Proactive vs. Reactive Risk Management Strategies

In a difficult economic climate, a company’s odds of survival depend on how skillfully it manages risk. A well-rounded risk management strategy can help companies stay in business longer because they can navigate key risks and prepare themselves for potential effects from internal and external conditions.

Understanding what sound risk management practices are, however, is no easy task. This article walks through the basics, so you can implement a smart risk management program at your own organization.

What Is Risk Management?

When developing a risk management program, a company typically goes through the following step. Those steps begin with a strategic planning exercise with senior management, and conclude with a business continuity plan.

Risk Identification

The first step is to identify the risks that might threaten your business model or business continuity. The below list is not exhaustive, but it does give you a sense of the threats you should be looking for:

• Operational risk
• Financial risk
• Reputational risk
• Compliance, legal, or regulatory risk

Risk Assessment

Once you identify the risks that might strike your organization, you need to assess the actual likelihood of the risk happening and the possible harm it might cause. This lets you organize your most pressing risks by priority, so you can allocate risk management resources more efficiently.

Risk Treatment (acceptance, avoidance, mitigation, transference)

You can treat different risks in different ways. For example, some companies might decide to accept certain cybersecurity risks, while others might transfer the potential damage (say, by taking out a cyber insurance policy). Still others might avoid the risk entirely (perhaps by not using a certain type of IT asset), and others might mitigate the risk by taking certain precautions to make the risk less harmful.

Risk Monitoring

Risks evolve over time. So once you decide on a risk treatment, you must still monitor your risks to see whether they’ve become better, worse, or gone away entirely. Companies might use a blend of internal controls and external providers to enable active threat monitoring from all risk factors, especially when launching new products or new markets.

Continuous Improvement

Companies should continuously improve their resilience to risk. Those efforts gradually reduce your risk profile, which assures company stakeholders and customers of the company’s long-term prospects. As companies improve at risk management, customer loyalty and retention improve.

All that said, each company needs to find its one approach to risk management. One of the most fundamental issues is whether to take a proactive or reactive approach to risk management.

Proactive and Reactive: What’s the Difference?

Reactive risk management could mean the following:

• Preventing potential risks from becoming incidents
• Mitigating damage from incidents
• Stopping small threats from worsening
• Continuing critical business functions despite incidents
• Evaluating each incident to solve its root cause
• Monitoring to assure that the incident does not recur

On the other hand, proactive risk management strategies include:

• Identifying existing risks to the enterprise, business unit, or project
• Developing a risk response
• Prioritizing identified risks according to the magnitude of their threat
• Analyzing risks to determine the best treatment for each
• Implementing controls necessary to prevent hazards from becoming threats or incidents
• Monitoring the threat environment continuously

Using the terms “proactive” and “reactive” when discussing risk management can confuse people, but that shouldn’t be so; proactive and reactive risk management are different things. Understanding the difference between the two is crucial to developing effective risk mitigation strategies. So let’s understand the nuances of each approach in detail.

The basics are simple. Reactive risk management tries to reduce the damage of potential threats and speed up an organization’s recovery from them, but assumes that those threats will happen eventually. Proactive risk management identifies possible threats and aims to prevent those events from ever happening in the first place.

Each strategy has activities, metrics, and behaviors useful in risk analysis.

Reactive Risk Management

One fundamental point about reactive risk management is that the disaster or threat must occur before management responds. In contrast, proactive risk management is about taking preventative measures before the event to decrease its severity. That’s a good thing to do.

At the same time, however, organizations should develop reactive risk management plans that can be deployed after the event – because many times, the unwanted event will happen. If management hasn’t developed reactive risk management plans, then executives end up making decisions about how to respond as the event happens; that can be costly and stressful.

There is one Catch-22 with reactive risk management: Although this approach gives you time to understand the risk before acting, you’re still one step behind the unfolding threat. Other projects will lag as you attend to the problem at hand.

Helping to Withstand Future Risks

The reactive approach learns from past (or current) events and prepares for future events. For example, businesses can purchase cybersecurity insurance to cover the costs of a security disruption.

