Risk Categories Definition
Risk categories can be defined as the classification of risks as per the business activities of the organization and provides a structured overview of the underlying and potential risks faced by them. Most commonly used risk classifications include strategic, financial, operational, people, regulatory and finance.
Why do you use Risk Categories?
- Risk categories help identify risks and enable them to become robust and practical at the same time.
- It ensures that the users can track the origin of the underlying and potential risks faced by an organization.
- These categories help determine the efficiency of the control systems implemented in all the departments of an organization.
- It ensures that risk identification is made comprehensively, covering all the probable aspects of the underlying and upcoming risk conditions.
- With these categories, users can determine the areas that are highly prone to risks, and it even allows in the identification of standard and probable causes.
- With risk categories, users can even develop appropriate risk dealing mechanisms.
How to Identify Categories of Risk?
An organization must scrutinize its process assets to find out if the same has a defined set of risk categories or not. The users can make use of techniques like the Delphi techniqueDelphi TechniqueThe Delphi method is a forecasting framework wherein the main objective is to arrive at a group consensus and fill up questionnaires by chosen experts. Next, the expert group opines their views on an initiator or facilitator, summarizing the gathered information into an understandable report., SWOT analysisSWOT AnalysisSWOT Analysis is an analytical tool to identify and evaluate an entity’s strengths, weaknesses, opportunities, and threats., documentation reviews, information gathering techniques, brainstorming, root cause analysisRoot Cause AnalysisRoot cause analysis is a problem-solving technique in which the source of a problem is identified, thereby finding the best possible solutions to it. It is a permanent fix to an issue since it establishes a cause-effect relationship for every adverse situation., interviewing, assumption analysis, checklist analysis, risk register, outputs of risk identification, impact matrix, risk data quality assessment, simulation technique, etc.
Top 15 Risk Categories
The following are the categories of risk –
#1 – Operational Risk
Operational risksOperational RisksOperational risk is the business uncertainty a company comes across in the industry while executing its everyday business operations. Such risks arise due to internal system breakdown, technical issues, external factors, managerial problems, human errors or information gap. can be defined as the risks of loss arising from improper implementation of processes, external issues (weather problems, government regulations, political and environmental pressures, and so on), etc. Operational risks can be better understood as a type of risk due to inefficiencies in business operations carried out by an organization. Examples of operational risks are insufficient resources, failure in resolving conflicts, etc.
#2 – Budget Risk
Budget risk can be defined as a risk that arises from an improper estimation of a budget allocated to a particular project or process. Budget risk is also regarded as cost risk, and the implications of such a risk are delay in the completion of a specific project, pre-mature handover of the project, failure to deliver the quality project or compromise in the quality of the project in comparison to what was committed to the client, etc.
#3 – Schedule Risk
When the release or completion of the project is not assessed and addressed correctly, the schedule risk takes place. Such a risk can impact a project and might even be the reason behind the failure of the same and, thus, can result in losses for the company.
#4 – Technical Environment Risk
Technical environment risk can be regarded as the risk concerning the environment in which both the customers and the clients operate. This risk can take place due to the testing environment, regular fluctuations in production, etc.
#5 – Business Risk
Business risksBusiness RisksBusiness risk is associated with running a business. The risk can be higher or lower from time to time. But it will be there as long as you run a business or want to operate and expand. can occur due to the unavailability of a purchase order, contracts in the initial stage of a particular project, delay in the attainment of inputs from clients and customers, etc.
#6 – Programmatic Risk
These are the risks that are not within the control of a program or outside the purview of the operational limits. Changes in product strategy or government regulations are examples of programmatic risks.
#7 – Information Security Risk
Information security risks are concerned with the breach of the confidentiality of a company’s or clients’ sensitive data. The violation of such data can be a huge risk for an organization, and it might not just cause financial losses but also result in loss of goodwillGoodwillIn accounting, goodwill is an intangible asset that is generated when one company purchases another company for a price that is greater than the sum of the company's net identifiable assets at the time of acquisition. It is determined by subtracting the fair value of the company's net identifiable assets from the total purchase price. of the same.
#8 – Technology Risk
Technology risks occur due to sudden or complete change concerning technology or even the installation of new technology.
#9 – Supplier Risk
Supplier risks take place in a scenario where there is third-party supplier interference in the development of a particular project owing to his association in the same.
#10 – Resource Risk
Resource risk occurs due to improper management of a company’s resources such as its staff, budget, etc.
#11 – Infrastructure Risk
Infrastructure risk takes place as a result of inefficient planning concerning infrastructure or resources, and that is why it is always essential to have appropriate planning of infrastructure so that the project does not get impacted.
#12 – Technical and Architectural Risk
Technical and architectural risk are such type of risk that fails overall functioning and performance of an organization. These risks arise out of the failure of software and hardware tools and equipment that are taken into use in a particular project.
#13 – Quality and Process Risk
Quality and process risk occurs due to improper application of customizing a process and hiring of staff to the process that is not well trained and as a result of which the outcome of a process gets compromised.
#14 – Project Planning
Project planning risks are such risks that arise out lack of proper planning concerning a project. This lack of project planning can cost the project to sink and fail to meet the expectations of the clients as well.
#15 – Project Organization
Project organization is another risk associated with the improper organization of a particular project. This lack of project organizing can cost the project to sink and fail to meet the expectations of the clients as well.
This has been a guide to Risk Categories and its definition. Here we discuss the top 15 risk categories with a detailed explanation along with how to identify it and Why do you use it?. You can learn more about from the following articles –