Risk management is a process that helps organizations evaluate and anticipate risks and make decisions in order to maximize profitability and minimize losses. The three-way risk management model is a tool that enables an organization to reduce the effects of risk. This model focuses on identifying, understanding and responding to risks.

Definition of Risk Management

Risk management is a systematic process of identifying, assessing, responding to and monitoring risks. It seeks to maximize opportunities, while minimizing threats and losses to an organization or individual. Risk management provides an organization with the framework it needs to make decisions and develop strategies to manage risks that may impact its operations.

Overview of a 3-Way Model for Risk Management

The 3-way risk management model provides a comprehensive view of the organization's risk management processes. It includes the following elements:

  • Identification - proactively identifying potential risks and their impact;
  • Evaluation - assessing the likelihood of risks being realized and the expected impact;
  • Response - developing strategies to address the risks identified.

Key Takeaways

  • Risk management is a systematic process of identifying, assessing, responding to and monitoring risks.
  • The 3-way risk management model provides a comprehensive view of the organization's risk management processes.
  • This model focuses on identifying, understanding and responding to risks.
  • The three elements include identification, assessment, and response.

Step One: Identifying Potential Risks

In order to create an effective three-way risk management model, the first step is to identify the potential risks. There are four steps within this process that should be undertaken in order to ensure the risks are accurately identified.

Specify the Scope

The first step is to specify the scope of the business or project. This should include the objectives, goals, and risks associated with the particular project or business. It is important to have a clear understanding of the overall goal and objectives in order to make sure the risks are identified correctly.

Collect Risk Information

Once the scope is specified, it is important to collect relevant risk information. This includes identifying and analyzing potential threats, vulnerabilities, and potential harm associated with the business or project. This information should also come from external sources including current industry trends, technical resources, competitor analysis, and market analysis.

Classify Risks

Once the risk information has been gathered, it is important to classify them into categories. This will help to prioritize which risks need to be addressed first. This can be done through a process of brainstorming and organizing possible risks into the following categories: Safety, Building Security, Human Resource Management, Financial Risk, Environmental Risk, and Legal Risk.


The final step in identifying risks is to document them. This includes creating a risk management plan that outlines the different types of risks and how they will be addressed. This should include the measures that will be taken to mitigate the risks, and any potential controls that may be implemented in order to reduce the risk of harm. Additionally, all of the risk information should be stored in a secure location and monitored on a regular basis.

Step Two: Evaluating Potential Risks

When creating a 3-way risk management model, the second step is to evaluate the potential risks of the project. This involves estimating the potential impacts and probabilities of the risks and then determining their overall severity and likelihood. By doing this, you can rank the risks according to their potential impact.

a. Estimating Impacts/Consequences

The first step to evaluating potential risks is to estimate the potential impacts of each risk. Consider what would happen if the risk occurred and the impact it could have on the project. This can include impacts on the budget, timeline, resources, overall quality and results of the project, as well as other negative outcomes. By estimating these impacts, you will be better prepared to manage the risks.

b. Estimate Probability

The second step to evaluating potential risks is to estimate the probability of each risk occurring. Consider how likely it is that the risk will become reality and the chances of it happening. This can be done by assessing current circumstances, trends, and other external factors. By estimating the probability of each risk, you can better understand the potential impacts.

c. Determine Likelihood and Severity

Once the potential impacts and probabilities of the risks have been estimated, the next step is to determine the overall severity and likelihood of a risk. This means looking at both the probability and the potential impacts of each risk to gain insight into the potential damage it could do. By looking at likelihood and severity together, you can get a better understanding of each risk.

d. Rank Risks According to Likelihood and Severity

After determining the severity and likelihood of each risk, the next step is to rank them according to those criteria. This will give you an idea of which risks have the potential to do the most damage and should be top of mind when managing the project. A risk matrix can be used to easily track and compare the different risks, as well as to prioritize which risks need to be addressed first.

Step Three: Responding to Possible Risks

After identifying and assessing potential risks, the next step is to develop strategies and plans to respond to them. It is necessary to adopt a proactive stance in this stage, in order to avoid any potential impacts that may result from the risks.

Create Risk Management Strategies

Risk management strategies are meant to protect an organization from potential risks and to reduce their impact. When creating strategies, it is important to consider all the resources available, such as financial resources, personnel resources and technological resources. When outlining strategies, it is also important to consider the desired outcome, the timeframe for implementation and cost-benefit analysis.

