What are Risk Categories?
The term “risk categories” refers to the risk groups that have been created on the basis of the business activities of the organization. These risk categories provide a structured overview of the potential risks to which the particular organization is exposed. Some of the most commonly used risk categories include risks pertaining to operations, business, resource, regulatory, people, and project.
Explanation of Risk Categories
Typically, any business is exposed to a number of risks and some of them can be lethal enough to cause serious financial losses or even push to the brink of bankruptcy. As such, most of the large companies set-up extensive risk management departments, while the smaller firms may hire one or two risk professionals to manage all the risks. Nevertheless, categorization of risks is the very first step or the foundation of the risk management strategy in any company.
Categories of Risk
Now, let us look at some of the most common categories of risks usually observed across companies. However, please note that the list is not exhaustive and some of them can also be clubbed together into a single risk category.
- Operational Risk: It can be defined as the risk that can arise due to inefficiencies in business operations or improper implementation of business processes. In some cases, even external issues, such as government regulations, weather problems, etc.,can also result in operational risks.
- Business Risk: This type of risk can occur due to various process related issues, which may include a shortage of purchase orders, delay in receiving inputs from clients, etc.
- Schedule Risk: This risk refers to an incorrect assessment of the completion or release of a project. Schedule risk can impact a project to such an extent that it can also become the sole reason for its failure.
- Budget Risk: It can be defined as the risk arising out of grossly inaccurate estimation of the budget for a particular process or project. Budget risk can result in a delay in project completion, premature handover of the project or compromised project quality. Budget risk is also known as cost risk.
- Information Security Risk: It can be defined as the risk arising out of breach of confidentiality of any sensitive data, especially financial data. The implication of violation of this type might not be restricted to financial losses as it can severely dent the reputation and goodwill of the organization.
- Supplier Risk: It can be defined as the risk due to too much dependence on one or very few suppliers. Such risks can impact the company’s production process or influence the progress of its ongoing projects.
- Technical Environment Risk: It can be defined as the risk that is pertaining to the environment in which the clients and the customers operate. Some of the reasons behind risk due to the technical environment include regular fluctuations in production, testing environment, etc.
- Programmatic Risk: This type of risk is usually beyond the purview of the operational limits and hence can’t be controlled or programmed. Some of the common examples of programmatic risks are changes in government regulations or product strategy.
- Technology Risk: This type of risk occurs due to sudden or complete change in strategy pertaining to technology or implementation of a new technology. Usually, people tend to resist such changes, which is one of the major manifestations of this risk.
- Resource Risk: This type of risk occurs due to the inability of the company’s management to allocate and utilize the available resources, such as employees, equipment, etc., appropriately.
- Infrastructure Risk: This type of risk arises out of inefficient planning pertaining to infrastructure resources. As such, it is very important for any company to devise appropriate infrastructure planning for its project.
- Architectural Risk: It can be defined as the risk of failure of the overall performance or functioning of an organization owing to the unsuccessful implementation of software & hardware tools.
- Process Quality Risk: This type of risk occurs due to failure to properly customize the business process. For instance, if a company hires staff that is not properly trained for the process, then there is a higher probability that the company’s process quality may get compromised.
- Project Planning: It can be defined as the risk that arise out of improper planning for a particular project. Such risks can cause the project to sink as it might fail to meet the client’s expectations.
How to Use Risk Categories
So, by now we know what kind of risks a business could face during its course of operation. However, just knowing about the risks is not of much use as long as we don’t convert it into some actionable tasks. Risk categorization is the just first step of a well-engineered risk management strategy and there is much more work to be done after that. The following steps include deep diving into each type of risk, analyzing them, identifying what are the specific things that could possibly go wrong, and then assessing their business impact. After all these steps, we can finally build the strategy for mitigating the risks.
So, it is important to note that there may be some degree of overlap between some of the risk categories based on individual perception and judgment. Also, this is not an exhaustive list and there can be more risks associated with businesses. Nevertheless, the point is that a company needs to identify which are the most important risks for their business and then act accordingly to build a robust risk management strategy.
This is a guide to Risk Categories. Here we also discuss the introduction and how to use risk categories along with uses and its explanation. You may also have a look at the following articles to learn more –