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13 types of business risks for companies to manage

To avoid business problems and operate effectively, companies need to be ready to deal with these common types of risks as part of their risk management programs.

Every business contends with risks that can affect how well it performs and, ultimately, whether it succeeds or fails. But different business risks -- even common ones faced by all companies -- don't affect each organization in the same way. As a result, a company's leaders must know not only what risks it faces but also the likelihood that those risks will cause problems and the business impact they could have.

This is all part of risk management -- the process of identifying, assessing and controlling potential business risks. Risk management consultants and practitioners typically break down risks by different categories, or types. However, risks aren't always siloed. Some are intertwined, which means they can be grouped together and managed collectively.

Despite variations in how risks are categorized by different experts in the field, the following are 13 well-established and emerging types of business risks that business executives and risk management teams need to understand.

1. Strategic risk

Strategic risk relates to issues that could affect a company's ability to execute against its strategic objectives and reach its business goals. This type of risk also concerns an organization's competitive advantages in the market and internal or external factors that could diminish them.

Elements to consider for managing strategic risk include the skills and stability of the senior executive and business management teams, the organization's capacity to navigate business or market change, its ability to successfully launch new products and services, and how resilient it is when faced with adverse circumstances.

Because strategic risk encompasses a broad array of issues, some risk management experts said many -- if not most or even all -- of the other risks detailed below could arguably fit into this one bucket.

2. Operational risk

A similarly expansive type of risk, operational risk involves anything that could affect an organization's ability to run its business operations effectively and efficiently, said Emily Frolick, an advisory partner at professional services firm KPMG and U.S. leader of its Trusted Imperative risk management program. Managing operational risk touches on the processes, procedures, policies, people and systems that a company has put in place and ensuring that they can weather adverse events.

"It can be a little bit of a catchall, but it's basically about the core operations of the company," said Tad Roselund, a managing director and senior partner at Boston Consulting Group who works with clients on risk management and compliance initiatives. As a result, operational risk relates to business continuity and resilience, added Roselund, who previously was BGC's chief risk officer with responsibility for internal risk and compliance functions.

Operational risk often also encompasses risks associated with supply chains and third-party vendors, environmental factors and an organization's facilities, although some consultants see those things as separate risk categories. KPMG, for one, considers environmental and geopolitical risk significant enough to be a single risk type. Others view such items as standalone risks only for businesses that are particularly vulnerable to them. For example, a manufacturer that relies on production plants to operate without unplanned downtime might break out facilities risk as its own category.

3. Process risk

Although it's sometimes considered part of operational risk, process risk is frequently listed as another type. It specifically relates to whether the various business processes that support a company's operations -- from core internal processes to digital workflows and supply chain functions -- are effective, efficient and resilient. If not, an organization needs to assess the downstream impacts that the process gaps could have and decide how to mitigate the resulting risks.

4. Financial risk

All companies face financial risk involving business factors that could affect cash flow, profitability, balance sheets and even an organization's solvency. Financial risk is "not that your stock price goes down," Roselund said. He explained that stock performance is an outcome -- whether positive or negative -- of how well a company manages its financial risk and other types of business risk it faces.

5. Compliance risk

Every company has regulatory requirements to meet. In addition, well-run companies establish a framework of governance policies and procedures to ensure that business operations meet internal standards and that business managers are accountable for adhering to the standards.

How well companies comply with those regulatory and governance requirements can affect business performance, and organizations in highly regulated industries, such as financial services, face greater consequences when they fall short on compliance tasks. Frolick said a company's ability to anticipate regulatory mandates and manage its relationships with regulators can also have an impact on its performance.

All of this makes compliance risk a top-level issue for many companies. Also sometimes referred to more expansively as regulatory and compliance risk or regulatory, compliance and governance risk, this category is a key focus of governance, risk and compliance (GRC) initiatives in organizations.

6. Legal risk

Similarly, every company has some amount of legal risk to manage, such as ensuring that business operations meet contractual obligations and abide by relevant laws. Legal risk also includes potential liability for product malfunctions or safety issues and criminal actions by executives and employees. Managing it requires companies to identify and understand the consequences of failing to meet their legal obligations.

Like other types of business risk, a company's exposure to legal risk varies based on multiple factors, such as the kind of products and services it provides. For example, a recreational company that offers high-adventure outings typically faces a greater chance of legal actions related to injured customers than a retailer. On the other hand, a retailer with hundreds of vendors might have a higher likelihood of contractual disputes.

7. Macroeconomic risk

Some practitioners also list macroeconomic risk as its own category. That particularly makes sense nowadays, said Jim DeLoach, a managing director at consultancy Protiviti who focuses on GRC, enterprise risk management (ERM) and compliance with financial reporting requirements.

"We're going through unprecedented times," DeLoach said, citing the ongoing backlash against globalization of trade, rising interest rates and growing economic tensions between countries. Business executives must pay close attention to those and other macroeconomic factors "because they can override everything else," he added. But companies that manage this type of risk well can respond quickly to such economic forces.