Create Risk Mitigation Plans

Risk mitigation plans refer to specific, long-term plans to reduce the probability or impact of a risk. When outlining these plans, the key steps include planning, implementation, monitoring and evaluation. These plans typically focus on identifying potential risks, specifying the steps to reduce their impact and allocating resources for their implementation.

Implement Action Items

Once the risk management strategies and risk mitigation plans have been created, the next step is to implement the action items. It is important to ensure that the action items are being completed in accordance with the timelines and budget. This also involves monitoring and evaluating the success of the action items on an ongoing basis.

Monitor and Re-evaluate Risks

The final step in creating a 3-way model for risk management is to monitor and re-evaluate the risks. This involves assessing the current situation and making adjustments to the strategies and plans as needed. Regular monitoring and re-evaluation help to ensure that the organization is prepared to respond to any potential risks.

Benefits of Utilizing a 3-Way Model for Risk Management

By adopting an effective 3-Way Model for Risk Management, organizations are able to benefit from improved risk identification, increased risk assessment and reasonable risk response plans.

Improved Risk Identification

The 3-Way Model for Risk Management provides a comprehensive way for organizations to identify risks and assess their potential impact. This includes developing a risk assessment strategy and establishing risk thresholds. The 3-Way Model enables organizations to identify potential risks that may have been previously overlooked. Additionally, organizations can create strategies to respond quickly and efficiently to identified risks.

Increased Risk Assessment

As part of the 3-Way Model, organizations can conduct a more detailed risk assessment. This includes gathering more detailed information on the potential risks and their potential impact. With the increased risk assessment, organizations can develop stronger mitigation plans and create proactive strategies to address and prevent future risks. Additionally, organizations can use the information gathered to provide better services and products that meet their business objectives.

Reasonable Risk Response Plans

By utilizing the 3-Way Model, organizations can develop reasonable risk response plans that address identified risks. This includes creating proactive plans to identify, mitigate, and respond to potential risks. Additionally, organizations can create reasonable mechanisms to report and monitor risk levels. With these reasonable risk response plans, organizations are better prepared to manage and reduce potential risks.

Challenges of Utilizing a 3-Way Model for Risk Management

The 3-way model for risk management is the most comprehensive approach for understanding risk and devising a strategy for mitigating it. However, it is a challenging model to implement and its successful usage relies heavily on an organization's level of preparedness.

Difficulty Estimating Likelihood and Severity

The 3-way model relies heavily on accurate assessments of the likelihood and severity of risks. Without such estimates, the model is not of much use as it would circle in indefiniteness. Unfortunately, estimation of the likelihood and severity of risks is often more complicated than it appears. For example, any given risk may have multiple causes and can have varying likelihood and severity depending on the circumstances. Therefore, obtaining accurate estimations is critical for successful application of the 3-way model.

High Costs of Resources

The 3-way model requires significant investments of resources in order to be implemented effectively. Organizations must have the resources to identify, assess, and plan risk management activities. Such resources are often difficult to come by and can have high costs associated with them. As a result, many organizations opt for less comprehensive methods of risk management as they are often more economical.

Time Intensive

One of the common drawbacks of the 3-way model is that it is incredibly time intensive. This is due in part to the complexity of assessing the likelihood and severity of risks, as well as the extensive planning required. Additionally, incorporating and managing the 3-way model across various departments and teams can be an arduous task. Ultimately, organizations must decide if the trade-off in resources and time are worth the effort associated with utilizing the 3-way model.


Risk management and analysis are important elements for any organisation. A 3-way model helps to analyse risks objectively and identify effective strategies to address them. By understanding the environment and the dynamics of external factors, this model can help organisations anticipate potential risks and take the necessary steps to reduce and manage the risk.

The 3-way model consists of an internal risk analysis, an external risk analysis, and a risk assessment. Each of these elements helps to identify sources of risk and strategies to address them. An effective risk management process should be an ongoing process that continually assesses and mitigates risks.

Benefits of 3-Way Model for Risk Management

  • Identifies sources of risk quickly and easily
  • Provides an objective view on risks
  • Allows for pro-active steps to address potential risks
  • Enables organisations to monitor, assess, and re-assess risks on an ongoing basis
  • Helps organisations to manage their risks in a more effective manner
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