What is Risk Management? Simplified Overview
Discover the essentials of risk management, its importance, and effective strategies for organizations
Risk management is a system for collecting, cataloging, analyzing, and acting upon risks based on a defined risk appetite, including developing concrete mitigation strategies and contingency plans to address potential problems and reduce the severity and impact of threats.
Managing risks involves continuously monitoring conditions and evaluating the effectiveness of measures taken to minimize harm and errors by conducting thorough risk assessments and understanding the likelihood and severity of risks. This enhances an organization’s ability to make informed decisions, such as investing in tools, people, and processes to implement timely adjustments and proactive measures.
However, risk management does not mean the same to every organization as each must prioritize risks differently depending on their industry, operational scale, and strategic priorities.
For instance, a financial institution might prioritize cybersecurity risks due to the sensitive nature of its data, while a manufacturing company might focus more on operational risks related to machinery and production processes.
This post will simplify risk management by explaining its definition and importance. We’ll also outline key components of the process, including identifying, evaluating, and prioritizing risks, followed by response actions and monitoring.
We’ll discuss the significance of effective risk management in achieving organizational objectives while considering some of the high-priority risks many organizations will encounter, such as cybersecurity threats, compliance issues, and risks introduced by new AI technologies.
Additionally, we’ll explore common risk management practices and strategies, including risk acceptance, mitigation, reduction, and transfer, as well as implementing risk management frameworks, third-party risk assessments, contingency planning, and root cause analysis.
Finally, we’ll compare traditional risk management with enterprise risk management (ERM) and examine the evolution of ERM for next-generation risk and compliance management.
By understanding risk management and how to tailor processes to meet unique business needs, organizations can implement more effective assessments, develop targeted strategies, and better prepare to handle the risks that matter most.
- Risk management definition
- The importance of effective risk management
- Understanding a standard risk management process
- Example risk management process
- Types of risk management responses
- What are some common risk management strategies used in organizations?
- Traditional risk management vs. enterprise risk management
- What is enterprise risk management? Is it better than traditional risk management?
- The evolution of ERM for next-gen risk and compliance management
Risk management definition
The International Standards Organization’s, or ISO’s, ISO 31000 guidelines for risk management defines risk as “the effect of uncertainty on objectives.” Uncertainty means something is not free from doubt. If an organization is absolutely certain its servers will never crash, for example, it won’t consider them when performing risk analysis because there’s no doubt they’ll continue to run. In the real world, uncertainties abound and are often out of your control, including whether servers will crash.
The real work of risk management focuses on the uncertainties that matter — the uncertainties that can impact an organization’s objectives. Here are a few major objectives that matter to almost every organization, including commercial businesses and government agencies:
- Data confidentiality, integrity, and availability: Keeping data secure and available to authorized users
- Business continuity: Continuing operations to fulfill the organization’s mission
- Regulatory compliance: Complying with all applicable laws, regulations, and standards
With this understanding of risks, uncertainty, and objectives, we can offer a more straightforward definition of risk management that considers its purpose and methods: Risk management is a comprehensive approach that helps an organization address potential risks and achieve its objectives by continuously monitoring activities and infrastructure, ensuring long-term stability and success.
Now that we have defined risk management, let’s discuss its importance. Understanding its significance is crucial for organizations, as it helps them anticipate potential challenges, minimize losses, and ensure long-term success. The following section explores why effective risk management is essential and how it contributes to achieving strategic objectives and maintaining cyber resiliency.
The importance of effective risk management
Risk management matters because unmanaged and unmitigated risks may lead to disruptions that prevent an organization from achieving its objectives.
Consider some of the high-priority risks that confront nearly every organization today:
- Cybersecurity risks: Cyberattacks are increasing in sophistication and frequency, and the costs of attacks continue to rise. Some costs involve IT and security teams tracking down and containing the breach. Others include setting up call centers and communicating with customers and regulators. Additional costs include a tarnished brand.
- Compliance risks: Failure to comply with regulations can result in hefty regulatory fines, bad press, strained customer relations, loss of business, and more. As data privacy and other regulations increase, remaining compliant becomes more complex.
- Risks introduced by new AI technologies: In the past few years, AI has become a technology that appears in voice-recognition apps and chatbots without being considered a strategic investment. The launch and rapid adoption of ChatGPT changed that.
