Positive Risk vs. Negative Risk in Enterprise Risk Management

Businesses face risk all the time – and that’s OK. Even though the word “risk” typically has negative connotations, the term can actually represent many situations, not all of them unfavorable.

ISO 31000 states that risk is the “effect of uncertainty on objectives.” That actually means risk can come in two types: positive and negative.

What Is Positive Risk and Negative Risk?

Positive risks are events that are beyond a company’s control, but can actually work in the company’s favor, allowing the business to capitalize and benefit from them.

In contrast, negative risks are potential events that could harm an organization. With these risks, the focus is on mitigating, preventing, or minimizing the extent of the negative outcomes or damage they may cause.

Can There Really Be Positive Risks?

Yes, there can be positive risks in business. Just like negative risks, positive risks are uncertain and may or may not occur – but when they do happen, they can boost your organization’s ability to achieve critical business goals. We can also call positive risks “opportunities.”

Positive risks can increase profitability, establish a strong market position, and enhance competitive advantage. Unlike negative risks (which hinder progress), positive risks support organizational teams and encourage improvements in how your employees work towards achieving business goals. Think of positive risks as motivators for executives to focus on profit goals, and also on helping employees to achieve professional aspirations.

The importance of positive risks lies in their ability to help companies reduce production and operational expenses, make better investments, and effectively allocate resources toward business growth. Embracing positive risks is crucial for fostering innovation; it allows companies to develop fresh approaches to overcome industry challenges. When you take on positive challenges, you can position your organization advantageously in the market, gaining a competitive edge.

Examples of Positive Risks in ERM

The idea of positive risks can sometimes be hard to grasp. Here are several practical examples.

Positive risk in project management

One responsibility of a project manager is to create and monitor the project budget, based on the estimated resources needed to achieve the project objectives. Sometimes a miscalculation in the planning phase results in too much money budgeted for the project, which can then be reduced.

Effective project risk management positively affects the organization, especially considering it’s much easier to redistribute unused resources than to cut other projects to cover overspending.

Positive risk in assets & investments

Many of the assets within a company have an estimated service life, which determines the worth of an object or property based on that asset’s ability to provide value over time.

When the actual useful life exceeds the estimated useful life (say, a technology company extending the useful life of its computers from three years to four), that is a positive development. The original assessment was wrong, but the result was beneficial for the organization since it can use the asset for a longer period without investing in a replacement.

Positive risk in technology

When deploying certain technologies to facilitate tasks within the company, the organization must consider the risks. Executives must balance the potential reward (greater efficiency) against the potential risks (higher security risks, for example).

That said, sometimes technology is upgraded in ways that enhance the original efficiency estimate or reduce the original risks. These changes can directly benefit companies that can now take advantage of these new capabilities to increase productivity.

Positive risk in development

Say your company introduces a new product. There is a risk that the product may not achieve the expected performance; for any number of reasons, the market may not like what you have to offer.

Alternatively, the product’s success may exceed your expectations. This could result in problems with the organization’s ability to meet greater demand for the product, but that is generally a good problem to have – certainly much better than the alternative of killing a new product for lack of demand.

Positive risk in supply chain management

Managing the supply chain comes with its fair share of risks, but sometimes these risks can work in your favor.

For example, say you switch to a new supplier offering lower prices. That switch involves some positive risks, like figuring out shipping fees, meeting delivery deadlines, and negotiating the terms of the new contract. It’s all about building trust and creating a solid relationship with this new supplier.

Examples of Negative Risks

Negative risks are much more visible in a company’s daily operations. Also called “threats,” negative risks should be considered alongside positive risks.

Negative risk in project management

Overspending is a common threat in project management. It can result from an inadequate estimate of project costs, and jeopardize your project’s objectives.

Lack of an action plan to deal with budget overspending is a negative risk for the company. Shifting the allocation of resources to complete a project is always a messy endeavor; meanwhile, project interruptions or delays can be far more costly than the original budget overrun.

Negative risk in assets & investments

When a particular tool, asset, or infrastructure fails earlier than expected, that can result in a partial or total production stoppage. Production stoppages harm employee efficiency, customer satisfaction, and profitability, among other damage to the organization.

Negative risk in technology

A wide variety of negative risks in the technology sector can interfere with achieving the company’s objectives. Many of these are invisible until they occur and cause all sorts of damage.

In the same way that there are updates that protect users of particular software, these updates can also create vulnerabilities if the updates go unnoticed by developers (with the potential for serious harm if cyber attackers discover those vulnerabilities).

Negative risk in development

It’s always possible that a new product or service will fail. Therefore, regardless of the proposal or the investment in market research, it’s wise to have risk response strategies in case of the project’s failure.

Negative risk in supply chain

Negative risk in the supply chain refers to potential events or circumstances that can adversely affect a company’s supply chain operations, performance, or objectives. These risks have the potential to disrupt the smooth flow of materials, products, and information throughout the supply chain, leading to various negative consequences.

Managing Positive and Negative Risks

Despite their starkly different consequences, positive and negative risks are two sides of the same coin. It may seem counterintuitive to assess and monitor positive risks since they only help the organization. Still, such risks provide a unique approach to risk analysis and the organization’s risk exposure.

When a positive risk materializes (as in the case of underspending or the underassessment of an asset’s lifespan) it indirectly represents a failure in your risk management processes – which either failed to identify a human error or were not sufficiently accurate in their assessments.

Another issue is that positive and negative risks have opposing risk management strategies. That is, while a company avoids negative risks by delegating tasks or rejecting certain agreements with third parties, it exploits positive risks by taking actions to increase the chances of those uncertain events. Both strategies need to be included in your risk management plan.

While positive risks are shared to reap benefits across the enterprise as much as possible, negative risks are transferred to others better suited to respond or mitigate the harm.

When a positive event occurs, the goal is to leverage its effects and take advantage of them to benefit the organization. In contrast, in a negative event, there are strategies to mitigate the harm. In both cases, the risks that cannot be influenced or modified are accepted, from which an organization can learn for future occasions.

Managing Risks with ZenGRC

Assessing your risks, installing proper controls for managing risk, and collecting documentation at each stage may be intimidating and time-consuming if you try to do it all yourself and manage the requirements on a spreadsheet.

The ZenGRC helps you comply with a wide range of frameworks, including GDPR, CCPA, HIPAA, and others, through identifying vulnerabilities, assessing policies and processes, and ensuring tracking and other measures operate correctly.

ZenGRC is a governance, risk management, and compliance solution that can help you streamline and optimize compliance activities by automating many of these time-consuming, manual processes. Schedule a free demo today and see how ZenGRC can help you manage your risk more easily and efficiently.