Common Terms and Definitions Found in Risk Assessment Programs
Before a company can develop a successful risk assessment program, it must understand the concept of risk and the terminology frequently used when discussing risk assessment.
Hazard: A hazard is something with the potential to cause harm to life, health, property, or environment. In the quality industry, a hazard is often referred to as an “undesirable event.” Hazards are an inevitable part of doing business, so a company must determine what its individual hazards are by looking at its own historical data as well industry data. Once an organization identifies its hazards, it will need to measure those hazards using risk. Hazard identification is the first step to developing an effective risk assessment program.
Risk: Risk is the likelihood that a particular hazard will occur, and the magnitude of consequences associated with that hazard. The terms risk and hazard are often confused, but it is important to understand the distinction.
Risk Assessment: A risk assessment is the process of evaluating and ranking the risk resulting from a hazard. A risk is typically evaluated for severity and frequency, and then assigned a “risk level.” A risk matrix is commonly used to determine risk levels (e.g., high, medium, low), and is a critical component of the risk assessment program. After the risk level has been determined, it’s important to determine whether the risk is acceptable or not, a determination which is not always clear-cut. For example, a “low” risk does not always imply acceptable risk, particularly when the consequences are severe (e.g., death).
Risk Management: Risk management is the process of weighing policy alternatives with all interested parties while taking into consideration risk assessment results, as well as other risk-related factors (e.g., control activities and monitoring). The goal of risk management is not only to identify risk, but to implement the steps necessary to manage and reduce the risk to an acceptable level. Risk assessment programs form the foundation of effective risk management.
Key Principles of Effective Risk Assessment Programs
Effective risk assessment is increasingly important to the success of any business but even more so for life science organizations and other highly regulated companies. Increased regulatory requirements, as well as increased scrutiny from shareholders, have forced companies to address the efficacy of its risk-related efforts, particularly its risk assessment programs. Done well, risk assessment provides a method for distinguishing risks that represent opportunities (yes, risk can sometimes be a good thing) from risks that represent pitfalls. These risks can either be internal (e.g., people, processes) or external (e.g., the economy, regulatory landscape) and either retrospective or in the future. When applied consistently, an effective risk assessment program empowers management and other key decision makers to exploit risks that might be good for business, while maintaining the appropriate controls to avoid regulatory noncompliance.
To obtain a revelatory risk assessment, key principles must be considered including:
Business Objectives—An organization’s business objectives will provide the foundation for measuring the impact and probability of risk ratings and determining the scope of the risk assessment. Whether broad (e.g., organization-wide strategic or reporting requirements) or narrow (e.g., relating to a particular product or function such as supply chain), a risk assessment program should begin and conclude with these objectives in mind. Once the scope is defined, risks are rated in terms of impact and likelihood, and then compiled in a risk profile which is viewed in relation to the company’s overall risk tolerance.
Holistic Approach—Risk assessments can be conducted at various levels of an organization (e.g., financial risk assessment, credit risk assessment, compliance risk assessment, etc.,); therefore, governance over the risk assessment process should foster a holistic approach and paint a complete picture of the organization’s overall risk appetite and tolerance levels.
Accountability—In order to ensure that the necessary resources are provided and requisite actions are taken, the risk assessment program should clearly define who is accountable for the oversight of the organization’s risk assessment process.
Key Risk Indicators (KDIs)—Key risk indicators, often referred to as KDIs, are used to measure how risky a particular activity is and to warn of a potential event. Capturing KDIs enhance a company’s ability to anticipate risks, as well as opportunities, before they occur. KDIs should be included in the risk assessment program and defined in relation to company objectives.
How MasterControl Helps Companies Overcome the Challenges of Developing an Effective Risk Assessment Program
When done correctly, risk assessment enables a company to identify and address potential risk factors to both avoid and capitalize on risk events. However, the challenges to conducting successful risk assessments and developing successful risk assessment programs are numerous. Fortunately, Master Control’s enterprise risk management solution, MasterControl Risk™, was designed to help regulated companies overcome these challenges and obtain measureable success in today’s ever-evolving risk landscape. Common challenges include the following:
- Difficult to interpret or use data: A significant amount of time, money, and resources are wasted in organizations that lack an effective tool for organizing and managing the volume, as well as the quality, of its risk assessment data. MasterControl Solution: Because MasterControl is an integrated solution, it connects users, data, and processes under one centralized system. The advantages of this level of connectivity are improved communication and visibility across the organization. And MasterControl’s risk assessment program is easy-to-use. Users can manage risks by project, launch risk assessments for each individual project, and easily view and report risk assessments for each project. MasterControl's best-practice form is a handy tool for risk management that prompts users to compile and track relevant data for assessing risks.
- Inconsistent assessments are performed: One of the biggest obstacles to producing meaningful risk assessments is that often times there are too many different risk assessments being performed across the organization. It’s critical to implement a shared method for performing risk assessments to avoid variations from one assessor (or department) to the next as these variations could result in a failure to identify overlaps and gaps in current risk practices. Standardization can be achieved by using common tools or templates, streamlined data capture, and flexible reporting. MasterControl Solution: Because the system was designed based on the best practices of the most effective risk assessment programs, MasterControl Risk guarantees that corporate risk tolerance thresholds are employed and followed company-wide. MasterControl offers robust analytics and reporting features that give users the option of selecting preconfigured reports or creating custom reports to address specific organization needs. In addition, the solution allows for reports to be scheduled regularly for more transparent oversight.
- Data silos and lack of integrated processes: A risk assessment program is only as good as the documentation that was used to create it. Manual or homegrown systems often lead to data silos which compromise the authenticity of the information gathered during the assessment process. An integrated method for tracking and recording risk-centric documentation across all processes is needed. MasterControl Solution: MasterControl’s enterprise risk solution seamlessly connects all documentation relating to the company’s risk assessment and mitigation activities. Multiple processes, such as corrective action preventive action management, supplier qualification, and non-conforming material disposition, can be integrated to optimize efficacy and efficiency. And unlike other risk assessment program tools on the market, MasterControl allows users to launch risk assessments from different places within the system. Keywords are used to launch them from any MasterControl Process form, for example, change control, supplier, etc.
To get more detailed information on MasterControl’s Risk Assessment Program, feel free to contact MasterControl representative.