[Read also: The 3 biggest GenAI threats (plus 1 other risk) and how to fend them off]
However, this adoption brings risks because the most useful AI applications need to work with an organization’s most valuable data, including customer communications, financial records, and more. Employees can easily inadvertently leak confidential information into public chatbots. Therefore, modern risk avoidance strategies must consider AI.
Given these risks, it’s more crucial than ever for organizations to implement processes to help reduce and mitigate risks, even as organizations rapidly adopt new, market-changing technologies.
Understanding a standard risk management process
Risk management is ultimately about understanding and reducing uncertainties about an organization’s objectives. The process involves multiple steps to compare risks, and it is not performed once and then deemed complete.
Risk management is a lifecycle of activities that comprises the following five key components:
- Identifying risks associated with strategic objectives
Risk management begins with identifying the organization’s legal, environmental, market, regulatory, and technology risks and then aligning how people, processes, and technology support the pursuit of business goals.
Think of this work as supply chain analysis. Compliance teams trace the flow of data, people, and operations from a high-level goal to specific IT systems and processes that help the organization realize that goal. Those systems and processes function as a supply chain for the goals themselves.
To measure risk, identify dependencies in the supply chain and trace them as far as is reasonable for the organization’s goals and capabilities. To compare risks, everything in the supply chain needs to be assigned a cyber risk score.
Once those objectives have been identified, the next step is analyzing the scope and connections between the risks and other organizational factors to understand the severity and potential impact the risk could have. - Prioritizing risks by building a weighted scale
Risks need to be ranked and prioritized based on their severity and likelihood. This step lets the organization gain a holistic view of its risk exposure and focus on the most critical risks by assigning them scores on a scale of one to ten. Even the strategic goals themselves need to be compared and weighted. It’s rare for an organization to treat all its strategic goals equally.
For example, based on conversations with the executive team, leaders might assign continued revenue growth of at least 10% compound annual growth rate (CAGR) a score of ten and regulatory compliance a score of seven.
Next, identify the people, processes, and technology supporting each strategic objective and rank the importance of each supporting factor.
To provide further nuance, business and IT stakeholders should collaborate to estimate the likelihood of a particular type of failure. For example, imagine an organization with a web server supporting a business-critical mobile app. The odds of that server delivering unacceptably slow performance during peak usage are likely higher than the odds of it succumbing to a power outage that crashes both the main and backup power systems.
By multiplying a score for the strategic importance of the server (say, seven out of ten) by the likelihood of a specific risk (say, 50% or 0.5), teams can begin ranking risks and identifying risks that require more immediate action.
For example, the server delivering slow performance might have a likelihood of 40%, and the server crashing in a catastrophic power outage might have a possibility of 2%. If the server’s importance is seven out of ten, the risk score for the slow performance scenario would be seven times .40 (which yields 2.8).
The risk score for the power outage scenario would be seven times 0.02 (which yields 0.14). The slow-performance scenario, which has the higher risk score, is the risk that needs attention first. - Centralizing risk management data in a risk register
Once this information about identified risks is collected and tabulated, it should be stored in a risk register, which is a centralized repository for information about risks and risk strategies.
A risk register provides a comprehensive overview of potential threats to the organization, ensuring that no risks are overlooked and that each is evaluated systematically. This centralization enhances communication and collaboration among departments and stakeholders, making monitoring and reporting risks easier. It supports informed decision making by providing accurate and up-to-date information and helps prioritize risk management efforts based on the most critical threats.
Since a risk register maintains a record of risks and their management, which is often required by regulatory frameworks, it can help ensure regulatory compliance. A risk register can also serve as a historical record, allowing for trend analysis and learning from past experiences to improve future risk management practices.
By clearly viewing all risks, organizations can allocate resources more effectively, ensuring that high-priority risks receive the necessary attention and resources for mitigation.
Centralizing risk management data in a risk register leads to more effective mitigation and a stronger overall risk management strategy. Authorized stakeholders across the organization should be able to access and use the risk register to guide their everyday activities.
- Strategizing a plan for each risk
This step involves implementing solutions to mitigate or eliminate risks by offering a clear roadmap that reduces uncertainty and improves the quality of decisions. It includes developing strategies, actions, and a structured approach to managing each risk consistently and systemically through supporting proactive management that anticipates potential issues and helps prioritize risks based on their severity and likelihood, allowing for a more efficient allocation of resources. This preventative approach can significantly reduce the impact of risks and prevent them from escalating into major problems.