8. People risk

Also called personnel risk or human risk, this is another type of risk that affects every business. All companies rely on people to operate and be successful. Consequently, companies face risks if they're unable to hire and keep enough people with the right skills to meet existing and anticipated business requirements. They also face risks if business conditions change and they have too many workers.

The behavior of people poses potential risks too. For example, executives and other employees might engage in illegal, unethical or improper behavior on the job or not be competent in their position. Personal issues could also affect people's ability to do their jobs, as could medical problems. "All these things are part of people risk," Roselund said.

9. Technology risk

Another universal risk category revolves around technology. A company's IT infrastructure should be assessed to determine whether and to what degree it creates risk -- for example, if IT systems and applications are aging, costly or not resilient enough. Deploying new technologies can also add business risks.

"You could be underinvesting in tech, you could have old tech, or your tech ecosystem could be expanding and creating new risk," Frolick explained. "There's also the potential that [systems] could go down, which is also a risk."

KPMG lists disruption along with technology as a single category of risk -- an acknowledgement of the significant impact that digital transformation initiatives often have on an organization. But it cuts both ways: Frolick said a company that implements a new system could disrupt its operations, as could one that decides to stick with older technology that becomes unreliable. In addition, every company faces the risk of being disrupted by competitors using new technology or existing technologies in a new way.

10. Cybersecurity risk

Also referred to as cyber-risk, cybersecurity risk deals with the potential for business issues and financial losses due to a cyber attack that affects operations or a security breach that results in the theft of company data. It's closely related to technology risk, but listing it as a standalone type of risk recognizes the significant costs and business damage that cybersecurity incidents can cause. For example, IBM's "Cost of a Data Breach Report 2023," based on a study conducted for it by research firm Ponemon Institute, found that the average cost of breaches in 553 organizations worldwide was $4.45 million.

KPMG groups cybersecurity and crime together as a combined risk category because so many security threats are the result of criminal acts. In addition to cyber attacks and data breaches, it encompasses illegal activities such as theft, fraud, embezzlement, money laundering and other financial crimes that can cause monetary and reputational harm to an organization, Frolick said.

11. Data risk

Although some risk management consultants and practitioners include concerns about data security under cybersecurity risk, others now consider data risk to be its own category. They cite data's growing importance to business operations as the reason for making it a separate risk type that also involves data management and data governance issues.

"Data governance, data quality, data for analytics -- those are all important topics. Data flows 24/7, and it changes constantly, so it needs the right amount of monitoring and governance," said Gaurav Deep Singh Johar, a risk management professional who's a member of the Emerging Trends Working Group at ISACA, a professional association for people in information security, risk management and related fields.

Companies that fail to adequately manage the risks around their data security, management and governance programs face lost business opportunities and market share as well as the potential for monetary losses, Johar said.

12. AI risk

This is another type of risk that some consultants now separate from the broader category of technology risk. They said that as the use of AI in business expands, companies must be more attentive to identifying and managing the risks that AI technology poses to their operations.

Risks in using AI include things such as feeding low-quality data into AI models and not having a strong AI governance framework to guard against unintended biases and model drift that degrades performance. But companies also face risks if they opt to limit or forgo their use of AI. For example, they might fall behind competitors that do use AI or miss out on possible business opportunities.

13. Reputational risk

How well a business manages its risks -- or fails to do so -- can also affect its reputation and the standing of its brand in the market. As such, some consultants see reputational damage as an outcome of poorly managing other types of risks rather than a separate risk category. "People talk about it as a risk, but it's generally an outcome of something else," Roselund said. "Something has gone wrong and therefore your reputation is damaged."

But others, such as KPMG, do consider reputational risk as its own category. Reputational and brand issues are "derivative of how well you manage the other risks," Frolick acknowledged, but she said they, too, can be managed to avoid or minimize potential risks. For example, companies can control how they position themselves in the market and how well they align with the expectations that customers and business partners have for them.

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Best practices for managing business risks

To successfully manage risk, an organization must start by identifying the types of risks that affect its business operations and then do risk analysis to understand the potential impact of each one. This often entails the creation of a risk taxonomy that defines the risks faced by a company and a risk register, which documents how individual risks apply to the business for tracking and risk reporting purposes.

Business executives and risk managers should then use these documents to develop and implement controls for avoiding risks or mitigating them to an acceptable level, in keeping with the organization's risk appetite -- a measure of how much risk a company is willing to take to achieve its business goals. But risk management strategies often need to be updated as business conditions and requirements change. At organizations with well-managed risk processes, a risk register "is very much a living document that is used within the core operations," Roselund said.

An effective risk management plan enables departments and business units to confidently navigate business situations, aware of risks and how to deal with them as they arise. "You don't want to avoid risk at all costs, because taking risks is how you grow," Roselund said. "But surprises are less good. You need to understand your risks, your controls and where your gaps are."

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