Risk Management Process – Establishing the External Context

Risk Management – Article 10

Risk Management Process – Establishing the External Context

Keshav Ram Singhal

Sub-clauses 5.3.2 of ISO 31000:2009 standard provides guidelines on establishing the external context. External context of an organization is the external environment of the organization in which the organization seeks to achieve organization’s objectives. External context of an organization can include but not limited to:

- Cultural environment
(We should understand the major elements of culture that may include material culture, language, aesthetics, education, religion, attitudes, values and social organizations.)

- Social environment
(Business of an organization does not function in a vacuum and it works in societies and therefore societies affect business. The social environment of business can be cutthroat. An organization has to act and react what happens outside the premises of the organization.)

- Political environment
(The political environment in a country affects its economic environment that, in turn, affects the performance of business organization.)

- Statutory and regulatory (legal) environment
(Every country has its own legal framework that governs and affects the business too. Government could change its rules and regulations, and this could an effect on business.)

- Financial environment
(Financial environment is the outcome of a range of functions of the economy on all financial outcomes in a country. It includes forex markets, bond markets, stock markets and commodity markets. Financial environment affects the business performance of an organization.)

- Economic environment
(Economic environment influences the business of an organization to a great extent. It refers to all those economic factors that affect the functioning of a business organization.)

- Natural and competitive environment
(The natural and competitive environment is a dynamic system in which business of an organization competes. It may also be known as market structure. World economic conditions may increase or decrease the prices of raw materials that might force an organization to increase or decrease its prices.)

- Key drivers having impact on the objectives of the organization
(A key business driver is something that has a major impact on the business and its objectives. Identifying and monitoring the key drivers of any business organization is critical to remain in business.)

- Trends having impact on the objectives of the organization
(Trends have a significant impact on organization’s business.It is important to understand whether the business of the organization is exploiting trends or trends are exploiting the business of the organization. It is better not to let the business of the organization get caught up in trends.)

- Relationship with external stakeholders
(Building trust with stakeholders makes relationship more productive and fosters partnership between the organization and stakeholders.)

- Perceptions and values of external stakeholders
(Building trust with stakeholders makes relationship more productive and fosters partnership between the organization and stakeholders. It is better to understand perceptions and values of stakeholders.)

It is important to understand external context. By understanding the external context, the organization ensures considering objectives and external stakeholders’ concern in the process of developing risk criteria. Establishing the external context specific to the scope of the risk management process is based on the organization-wide context, but it should be:

- With specific details of statutory and regulatory (legal) requirements
- With specific details of stakeholders’ perceptions
- With specific details of other aspects of risks specific to the scope of the risk management process

The process of establishing the external context should be done by understanding the external context and external environment (including key drivers, trends, relationships, perceptions and values). In this regard organization needs to continually monitor the external environment and it is not a one-time process or activity.