The recent proliferation of powerful storm systems, literal and figurative, makes this an opportune time to review the five types of risk that threaten every organization. Fortunately, once identified, these risks can be managed through a handful of proven, practical strategies.
[Related: Don’t Just Hope: Choosing Strategies to Mitigate Risk]
In the past few months, an already challenging operating environment for organizations was made even more uncertain by a global internet outage, turbulence over tariffs, devastating storms, and a prolonged shutdown of the U.S. government.
This accumulation of threats makes this an excellent time to revisit the subject of risk—specifically, the five types that can damage every organization, whether it’s a business, nonprofit, or government agency.
It also makes this a good time to consider a related but often overlooked issue: the web-like nature of risk and the surprising vulnerabilities this interconnectedness can create.
Let’s begin with a breakdown of the five types of risk, then we’ll turn to the topic of cross-risk issues and share some strategies for managing risk across the board.
As indicated above, the five types of risk are operational, financial, strategic, compliance, and reputational. Let’s take a closer look at each type:
The possibility that things might go wrong as the organization goes about its business. Reflects the fact that assets, processes, and people can fail, leading to consequences for the business ranging from negligible to catastrophic.
The potential costs or loss related to threats. This is often included in other risks but should be considered separately as well. Can include lost revenue, delayed revenue, restricted cash flow, and cost increases (such as for labor or supplies).
The potential to limit the ability to execute strategies, achieve objectives, and make decisions. Strategic risks are those pertaining to the possibility the company is moving in the wrong overall direction. Could include changes in business demand or need; competitive changes or pressure; technological changes; senior management turnover; and stakeholder concerns or pressure.
The potential to fall out of compliance with the guidelines, laws, or contracts the organization is obliged to operate under. This could happen if, for example, the company becomes unable to perform a certain function or loses the ability to monitor compliance activities. Common compliance areas include: regulatory requirements; best practices (as in accounting); elective compliance with standards such as ISO or ITL; and contractual terms and conditions.
The potential to lose financial, market, and social standing due to damage to reputation. This damage could be either warranted or unwarranted. Reputational risks include: management gaffes; criminal proceedings against the company or its employees; technology issues; strategic decisions; issues with product or service quality; and associations with vendors or partners. In recent years, social media has added a volatile new element to reputational risk.
The company that wants to protect its future continuously assesses and mitigates its risks across all five of these areas.
One stumbling block that’s often overlooked, even by risk-savvy organizations, is what we might call cross-risk issues—vulnerabilities that arise from the web-like nature of risk. Tug one strand of a web and the whole structure can shift or tear. Something similar occurs with risk.
A people risk can quickly become a reputational risk if the absence of a key person leads to undisciplined messaging during a crisis. A financial risk can morph into an operational risk if currency fluctuations make critical materials unaffordable, triggering a production slowdown. Similarly, a vendor risk can give rise to a reputational risk if a supplier with which a company is closely associated is caught up in a scandal.
Here’s another example: Suppose a compliance department is required to submit a quarterly report that depends on data from an operational unit. If that unit is down, the report can’t be produced, potentially resulting in a fine. In this scenario, an operational issue cascades into a compliance impact.
Managing cross-risk issues requires awareness and a willingness to trace connections that aren’t immediately obvious. Always ask whether any mitigations you implement in one area might create a knock-on risk in another.
The following are some strategies you can take to help your company manage its risks across the board:
An organization that manages risk across all five areas—and understands how those risks connect—builds the resilience needed to weather whatever storms lie ahead.
The five types of risk—operational, financial, strategic, compliance, and reputational—form the foundation of any effective risk management program. Understanding and monitoring each type helps organizations prepare for potential disruptions before they become crises.
It’s also important to recognize how risks can overlap or influence one another. By identifying these cross-risk issues, organizations can strengthen their resilience and avoid unintended consequences when implementing mitigations.
If your organization would like guidance in assessing and managing risks across the board, MHA can help. Our consultants partner with clients to develop practical, sustainable strategies for managing risk and maintaining operational continuity in even the most turbulent environments.
Everything You Always Wanted to Know About Managing Risk but Were Afraid to Ask
Don’t Just Hope: Choosing Strategies to Mitigate Risk
Every Single Day: Make Risk Management Part of Your Company’s Culture