businesses simply don’t have the time, know-how, and manpower to dedicate to thorough intelligence gathering. There’s also the grey area of privacy laws to consider – how much is a company allowed to dig into their potential hires or partners? In such cases, trusting a specialist and market leader like RMI to do the legwork for you can be the most cost-effective solution. Contact us to learn more about our intelligence solutions