Adopting a risk strategy also ensures accountability by assigning specific actions to individuals or teams. This supports clear ownership of risk management tasks and helps track progress by ensuring that risks are being managed. This is particularly important in high-stakes situations requiring quick and effective responses. Organizations can anticipate potential issues and take preventive measures by having a defined strategy and promoting a proactive management stance. - Monitoring risks and outcomes over time
The final step is to monitor and review the risks continuously, including the effectiveness of the risk management strategies, to ensure that the risk environment is well understood, identified risks are effectively managed, and any new risks are identified and managed promptly.
Organizations that regularly monitor risks can create a linear graph of how risk and compliance are decreasing or increasing over time, which provides vital data to teams performing other risk management activities and to high-level executives who want to track progress, understand the impact of risks at varying degrees as changes take place, and other factors affecting the cost of risk management.
These monitoring efforts should also include tracking implemented controls and strategies, studying their effects on the organization, and understanding the residual risk left behind. By continuously monitoring risks and the impact of risk management strategies, organizations can more easily detect potential threats early. This enables timely mitigation before issues escalate, using real-time data to inform decision making, ensure regulatory compliance, and avoid legal penalties.
[Read also: Shadow IT is “out of control” – here’s how to manage the risk]
Additionally, it supports continuous improvement by allowing organizations to learn from their experiences, refine their strategies, and effectively mitigate threats by building a more resilient risk management framework that supports long-term success in addressing the risks considered the most relevant and potentially damaging for the organization.
Let’s examine a practical example using these five essential components of the risk management process to see how a generic e-commerce company might navigate these steps, address common risks it might encounter, and demonstrate how these principles are applied in a real-world context.
Example risk management process
Imagine an e-commerce company with a global online presence and shipping and fulfillment operations worldwide. Following these five steps, let’s walk through what the risk management process could look like.
- Identify: When identifying risks in step one, an e-commerce company may consider its website and IT infrastructure supporting that website to be critically important and among the risks it may face.
Examples of risks for that website could include cyberattacks, software bugs, data center outages, human error in configurations or operational controls, and so on. - Prioritize: The e-commerce company would then need to rank the probability of each risk occurring and what these risks could mean for the business.
For example, the e-commerce company should determine how likely a cyberattack is to cause an outage since the website’s becoming unavailable for many days would be catastrophic to the organization’s business. The company should also consider whether it follows cybersecurity best practices to protect the website. If it does, the overall risk of that outcome has diminished, and it can be ranked a lower priority in the next step. - Centralize: Since the e-commerce company understands all the risks, it can now more easily identify which risk is most likely and the most devastating by viewing the consolidated risk data, allowing it to prioritize accordingly.
For instance, what about the risk of the website going offline because a data center has suffered an outage? Suppose the company has a fail-over architecture to transfer operations to another data center and service provider. In that case, that risk, too, may be diminished. However, if the company hasn’t established a fail-over system, the risk of that type of outage remains high and should be prioritized in its risk management strategies. - Strategize: The e-commerce company has an informed understanding of its existing and potential risks and prioritization that aligns with its objectives. The relevant stakeholders can now work to develop and implement specific strategies tailored to each identified risk.
In response to data center outages, the e-commerce company can investigate implementing redundancy systems like backup generators and uninterruptible power supplies (UPS) to ensure continuous operation during power failures. Advanced resiliency solutions, such as software that automatically moves network traffic and workloads during an outage, are also possible solutions, as well as regular testing and drills to simulate data center outages to prepare for actual incidents and train employees to handle such situations. Implementing monitoring and alerting systems to detect potential issues before they escalate can also prevent outages.
By adopting these strategies, the company can effectively manage the risk of data center outages and ensure business continuity. - Monitor: Lastly, the e-commerce company must continually monitor risks and outcomes to stay vigilant and responsive to new and evolving risks. By regularly reviewing the effectiveness of risk management strategies, the company can identify gaps or weaknesses in its approach. This enables the business to make necessary adjustments and improvements, ensuring that risk mitigation measures remain effective and relevant.
