Keeping It Simple: A Quick Guide to Effective Risk Identification

In the dynamic world of business, it's easy to get lost in complicated processes. Risk identification is no exception, especially for those new to risk management.

However, effective risk identification doesn't have to be complex. It's about focused analysis, a thorough understanding of the product or service, and aligning your company’s approach with its overall risk tolerance.

Pedro Morales

True sophistication lies in achieving the desired outcome through the most streamlined and elegant means possible. Leveraging the power of multiple perspectives is a key part of such an approach.

Imagine, for example, an architect and a security expert meticulously auditing a building to ensure its structural integrity and to identify potential security breaches. The "building" represents the product or service in question. The goal is to ensure it functions as intended and to uncover potential vulnerabilities, including those exploitable by unauthorized access or malicious intent.

The Action Plan for Identification

A comprehensive approach is needed to identify risks effectively. Here are six steps worth implementing:

1. Take a Deep Dive into the Product to Unearth Vulnerabilities

Detailed analysis is critical. One must go beyond a simple checklist and truly dissect the product or service. Thinking like an engineer, a user and a hacker, simultaneously, is key.

What are the core components? How do they interact? Where are the dependencies and single points of failure? The focus shouldn't solely be on external threats like cyberattacks. Internal vulnerabilities – such as system failures, data corruption, process bottlenecks, and even human error – must also be considered.

For example, imagine assessing the risk of a new mobile banking app. External vulnerabilities might include unauthorized access to user accounts or data breaches due to weak encryption. Internal vulnerabilities could involve server outages that prevent access to accounts, software bugs that lead to incorrect account balances, or inadequate fraud detection mechanisms.

The key is to be comprehensive. All possible scenarios, no matter how unlikely they may seem, should be considered.

Each potential vulnerability, its potential impact and the likelihood of it occurring should be documented. This in-depth analysis forms the foundation of the risk identification process and guides the development of effective mitigation strategies.

2. Pick the Brains of Product Teams as Part of a Collaborative Process

To truly understand how a product might be exploited, one needs to think like someone who wants to break it. This is where product teams become invaluable. They possess in-depth knowledge about the system's intricacies, potential weaknesses and unconventional use cases that might not be apparent to outsiders.

Product teams should be encouraged to "think like an adversary" and brainstorm ways the product could be misused, abused or compromised. However, relying solely on product teams can create blind spots.

Risk management and other central teams play a crucial role by bringing a broader perspective. They ensure a comprehensive assessment that considers industry best practices, regulatory requirements and the company's overall risk appetite. They can guide product teams with structured frameworks, prompt them with "what if" scenarios, and challenge their assumptions to uncover hidden vulnerabilities.

This collaborative approach, combining the product team's deep product knowledge with the risk management team's broader perspective, ensures a more robust and comprehensive risk identification process.

3. Establish Preventive Controls

Once potential risks have been identified, it's time to shift gears and think about protection. This involves brainstorming preventive controls – measures that can be put in place to mitigate or eliminate those risks. Think of it as building a fortress around the product or service.

It is important to avoid getting bogged down in the details at this stage. The goal is to generate ideas and explore possibilities.

Stronger authentication measures might be needed, for instance, to prevent unauthorized access, while redundant systems could be required to ensure business continuity. Stricter data validation checks, moreover, may be necessary to prevent errors. These controls don't need to be perfect or fully formed yet; this stage is about laying the groundwork for future action.

Thinking through potential controls during the risk identification phase allows for better planning and prioritization within broader risk management practices. It helps connect the dots between vulnerabilities and mitigation strategies, ensuring a proactive and comprehensive approach to risk management.

4. Use Data to Build an Early Warning System

Effective risk management is not just about identifying and mitigating existing risks; it's also about anticipating future ones. This is where data comes into play. By identifying key metrics and data points that could signal emerging or changing risks, an early warning system can essentially be built.

Consideration should be given to what signals might indicate a problem. Is it a sudden spike in error rates? An increase in customer complaints? A surge in suspicious login attempts? These data points can provide valuable insights into the health of the product and offer alerts about potential issues before they escalate.

It's crucial to consider this during the risk identification phase because it helps prioritize and set the groundwork for building the data capabilities needed to monitor key risks effectively. This might involve engineering systems to collect the right data, setting up dashboards for visualization or even implementing automated alerts to notify staff about anomalies.

5. Align Threats with Risk Appetite

Every organization has a certain level of risk it is willing to accept in pursuit of its objectives. This is known as risk appetite. It's essential to consider this early in the risk identification process, especially when dealing with new products, services or technologies that introduce unfamiliar risks.

A new risk might challenge an existing risk appetite and require careful evaluation. This calls for a couple of important questions to be asked and answered: (1) Does the risk align with the company's overall risk tolerance? (2) Could it, moreover, have spillover effects on other areas of the business? (For example, a new AI-powered product might introduce risks that haven't been previously considered.)

By addressing these questions during the risk identification phase, new ventures can be ensured to be aligned with the company's broader risk management strategy, avoiding any unintended consequences.

6. Keep the Process Straightforward

Discussions around the ownership of this process are far less important than bringing the right perspectives to the table. The focus should be on building a solid framework, emphasizing the following factors:

• Clarity: A simple process is easier to understand and implement, leading to better execution and results.
• Efficiency: Avoid unnecessary complexity and focus on what truly matters – identifying and mitigating key risks.
• Adaptability: As the product and the threat landscape evolve, a simple framework is easier to adapt.

Parting Thoughts

Risk identification is an ongoing journey, not a destination. While risk assessments and self-assessments are valuable tools, they provide a snapshot in time. It's important to avoid the trap of thinking that managing risks is just a point-in-time exercise.

Effective risk management is forward-looking and preventive. The goal should be to identify and mitigate risks proactively, before they become problems.

As a risk program matures, reactions should lessen and anticipation should increase. This means paying close attention to both the control environment and the ever-changing landscape of inherent risks.

Building a robust risk identification program, however, doesn’t have to be overly complex. Indeed, the aim should be to build a simple, focused program that protects the business, drives success and fosters trust with customers and regulators. Emphasizing long-term value and customer protection, rather than short-term gains, is a win-win for everyone involved.

Pedro Morales is a Risk & Compliance Director at Google. He began his career in consulting before moving to Santander's risk team, and later held various leadership roles at the Federal Reserve System supervising large banks. The views he expressed in this article are his alone and do not necessarily reflect those of his employer.