It is impossible to get rid of risks completely, but the important thing for any business to know is how to assess and handle these risks in such a way that their company is not too negatively affected. This is why risk mitigation is important.
What Is Risk Mitigation?
Risk mitigation is the process of identifying and assessing risks while minimizing the effects of those risks on a business. Risks can be both positive and negative, leading to opportunities or posing a threat to a company. Risk mitigation is a process that is done routinely as part of good business management. It is especially important to have risk mitigation strategies in place before any large business transactions or endeavours.
Why Is Risk Mitigation So Important?
In any area of life, it is important to identify the risk and understand the potential consequences before making an important decision. This is especially important in business, where the wrong decision could impact companies and employees in a negative way. When all of the risks are properly identified, company owners and employers are able to make decisions that will lead to the best possible outcomes for their businesses and employees as a whole.
The Five Key Risk Mitigation Strategies
There are many ways companies may work to mitigate their risks. Strategies can be both positive and negative, working to offer positive results or minimizing negative outcomes. Most of these will fall under one of five key approaches.
Avoidance
Avoidance will often happen when the potential effects of a risk are too large for a company to accept. This is where steps will be taken to avoid the risk altogether. It could potentially mean that a business deal isn’t undertaken or a decision is not made because the risk could mean too much potential damage to a company. It is important to remember when choosing an avoidance strategy that there will be potential impacts from the decision not to take the risk. For example, a company is looking at launching a new product but decides not to because of the largea amount of risks. The impact of this would be that although the risk has been avoided, they will forfeit any potential revenue which could have been gained from the new product.
Acceptance
Risk acceptance is when a company understands the potential consequences, but decides to accept the risk and take a chance anyway. This path is usually chosen when the risk is relatively small or the potential negative outcomes are minor in comparison to the potential gains. When companies decide to accept the risk, they should do so after considering all possible options. While a small risk may not impact a company in the short term, there is always the potential for the impact to lead to further risks, which could then create larger issues in the longer term.
Reduction/Control
When a decision needs to be made that comes with a large level of risk, there is sometimes a need to take other measures that work to reduce and control the impact of the risk on a business. This could mean taking other, smaller risks alongside the big one that are likely to have more positive impacts. Alternatively, it could mean sharing or transferring the risk between other parties or taking out an insurance policy to act against losses incurred by taking the risk.
Sharing/Transfer
By transferring the risk, businesses are able to outsource their risks to a third party. An example of this is when insurance policies are taken out to absorb potential losses incurred from a risk. Transferring risks can help to reduce further damage incurred from taking a risk that has a high potential for a negative outcome. While transferring a risk doesn’t eliminate the risk entirely, it does reduce the potential impact of it.
Monitoring
Sometimes, the best way to manage a risk is to take it and continuously monitor its effects. This is particularly helpful if it is difficult to know exactly what the outcome of specific actions might be. This strategy is best used for decisions that have a low or medium risk of negative outcomes, but can be used in almost any situation. By having an employee, or even a team of employees, monitoring the impact of risks, changes can be acted on quickly and decisions can be made to reduce the impact of further risks or mitigate negative outcomes.
Risk Assessment
Risk assessments are designed to identify the potential risks a company may face. A risk assessment is usually performed when a company is deciding on a potential future strategy, as it will help to show the majority of risks that they could face.
Analyze
Once the potential risks have been identified, they need to be thoroughly analyzed. This way you can consider all the possible impacts that a risk might have on your business, customers, revenue and future growth. Taking the time to thoroughly analyze the potential risks can help you to see whether one option holds more negative possibilities than another.
Evaluate
After analyzing the potential risks, businesses are able to evaluate which option is likely to be the most beneficial. This offers an opportunity to disregard any options where the negatives are likely to outweigh the positives and consider which risk mitigation strategies might be best.
Prioritize
It is important to prioritize the risks that could have the most potential benefits for your business while providing the minimum amount of negative outcomes. The information gained during the analysis and evaluation sections of the risk assessment process will enable you to see which risks should be prioritized. Above all, make sure that the risk you choose aligns with your company’s goals and values.
Treat
When you have access to all the information and can see which options are likely to have the most benefit, it is time to act. Treat the risk using your chosen strategy and keep a record of what was done, how it was done and the individual responsible.
Monitor
Once a course of action has been decided and put in place, it is important to monitor the situation. This will enable you to make changes when necessary and spot any further risks that happen as a result of your chosen strategy. Monitoring can be done in a number of ways, which may vary depending on the risk being taken and the business involved. Businesses will often find a way of measuring data so that it can be viewed over a period of time.
Review Strategy
Once a decision has been taken regarding a risk, it is important to review whether the strategy provided the results you had hoped for. This can highlight areas for future improvement or anything that should have been done differently. Reviews can be carried out at any time, but should be done after enough data has been gathered to reflect on. Reviewing a risk too soon after making a decision can lead to not having enough information to know whether or not your chosen strategy was effective.
Tips for Risk Management
While the exact method of risk management will vary depending on the needs of your company, there are a few things to keep in mind that can make the process easier.
Transparency
Decision-making processes and risk-mitigation strategies should always be as transparent as possible. Because of this, consider documenting each step of the process. This will help you to evaluate, monitor and review the results of each risk, as well as providing a level of protection for employees. Creating a specific risk-management policy helps to increase transparency within a company, as employees are able to see exactly what the acceptable levels of risk and expectations are within a business. It also enables them to understand the appropriate steps to take when they feel that the risk-management policy has been breached.
Contingency Planning
When making any kind of decision, it is important to plan for a variety of eventualities. Taking a risk may mean preparing for a number of possible outcomes, as it isn’t always easy to see what the mid- and long-term outcomes could be.
Insurance
If a risk is required that has a large potential for financial loss, it is a good idea to put appropriate insurances in place. Legal requirements will mean that certain types of insurance will be required as a matter of course, but it is worth making sure that you have covered a variety of contingencies that could provide a safety net for your company should something unexpected occur.
Limited Liability
If you are a small business owner or a sole proprietor, there are ways of limiting liability when it comes to taking risks. By registering as a limited liability company or a corporation, business owners will not be held responsible for debts and liabilities incurred.
Create a Risk Management Team
One of the best ways to keep on top of the risks that could potentially affect your company is to create a specialist risk management team, dedicated to identifying and reducing risks. By employing an in-house department of risk specialists, you will always have access to current data and advice that is formulated in a specific way for your business.
Outsource Risk Management
If you run a small company or don’t have the expertise within your business to create your own risk management team, it might be a good idea to outsource this to someone else. There are a number of ways to do this, but the result is that you will be able to rely on expert advice without needing to employ specialist staff.
Final Thoughts
There is no way of completely avoiding risks within a company. Risks are essential for growth; without them, a company will stagnate and fall behind its competitors. By identifying risks and creating suitable strategies, businesses can move forwards without placing unnecessary risks on their company or employees. It is important to understand that it might not always be possible to use the same strategy for every single risk. Some will come with more potential consequences than others. This is why companies should always have a number of potential strategies that can be tailored and implemented depending on the risk faced at that time.