Monitoring outcomes helps the company learn from past experiences, both successes and failures, and apply these lessons to future risk management efforts while fostering a proactive risk management culture within the organization.
This proactive approach enhances the company’s resilience and builds trust with customers, stakeholders, and partners, who can be confident that the company is committed to maintaining a secure and reliable operation.
After examining a practical example of the risk management process through the lens of a generic e-commerce company and the various challenges it might face, we can shift our focus to the common types of risk management practices. These practices include risk acceptance, mitigation, reduction, and transfer, each offering distinct strategies for handling potential risks. Let’s delve into these approaches to understand how they can be effectively applied in different scenarios.
Types of risk management responses
Organizations have various choices for responding to the risks identified through risk management practices. These choices include:
- Risk acceptance occurs when an organization decides to accept the risk without investing in risk reduction or mitigation strategies. Sometimes, an organization might decide that a risk is acceptable because its impact is small, the odds of occurring are minuscule, or both.
Consider a retail company that identifies a potential risk in its store’s payment system but determines that the cost of completely overhauling the system to eliminate this vulnerability is very high, and the likelihood of it being exploited is low.
In this scenario, the company might decide that the potential impact is manageable and the likelihood of exploitation is low enough to justify not investing in costly mitigation strategies. Instead, it might focus its resources on enhancing other aspects of its security infrastructure. - Risk mitigation entails planning and developing strategies to reduce threats to project objectives often faced by an organization.
Suppose a company decides that, to some extent, data breaches are inevitable. In that case, it might decide to implement zero-trust architecture to limit the ability of attackers to move from one compromised device to another.
While the overall risk of a data breach might remain the same, the damage that could result would be diminished because attackers would not be able to freely move about the network using lax user permissions and open network ports. - Risk reduction includes investing in tools, people, or processes to reduce the likelihood or severity of a risky outcome.
For example, if an organization wants to reduce the risk of data breaches, it could invest in endpoint management solutions to ensure that endpoints (such as desktops and laptops) have all the latest security updates installed. - Risk transfer means passing the burden of the risk along to another organization, such as a cyber insurance company or some other type of business partner.
For instance, business leaders might buy an insurance transfer to cover some of the risks of a ransomware attack to an insurance company that promises to cover most or all the costs of recovering from such an attack.
Before issuing the policy, the insurance company, in turn, might require the organization to implement strict security controls and present certifications of IT compliance with cybersecurity frameworks, such as SOC 2, that relate to data security practices. In either case, the organization has transferred some of its risk to another party by paying for insurance.
Having discussed the various types of risk management practices, we can turn our attention to common risk strategies organizations employ. These strategies include implementing risk management frameworks, conducting third-party risk assessments, developing contingency plans, and performing root cause analysis. Let’s explore how these strategies are utilized to effectively manage and mitigate risks within an organization.
What are some common risk management strategies used in organizations?
Beyond the risk management process described above, what other strategies can organizations adopt to achieve compliance and reduce the risk of loss? Here are some popular risk strategies to consider in addition to following a streamlined management process.
Risk management frameworks
Adopting existing risk management frameworks can help by offering a structure and best practices for risk analysis, mitigation, and other steps in risk management and compliance management workflows.
Widely-used risk management frameworks include:
- Committee of Sponsoring Organizations’ (COSO) Enterprise Risk Management: COSO’s enterprise risk management guidance was recently updated to highlight the importance of considering risk in the strategy-setting process and driving performance
- Factor Analysis of Information Risk (FAIRTM): An international standard quantitative model for information security and operational risk
- ISO 31000: ISO’s guidance on risk management features principles, a framework, and a process for managing risk that can be used by any organization regardless of its size, activity, or sector
- National Institute of Standards of Technology (NIST) Risk Management Framework (RMF): A comprehensive, flexible, repeatable, and measurable seven-step process that any organization can use to manage information security and privacy risk for organizations and systems and links to a suite of NIST standards and guidelines to support implementation of risk management programs to meet the requirements of the Federal Information Security Modernization Act (FISMA)
[Read also: What are cybersecurity frameworks? An overview]
Third-party risk assessments
Risks can come from internal resources and operations and the resources and operations of an organization’s partners, including suppliers, consultancies, and other types of partnerships. Third-party risk is especially important in cybersecurity.
Implementing tools and processes for assessing and managing third parties helps mitigate this risk type.
