The risk management framework is a template and guide used by companies to identify, eliminate and minimize risks. It was originally developed by the National Institute of Standards and Technology to help protect the information systems of the United States government. An effective risk management framework seeks to protect an organization's capital base and profits without hindering growth. In addition, investors are more willing to invest in companies with good risk management practices.
This generally translates into lower borrowing costs, easier access to capital for the company, and better long-term performance. It includes activities to prepare organizations to implement the framework at appropriate levels of risk management. They include risk identification; risk measurement and assessment; risk mitigation; risk reporting and monitoring; and risk governance. The Risk Management Framework (RMF) provides a disciplined and structured process that integrates information security and risk management activities into the system development lifecycle.
Given the increasing globalization of companies and supply chains, current risk analysis techniques cannot address the increasing complexity of the risk environment. When starting with RMF, it can be useful to divide risk management requirements into different categories. A risk management framework helps protect against potential losses of competitive advantage, business opportunities, and even legal risks. It was originally published in 2004, although COSO has released several updates to the framework as risk management practices have evolved.
Somewhere along the list, the organization may decide that risks below this level are not worth addressing, either because that threat is unlikely to be exploited or because there are too many major threats to manage immediately to include low threats in the work plan. Almost every company has intellectual property that must be protected, and a risk management framework applies both to this property and to its data and assets. Finally, developing a risk management framework can have a beneficial impact on the fundamental functioning of your company. Adopting a risk management framework that incorporates best practices into a company's risk culture can be the cornerstone of an organization's financial future.
Risk measurement provides information on the amount of a specific exposure to risk or an aggregated exposure to risk and the likelihood of a loss due to those exposures. Federal agencies are required to comply with the risk management framework, but private companies and other organizations can also benefit from following its guidelines. For example, market risk can be measured using observed market prices, but measuring operational risk is considered both an art and a science. In particular, companies operating in the investment sector rely heavily on risk management as a basis that allows them to withstand market declines.
