Business Risk Identification Methods & Techniques: Identifying The Root Cause
Table of Contents
Risk identification can be defined as the process of determining which risks are relevant to your organization. By implementing best-practice risk identification techniques, your risk management plan can better prevent risks from materializing.
What is the Risk Identification Process?
You can begin to identify risks in many different ways, but the best way to begin the risk identification process is by taking a “root cause” approach.
Simply put, identifying risks and their root causes is essential in understanding the fundamental reason that an event occurs. Understanding the root cause, and not just the symptoms, allows you to design key risk mitigation strategies that neutralize risks and prevent them from re-emerging in the future.
Standardization is key when you’re identifying risks, and having a risk library allows different business units to communicate in a uniform fashion to facilitate your ability to identify risks and prioritize based on criticality.
Risk Identification: Techniques & Methods
When multiple business areas identify the same issue, systemic risks and their upstream and downstream dependencies can more easily be identified and mitigated.
The root cause method also identifies areas that would benefit from centralized controls, which eliminates the extra work of maintaining separate activity-level controls.
Technique #1: Identifying Root Cause
Centralized controls are extremely important from an efficiency standpoint; the more you can accomplish with a set number of controls (rather than designing a larger number of unique controls), the fewer tests and metrics you’ll need to run and collect, respectively. Identification of the root cause of a risk provides information about what triggers a loss and where an organization is vulnerable. Using root source categories provides meaningful feedback: What steps should be taken to most effectively mitigate risk in your GRC program? Risk identification based simply on the effect or outcome often leads to ineffective risk mitigation activities.
Risk mitigation activities should be aimed at the root cause and will differ depending on the source of the risk. For example, in order to prevent a headache, you must know why you have one; if illness is the cause, seeing a doctor for treatment or a medication prescription is the appropriate mitigation activity. However, if the headache is being caused by a lack of sleep, going to bed earlier is a much more efficient and effective mitigation strategy than visiting a doctor. You may also mitigate a headache by taking a painkiller. This will make the headache go away, but it will not prevent future headaches because it does not target the root of the problem.
Armed with the knowledge of the source of a risk, we can proactively manage risk and avoid future risk events. In this simple example, it’s easy to see why creating controls based on the risk event/outcome (not the root cause) can lead to ineffective mitigation activities.
Another great option for identifying risks involves creating a systemized approach for completeing assessments of potential risks within your business.
Create a risk management framework that you can use to identify, track and monitor risks all in one place. By knowing what a risk assessment matrix is and utilizing it will give you a place store both quantitative and qualitative risk analyses.
If you are just getting started and need a quick method for identifying risks, then our free risk assessment template is a great place to start (before moving onto a more advanced platform such as LogicManager).
LogicManager provides organizations with a pre-built root cause risk library in our comprehensive risk assessment software. This library is entirely flexible, allowing organizations to use the risk identification techniques or risk identification methods best suited to their organization.
LogicManager’s complete root cause library also includes best practice compliance and performance-balanced scorecard indicators. You can add to your library over time while receiving updates on emerging risks or new standards.
To learn more about our risk library, including our identification and assessment tools, click here.
Manage Tomorrow’s Risks Today Using LogicManager’s Enterprise Risk Management Software
Book a free demo to see how our software can protect and reduce negative impacts against your business.