[Read also: What is third-party risk management?]
Contingency planning
Sometimes, bad things happen. When they do, it’s best to be prepared. If teams know how to respond to an emergency, they can eliminate confusion and guesswork and respond more quickly and effectively.
Contingency planning is planning for emergencies, including cyberattacks, major IT outages, natural disasters such as earthquakes or major storms, and other potentially devastating attacks. By developing plans and rehearsing responses for these emergencies, organizations can reduce the damage that might result when these emergencies occur.Root cause analysis
When a major or minor risk manifests, it’s helpful to gather a cross-departmental team of stakeholders to understand what happened and why and trace the event back to its source.
They must typically ask and answer the following when determining root cause:- What is the problem related to poor employee training? If so, investing in new training modules might be appropriate.
- Was the problem related to a data breach? If so, where on the network did it occur? How long was the attacker able to linger undetected
- Were systems up to date and properly configured?
- Do all the stakeholders, like DevOps, IT, and security teams, have the central visibility and real-time endpoint data needed to collaborate effectively when pinpointing the attack’s source and nature?
- Does the organization have access to all its endpoint devices?
By analyzing the root cause of the problem and identifying weaknesses in IT infrastructure, employee training, and other areas, organizations can reduce the risk of a similar event occurring again and jeopardizing their strategic objectives.
Now that we’ve covered some essential risk management strategies, let’s compare traditional and enterprise risk management approaches to determine how each can help or hinder these efforts.
Traditional risk management vs. enterprise risk management
In conventional risk management frameworks, the responsibility of managing risks usually falls on the shoulders of the business leaders overseeing the respective units where those risks are present. In some organizations, risk management might fall under the responsibility of a Chief Compliance Officer (CCO), Chief Operating Officer (COO), Chief Audit Officer (CAO), Chief Financial Officer (CFO), or other C-level executives. For instance, the Chief Information Officer (CIO) or Chief Technology Officer (CTO) handles IT-related risks, the CFO handles financial risks, and the COO manages operational risks.
Risk managers are also crucial in traditional risk management. They safeguard the organization’s objectives and operations against potential harm and impact by assessing the likelihood of events, including accidents and natural disasters, and developing strategies to mitigate risks related to specific departments, most commonly in IT, finance, or operations.
However, these roles can’t work in isolation. Their success depends on information sharing and collaboration with other organizational stakeholders, including line-of-business managers, DevOps leaders, and cybersecurity team leaders.
While departments and business units may have advanced systems to tackle their specific risks, organizations can face challenges if they fail to recognize the interconnections between different risks or their combined effect on overall operations.
To address traditional risk management’s shortcomings in managing risks within each department, enterprise risk management emerged in the 1990s as a holistic approach. Several high-profile failures, preventable large losses, and the growing role of shareholder value models in strategic planning drove this approach. Let’s dive deeper into ERM and its challenges in addressing modern risks.
What is enterprise risk management? Is it better than traditional risk management?
Instead of the more reactive approach used by traditional risk management programs of dealing with risks as they arise, ERM integrates risk management into all aspects of an organization’s decision-making processes, aiming to identify, assess, and manage risks across the entire organization before they occur. This proactive approach helps organizations anticipate and mitigate risks before they become serious threats.
[Read also: What is threat hunting? Overview with real-world examples]
However, ERM still faces several issues today. Poor communication, insufficient training, and a lack of continuous improvement can significantly hinder the effectiveness of ERM programs.
Many organizations also struggle to establish the risk-aware culture needed to support ERM, which can stem from not allocating enough resources or fully integrating ERM into an organization’s strategy.The complexity of ERM frameworks can also be overwhelming, often resulting in fragmented efforts as organizations opt instead to continue taking a reactive approach to risk management.
Ever wondered what happens when risk management programs fall short? Consider these recent hefty regulatory fines and legal settlements imposed on some of the most successful and tech-savvy organizations in the world:
- In 2024, Ireland’s Data Protection Commission (DPC) fined Meta Platform Ireland Limited (“Meta Ireland”) €91 million ($95.7 million) for violating the General Data Protection Regulation (GDPR) by storing user passwords without encryption.
