Risk is a part of life.
We cannot avoid it.
But we can develop risk strategies to control and mitigate risk.
What are the four risk mitigation strategies?
Strategies for risk avoidance by elimination
Prevention by elimination is the best way to mitigate risk. You are reducing the amount of risk you take. Risk avoidance is the decision to avoid accepting a risk that could harm a business or its assets. On the other hand, a risk management strategy is the method of controlling and mitigating the negative or positive consequences of potential risk events.
Strategies for risk acceptance
Assess, identify and accept risks. Risk assessment aims to determine the level of risk a business is willing to accept to achieve its objectives. Accepting risk is the decision to take on the potential consequences of a possible event.
Strategies for risk acceptance – governance, monitoring and reporting, crisis management, and insurance are methods all businesses use to accept a specific risk.
As risk acceptance is a conscious decision made to accept the consequences should a risk event occur
Exchange rate – not taking out exchange forward cover is an example of risk acceptance. The impact will only be known at the time of placing the order.
Car insurance – accept absolute risk by not having any insurance on your car and not paying an insurance premium. Accept risk for funding a rental car and not choose the option in exchange for a lower insurance premium or accept some financial risk on the excess payment in exchange for a lower insurance premium.
Strategies for risk reduction
Assess, identify and manage risks. Risk management involves using information from risk assessments and other sources to make informed decisions about controlling and mitigating risks. Risk controls allow businesses to reduce or eliminate the chance that risks will cause harm.
Health and safety – workers must use Personal Protective Equipment (PPE) when in a particular area of a worksite.
Quality – a manufacturer reduces financial and schedule risk by the impact of rework by improving the quality assurance process.
Strategies for risk transfer
Transfer risk to other parties. Risk transfer is moving risk from one entity or organisation to another. It can reduce the risk a particular business activity poses or protect other businesses from a risky decision.
Insurance – the insurance policy transfers risks such as flooding or fire to business premises.
Outsourcing – outsourcing a particular project or service and transferring the risk with the contract terms.
What to do when a risk becomes an issue. There are a few things that you can do to mitigate the risk of something going wrong.
Establish clear goals and objectives for the business, ensure all stakeholders are on the same page and create a contingency plan that outlines what will need to be done to meet these objectives following a risk becoming an issue.
Additionally, monitor the risk throughout to identify any changes or updates that may need to be made to the contingency plan.
Finally, establish communication protocols and procedures if something goes wrong, so everyone knows what needs to be done and when.
Managing risk is essential for any business.
The four risk strategies listed above and developing contingency plans can reduce your risk profile and keep your business running smoothly.