As we well know, there are risks inherent in almost every major business decision. Even if decision-makers opt out of an opportunity because it seems too risky, that decision in itself can still be hazardous. Being too timid could lead to things like new markets not being pursued, new products not being developed or allowing competitors to gain the advantage. Therefore, it's crucial to have a detailed, data-backed strategy in place to measure and reduce risk.
Risk mitigation strategies are designed to eliminate, reduce or control the impact of known risks intrinsic with a specified undertaking, prior to any injury or fiasco. With these strategies in place, risks can be foreseen and dealt with. Fortunately, today’s technology allows businesses to formulate their risk mitigation strategies to the greatest capacity yet. While every organization needs to identify the strategies that are most appropriate for them, here are a few simple strategies to perfect the process.
To anticipate the business future, it is first essential to comprehend both the historical and actual business performance. Cumulative business data will indicate what is practical, what has been implemented, and what has worked effectively in the past. Some risks will continue to occur and recur, such as dependencies, modifications in necessities, environment and conditions and skill set gaps. Business analytics can be used to describe what is happening in the business, track performance, recognize issues that need to be addressed, and convey accurate information for analysis, planning and forecasting.
Appropriate risk reduction methods cannot be developed until the possible hazards, disadvantages or losses are thoroughly evaluated. The steps included in risk evaluation are as follows.
Risk identification must include whether the risk is, first and foremost, preventable. These risks come from within — they can usually be managed on a rule-based level, such as employing operational procedures monitoring and employee and manager guidance and instruction. Strategy risks are those that are taken on voluntarily to achieve greater rewards. External risks originate outside and are not in the businesses’ control, such as natural disasters. External risks are not preventable or desirable. Cost, performances and schedules are some of the business variables that may be impacted by any category of risk. Considerations of risks included in the assessment should include those that may impact current and potential customers and those that impact resources necessary to accomplish internal practices successfully.
2. Impact Assessment
Determine the probability and significance of certain "risky" events. Anticipated risks can (and should) be rated according to their degree of probability.
3. Develop Strategies
Risk mitigation planning strategies and implementations should be developed for risks categorized as high or medium probability. Low risks may be tracked or monitored for impact but are less important in this step.
The Best Risk Mitigation Strategy
Some strategies may be economically unfeasible for successful risk management. Generally, risks are taken on when strategies can be designed that reduce the risk level to “as low as reasonably practicable." These strategies are balanced with efforts to reduce or eliminate the associated hazard (such as time, cost or complexity). The best mitigation strategy may lower the risk probability, the severity of outcome, or reduce the organization’s exposure to the risk. More than one mitigation strategy may be employed to attain optimal results.
The four types of risk mitigating strategies include risk avoidance, acceptance, transference and limitation.
- Avoid: In general, risks should be avoided that involve a high probability impact for both financial loss and damage.
- Transfer: Risks that may have a low probability for taking place but would have a large financial impact should be mitigated by being shared or transferred, e.g. by purchasing insurance, forming a partnership, or outsourcing.
- Accept: With some risks, the expenses involved in mitigating the risk is more than the cost of tolerating the risk. In this situation, the risks should be accepted and carefully monitored.
- Limit: The most common mitigation strategy is risk limitation, i.e. businesses take some type of action to address a perceived risk and regulate their exposure. Risk limitation usually employs some risk acceptance and some risk avoidance.
Today's information technology can help perfect risk mitigation strategies by enhancing the ability to identify, evaluate and monitor risks. Furthermore, it enriches the ability of businesses to forecast events with greater accuracy.
For example, leveraging prescriptive analytics drastically increases the accuracy of risk assessment by offering simulation and optimization opportunities that eliminate the tendency toward confirmation bias, a problem many companies face when simply relying on descriptive and predictive analytics. Appropriate technology, e.g. optimization software that uses prescriptive analytics, allows businesses to recognize when resources are being escalated toward abortive courses of action. It transcends organizational biases, allowing companies to develop more powerful risk mitigation strategies and make significantly more informed decisions.
Editor's Note: This post was originally published March 20th, 2016 and revised September 30th, 2018.