The DPC noted, “This decision highlights the requirement for data controllers to implement appropriate security measures when processing personal data, taking into account factors such as the risks to service users and the nature of the data process.” - In 2024, the Dutch Supervisory Authority (SA) fined Uber €290 million ($305 million) for improperly transferring the private data of 170 French drivers to the U.S. in violation of GDPR, which imposes strict rules for the retention and transfer of personal data.
- In 2023, DPC fined Meta a total of €390 million ($410 million) for breaching the GDPR “in connection with the delivery of its Facebook and Instagram services.” Meta Ireland was fined €210 million ($225 million) for violations related to Facebook and €180 million ($193 million) for violations related to Instagram.
- In 2022, mobile communications giant T-Mobile agreed to pay a settlement of $500 million following a data breach that occurred in early 2021 and affected nearly 77 million customers. The incident involved unauthorized access to T-Mobile’s systems after a portion of customer data was discovered listed for sale on a known cybercriminal forum.
The company settled a consolidated class action lawsuit, agreeing to pay an aggregate of $350 million to fund class members’ claims, the legal fees of plaintiffs’ counsel, and the costs of administering the settlement. The company also promised to spend $150 million on data security and related technology in 2022 and 2023.
Free eBook: Managing risk in the age of data privacy regulation
As these fines and legal settlements show, organizations still need to do more to prioritize compliance management and ensure that all people, tools, and processes support business leaders’ cybersecurity and compliance goals.
Fortunately, risk solutions are evolving to become more comprehensive and autonomous by leveraging AI capabilities and the scalability and flexibility of cloud architecture to meet the demanding requirements of securing and managing modern enterprises.
Having established a clear understanding of ERM and how it compares to traditional risk management, we can explore its evolution. This next section will outline how ERM has adapted to address the complexities of next-generation risk and compliance management, highlighting the advancements and innovations that have shaped its current practices.
The evolution of ERM for next-gen risk and compliance management
Risk is ultimately about activity. It’s about things proceeding as usual until they don’t.
For risk and compliance solutions, integrating AI and machine learning allows organizations to quickly determine what’s normal, unusual, and outright dangerous — at scale and in real time. These technologies can be used to perform risk analysis, anomaly detection, threat detection, reporting, and risk remediation at lightning speed and accuracy, giving business and IT leaders unprecedented detail into operations, risks, and possible solutions.Together, machine learning and AI can:
- Analyze data: From login activity to supplier billing amounts, AI and machine learning provide a fast, scalable approach to analyzing operations in fine detail. This offers business and IT leaders data for fine-tuning risk management and compliance management approaches.
- Detect patterns: Recognizing patterns in data can help organizations establish behavior baselines — whether by people or machines — for anomalies that might represent a threat, such as a data breach.
For example, if your company’s accounting team usually works business hours during the week and rarely logs in on weekends, detecting that a laptop or other endpoint assigned to an accountant is accessing the network at 3:00 AM from a remote location can be used to trigger an alert and remediation actions. - Power automation: Smart security automation is powering the future of endpoint management, from generating reports and summaries from data collected and located in disparate sources to automating patch management, real-time threat detection and response, and more.
AI and machine learning is positioned to empower organizations to tackle the ever-growing challenges of cybersecurity threats and regulatory demands with confidence and agility by revolutionizing how they approach risk and compliance through more effective and responsive processes.
Tanium Risk & Compliance equips organizations with real-time visibility into endpoints, continuous monitoring for exploits, and a comprehensive suite of tools to address vulnerabilities and restore assets to good standing — all within the automated Tanium platform.
With Tanium, organizations benefit from a unified platform that scales to manage risk and compliance by providing complete visibility into endpoint risks and noncompliance incidents and the context necessary for teams to remediate these exposures. Tanium also enables security and operations teams to consolidate disparate point solutions into a single agent and solution.
Tanium Autonomous Endpoint Management (AEM) is a new evolution of the Tanium platform that introduces advanced AI and machine learning capabilities. These include real-time cloud intelligence, which allows for the analysis and measurement of even the smallest changes on endpoints to enable confident assessments of their impact; automation and orchestration, which capture and design dynamic, reusable automation covering various IT and security operations use cases; and deployment templates and rings, which minimize disruptions by ensuring that endpoint changes are rolled out in coordination with the pace of the organization.
Schedule a personalized demo to discover how Tanium can enhance your risk and compliance management and other critical security efforts.
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