COSO Framework governance, risk management and compliance (GRC)
Definition

ISO 31000 Risk Management

The ISO 31000 Risk Management framework is an international standard that provides businesses with guidelines and principles for risk management from the International Organization for Standardization. Regulatory compliance initiatives are usually specific to a particular country and applicable to certain sized businesses or businesses in specific industries. However, ISO 31000 is designed to be used in organizations of any size. Its concepts work equally well in the public and the private sector, in large or small businesses and nonprofit organizations.

ISO 31000 framework and guidelines

The risk management framework is made up of six distinct areas:

  • Leadership. Leaders within the organization will need to take the initiative to make sure that ISO 31000 is adopted and applied in a way that aligns with the organization's culture and business objectives.
  • Integration. While it is important to integrate risk mitigation into as many organizational processes, it is important to not cause operational bottlenecks or stand in the way of core business processes being performed.
  • Design. Organizations will need to design a risk management strategy that works for the organization based on its needs.
  • Implementation. The implementation process integrates the organization's risk management design into business processes. Implementation is usually a formal process with stated objectives, deadlines and reporting requirements.
  • Evaluation. Evaluation assesses the design to determine what is working and what may need to be refined.
  • Improvement. Organizations should continuously look for ways to improve their ISO 31000 implementation.

ISO 31000's risk management principles

ISO 31000 seeks to help organizations take a methodical approach to risk management by doing three key things:

  • identify risks;
  • evaluate the probability of an event tied to an identified risk occurring; and
  • determine the severity of the problems caused by the event occurring.

As such, ISO 31000 does not seek to eliminate risks, because the total removal of all risks is impossible. Instead, it is meant to help organizations identify their risks and establish a strategy for mitigating or reducing risks where appropriate.

There are eight core principles involved in ISO 31000:

  • Inclusive. For efforts to be successful, all the organization's key stakeholders must be involved.
  • Dynamic. Organizations change over time. As such, the risk sources that are relevant to an organization today might change tomorrow. Organizations must perform ongoing risk analysis if their risk mitigation efforts are to continue to work.
  • Best available information. Risk mitigation efforts must be based on the best and most current information available. However, organizations must also accept the idea that unanticipated risks will always exist.
  • Human and cultural factors. Human and cultural factors can be key drivers of risks. The list of identified risk should include those risks related to human error or to the organization's unique culture.
  • Continuous improvement. Long-term adherence to ISO 31000 means adopting the principles of continuous improvement to ensure that the organization's risk mitigation efforts improve over time.
  • Integration. The concepts of risk mitigation and identification should be integrated into all business processes.
  • Structured and comprehensive. Organizations should create a comprehensive risk mitigation strategy that addresses all known risks.
  • Customized. Because every organization is unique, the concepts of ISO 31000 should be applied in a way that is custom tailored to the organization.

Benefits and challenges of ISO 31000 standard

There are several benefits associated with adopting the ISO 31000 standard, including the following:

  • Proven effectiveness. Because ISO 31000 is an internationally recognized standard, it is used by countless organizations. This means that ISO 31000 has been thoroughly vetted and proved to be effective.
  • Reduced legal exposure. By identifying key drivers, organizations may be able to reduce their legal exposure and decrease the risks posed by litigation.
  • Address risks in a standardized method. When properly implemented, ISO 31000 can act as a template that will help organizations identify key drivers of risk. It establishes risk criteria and risk treatments in a standardized way.
  • Create a culture of risk mitigation. By incorporating risk mitigation into nearly all business processes, employees will become used to the idea of identifying and potentially mitigating risks.
  • Increase the organization's profitability. When an organization mitigates unnecessary risks, it also reduces the potential for financial damage stemming from events tied to that risk.
  • Utilize what is already in place. ISO 31000 is just one of many ISO standards. The various standards are designed to work together, which means that organizations may be able to incorporate the work that they have already done into their ISO 31000 strategy.
  • It can drive an organization to be more preemptive. A good ISO 31000 implementation can help an organization shift from being reactive to taking a more proactive approach at risk mitigation.
  • It may help the organization to more easily acquire funding. Banks and investors tend to be risk averse. If an investor is convinced that an organization is serious about identifying and mitigating risks, they may be more likely to approve an investment.

Although there are clear advantages to adopting ISO 31000, there are also at least some challenges that must be considered, including the following:

  • Adherence requires a continuous effort. If an organization fails to incorporate ISO 31000 concepts into business processes, the risk mitigation plan that it creates will quickly become outdated and will likely be ignored by employees.
  • Potential for a false sense of security. Even with an effective risk mitigation plan in place, organizations must remember that there will always be unidentified risks.
  • Organizations can become risk averse. Risk aversion can make it difficult for an organization to capitalize on new opportunities.

How to effectively implement ISO 31000

Each organization will need to take a unique approach to ISO 31000 because every organization is different. Even so, ISO outlines three key steps for getting started:

  • Be aware of objectives. An organization's risk mitigation strategy should align with its business objectives, not get in the way of them.
  • Assess existing governance. Larger organizations likely already have a governance structure in place. That existing structure may be useful in the formulation of roles and procedures related to ISO 31000.
  • Consider level of commitment. Prior to implementing ISO 31000, organizations should consider the resources they are willing to invest in their risk mitigation efforts.

While following the implementation steps can be done in sequence, they should also be repeated consistently.

  • Communication and consultation. This step aims to increase awareness and understanding among stakeholders while also gathering input and information to aid decision-making. It should take place throughout all steps of the implementation process.
  • Scope, context and criteria. The goal of these three steps is to customize ISO 31000 to the company's risk management needs. Organizations should be aware of the breadth of implementing risk management. They should also understand the internal and external environment of the company. Finally, the organization should establish criteria based on company priorities, objectives and policies. The criteria should be reevaluated throughout the implementation process and amended if necessary.
  • Risk assessment. This step is made of up the following three separate processes:
    • Risk identification. The goal is to find and define risks that could harm or hinder a company's business objectives.
    • Risk analysis. The goal is to evaluate and comprehend any risks and their features, including the risk level, complexity, sources, probability, circumstances and effective controls.
    • Risk evaluation. The goal is to compare the risk analysis to the risk criteria to figure out where action is needed and support those decisions.
  • Risk treatment. The purpose of this step is to choose and apply risk management options.
  • Monitoring and review. This step should take place during all stages of the implementation process. The goal is to assess the effectiveness of the process implementation and find any room for improvement.
  • Recording and reporting. This step aims to document the implementation process and communicate activities and outcomes to the organization.
This was last updated in November 2021

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