Inherent vs. Residual Risk: What’s the Difference?

It’s estimated that cybercrime collectively costs organizations $16.4 billion per day, or $190,000 per second. Evaluating risks, implementing mitigating controls, and measuring the effectiveness of those controls are essential to protecting your systems and data — and reducing or eliminating your share of the global cybercrime bill. 

Risk management has been around for decades, but businesses are evolving faster than ever as new technologies are adopted, partnerships are forged, and products or services are rapidly developed. Every new change introduces new risks or amplifies existing risks. As a result, it’s never been more critical for businesses to manage risks appropriately. 

The way that businesses understand risks is constantly evolving. Conducting an inherent risk analysis to establish a baseline, implementing controls, and measuring residual risks allows organizations to make sure they’re securing their systems as effectively as possible.

Today, we’re going to examine the vital difference between inherent risk and residual risk, along with what they both mean for your business. We’ll start by defining both, then provide an overview to identify critical risks that need adequate controls. 

Inherent vs. Residual Risk: What's the Difference?

Defining Inherent Risk vs Residual Risk

Understanding the definition of both types of risks and their relationship is essential to properly secure your organization. 

What is Inherent Risk?

An IT inherent risk is any risk your organization finds present, without mitigating controls applied to reduce or remediate it. A mitigating control is any procedure, process, activity, or technology that aims to minimize or eliminate risk. So an inherent risk is any threat posed to your business if you don’t do anything to prevent it.

Some examples of inherent risks are:

  • Mishandling of sensitive data: Without the right policies and systems, it’s likely that important data will not be transferred or stored correctly. It may be obtained by malicious actors or simply lost due to accidental deletion. 
  • Unreasonable user access levels: Information and systems should only be accessed by those who need them, not by everyone. The wrong people viewing sensitive information can create significant compliance issues, even if it doesn’t involve a cybercriminal. 
  • Insufficient device security: No password policies or lacking device security software can quickly lead to cybercriminals compromising endpoints throughout your organization. Requiring strong passwords and frequently updating security software are mitigation controls that can protect your organization.

What is Residual Risk?

As you might guess, residual risks are any known risk found present after mitigating controls are in place. This risk category is any type of risk that your organization is aware of and has done everything possible to mitigate, but it’s still a risk facing your organization. 

Common residual risks include:

  • Phishing attacks: Cybercriminals will imitate people of authority that your company works with, or even internal employees, and email employees in various departments to obtain delicate information. They’ll often imitate HR, C-suite executives, or sales reps to manipulate employees into clicking malicious links and revealing sensitive information. Since these attacks can target anyone in your organization, it’s a notoriously tricky risk to eliminate.
  • Internal bad actors: We’ve all seen those stock photos of someone in a hoodie in a dark room hacking away at your network, but that’s not always the case. People legitimately employed by your company may use their credentials to steal sensitive information or even install malware. 
  • Third-party attack vectors: Even with thorough vendor risk assessments, it’s impossible to entirely eliminate the possibility of a trusted third party being compromised and affecting your systems. All it takes is haphazardly implementing new technology without your knowledge, and trusted vendors can be exploited to access your sensitive data.

Identifying Inherent Risks that Need Mitigating Controls

How can your organization understand the inherent risks it faces? First, you’ll need to conduct a thorough risk assessment, prioritize risks and potential impacts, and implement mitigating controls. 

Once those controls are in place, they become residual risks that must still be consistently monitored to determine the controls’ effectiveness. Controls that aren’t mitigating risks as expected should be revisited and improved.

Cybersecurity frameworks can help guide you through this process by highlighting inherent risks and recommending adequate controls. Don’t think you have to start from scratch — use the knowledge shared by other experts who created those frameworks.

Start with a Comprehensive Security Risk Assessment

Begin the process with an inherent risk audit, which is part of a security risk assessment. These specific assessments are involved but incredibly valuable and call for:

  • Inventorying your assets
  • Examining the threats that your assets face
  • Determine vulnerabilities that enable those threats
  • Understand the cost of a threat occurring
  • Discover mitigating controls to reduce or eliminate them.

Essentially, security risk assessments explore every inherent risk your assets are currently exposed to. 

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Determine Likelihood and Impact of Identified Risks

Once you’ve identified risks facing your enterprise, you might be tempted to start implementing mitigating controls to stop them all. 

However, your business doesn’t have endless time and resources. So instead, it’s vital to identify the likelihood of the risk resulting in an attack and the financial or operational impact of said risk. Often called a cyber security risk register, this step helps assign priority to inherent risks. 

The risk’s priority level can be a simple high-medium-low or a more complex scoring or ranking system. The goal is to identify inherent risks that are likely to occur and inflict operational or financial damage. 

Don’t ignore likelihood as you assign priority levels. For example, if a risk is costly but highly unlikely, you may be better off focusing on more likely risks.

Implement Mitigating Controls

The priority level discovered in the above step will guide your implementation of specific mitigating controls. For example, you’ll likely involve IT managers and executives to determine the funding available, then carefully allocate the budget to mitigate high-priority risks.

Lean on cybersecurity frameworks and research shared by other security experts to guide the controls implemented. For example, frameworks might require a specific control, or a research paper will shed light on the effectiveness or ineffectiveness of a potential control. 

This step converts inherent risks to residual risks. You’ve identified the risks and taken measures to prevent them. You know that the risk isn’t eliminated, so monitoring becomes essential. 

Continually Monitor Residual Risks

Now that you have controls in place, it’s vital to measure the effectiveness of the control at preventing the risk. 

Are employees still being phished or wandering into parts of your network they don’t belong? Is sensitive data adequately stored? Are endpoints being penetrated, or are they remaining secure? 

You’ll need to discover the best way to track metrics that reflect the success or failure of the implementation. Every control will have a unique KPI associated with it. Measure and document the changes in that KPI to understand if a control needs to be reexamined, reinforced, or removed.

Don’t Forget About Third-Party Risk Management

Vendors and partners represent potential attack vectors that must be understood. You can repeat the above process focusing on a specific vendor and their interaction with your networks or applications. What are the third party’ inherent risks? What controls can mitigate them? How can you monitor the effectiveness of those controls?

Measure and Document Control Effectiveness

Measuring the performance of implemented controls is crucial. Controls will likely need refinement as the cybersecurity landscape changes and evolves. A wildly effective control a year ago might not be effective at all today. Consistently measuring and documenting the effectiveness of controls will tell you when it’s time to refine it or throw it out altogether. 

Using the right platform to assess your cybersecurity landscape will help your team understand if a control needs to be updated before it leads to an attack. 

Centraleyes gives you real-time monitoring to alert you to ineffective controls ahead of time. Book a demo today and see how Centraleyes can be a powerful asset in securing your assets.

Start Getting Value With
Centraleyes for Free

See for yourself how the Centraleyes platform exceeds anything an old GRC
system does and eliminates the need for manual processes and spreadsheets
to give you immediate value and run a full risk assessment in less than 30 days