This strategy assumes that a breach will happen at some point. But once that breach does occur, the business might understand more about how to avoid future violations and perhaps could even tailor its insurance policies accordingly.

Proactive Risk Management

As the name suggests, proactive risk management means that you identify risks before they happen and figure out ways to avoid or alleviate the risk. It seeks to reduce the hazard’s risk potential or (even better) prevent the threat altogether.

A good example is vulnerability testing and remediation. Any organization of appreciable size is likely to have vulnerabilities in its software that attackers could find and exploit. So regular testing can find and patch those vulnerabilities to eliminate that threat.

Allows for More Control Over Risk Management

A proactive management strategy gives you more control over your risk management. For example, you can decide which issues should be top priorities and what potential damage you will accept.

Proactive management also involves constantly monitoring your systems, risk processes, cybersecurity, competition, business trends, and so forth. Understanding the level of risk before an event allows you to instruct your employees on how to mitigate them.

A proactive approach, however, implies that each risk is constantly monitored. It also requires regular risk reviews to update your current risk profile and to identify new risks affecting the company. This approach drives management to be constantly aware of the direction of those risks.

What About Predictive Risk Management?

As the name suggests, predictive risk management about predicting future risks, outcomes, and threats. Some predictive components may sound similar to proactive or reactive strategies.

Predictive risk management attempts to:

• Identify the probability of risk in a situation based on one or more variables
• Anticipate potential future risks and their probability
• Anticipate necessary risk controls

Five Risk Management Strategies with Examples

Now that we understand the two main types of risk management strategies, let’s review how companies implement these strategies in the real world. The following real-world examples might not be conclusive, but they can guide your risk management strategy.

1. MVP or experiment development

   Instead of launching a full product line or entering a new market, companies can launch products in a lean, iterative fashion- the ‘minimum viable product’ – to a small market subsection. This way, companies can test their products’ operational and financial elements and mitigate the market-related risks before they launch to a broader audience.

   For example, an airline could test facial recognition technology to make security checks faster, but might want to validate privacy and data security concerns first by trying it out at one airport before going nationwide.

2. Risk isolation

   Companies can isolate potential threats to their business model by separating specific parts of their infrastructure to protect them from external threats.

   For example, some companies might restrict access to critical parts of their software ecosystem by requiring engineers to work at a specific location instead of working remotely (which opens the door to potential cyber threats).

3. Risk-reward analysis

   Companies may undertake specific initiatives to understand the opportunity cost of entering a new market or the risk of possibly gaining market share in a saturated market. Before taking the initiatives at a broader level, the analysis would help them understand the market forces and their ability to induce or reduce risks with what-if scenarios.

   For example, a direct-to-consumer delivery company might want to project the anticipated demand for entering the market with faster medical supply delivery.

4. Data projection

   Companies can analyze data with the help of machine learning techniques to understand specific behavioral or threat patterns in their ways of working. These data analysis efforts might also help them understand what second-order effects are lurking because of inefficient processes or lax attention on certain parts of the business.

   For example, a large retailer might use data analysis to find inefficiencies in its supply chain to reduce last-mile delivery times and get an edge over the competition.

5. Certification

   To stay relevant and retain customer trust, companies could also obtain safety and security certifications to prove they are a resilient brand that can sustain and mitigate significant operational risks.

   For example, a new fintech company might get certified for PCI-DSS security standards before scaling in a new market to build trust with its customers.

   (For more reading, we have compiled additional suggestions on risk mitigation.)

How ZenGRC Pro Can Help With Risk Management

Covering all aspects of a risk management plan on your own is challenging. The RiskOptics ZenGRC Pro Platform is the best way to create an action plan that addresses all your risks and that you can put into practice efficiently.

ZenGRC Pro can help whether you’re working with a reactive or proactive approach to risk management; its intuitive interface can show you which risks need mitigating and how to do it at a glance. It also tracks your workflows and collects the documents you’ll need at audit time, and more.

Have peace of mind by trusting the only reliable way to prepare for big or small risks. Book a ZenGRC demo today!