Risk management strategies refer to the approach businesses take to address threats that could negatively impact the organisation. They can be created for any project or situation. It is necessary for businesses to find the best way to mitigate risks and treat them. Companies need to be aware of the various types of risks and the process they need to follow to address them.
Types of risks
Risk management strategies are essential for businesses to recognise potential threats to their survival. The most common risks are:
Most companies have to comply with internal and external rules and regulations. The risk describes the possibility of individuals not following those laws and allowing for issues to arise that could damage the organisation’s reputation and financial stability. The obligations of a business are determined by the industry, country and state in which it operates. Employers need to be aware of all the rules and regulations that apply to their company. Failure to do so means the business might potentially face losses and fines. An example of compliance risk includes adhering to workplace health and safety laws.
Operational risk is related to operating a business with ineffective policies, processes and the impact from external events. Losses resulting from operational risk increased worldwide after the global financial crisis. The consequences of the risks might be direct or indirect and it is likely that they might go unnoticed. An operational risk could trigger a domino effect causing some areas of the business to fail. An example could be a breach of private data.
Employers need to understand their business and how much it can handle and what they need to prioritise. The risk closely focuses on the decisions made for the business to achieve its goals, for example, the training of employees or maintenance of equipment.
Strategic risks refer to the threats a business may face from internal and external events. Competition, reputation and politics all affect the company and may influence its viability. Most organisations have a strategy that will help them succeed. It might be difficult for an organisation to recognise flaws in its strategy and that might increase the possibility of failure. Managers obviously cannot predict the future but not taking into consideration internal and external factors could lead to failed decision-making.
Even though strategic and operational risks can sound very similar they have some notable differences. Strategic risks focus more on the long-term impact of risks that could cause a change in a company’s strategy. Operational risks focus more on short-term factors that could affect the current business strategy. For example, new competition in the market is an example of a strategic risk.
This risk refers to any changes to liquidity, credit, interest rates and any factors that may affect the financial stability of a company. Financial risks cannot be removed as operating a business always comes with a risk. There is no guarantee that the organisation will continue to make a profit and develop feasible ideas. The economy can play an important role in the financial health of an organisation. Employers need to be aware of market trends and how changes in interest rates might influence the credit risk that is associated with borrowing.
Each type of risk will probably need its own risk management strategies.
Risk management process
There are some steps businesses need to take to understand the risks that are present and how those risks could affect the company. The 5 steps are:
There are more than 4 types of risks that could impact a business. Management needs to identify risks by using risk management tools such as a risk assessment or other methods such as using historical data and interviewing employees. They need to research what could possibly go wrong, even if the events seem improbable and consider both current and future challenges.
A risk analysis highlights the possibility of a risk materialising and the impact the risk could have on a business. A risk matrix might be used to visualise the severity of the risk, with colours indicating how urgently an organisation may need to take action. What is the root cause of the risk? By comprehending the likelihood, frequency and severity of a risk, managers can then make decisions on how to prioritise risks and allocate resources.
Once a risk has been analysed the business can understand if they can handle it or if current controls can manage it. The rank given to each event can also indicate if the company will be able to handle it or if it has enough resources to respond to it. During this step, qualitative and quantitative assessments might take place, depending on the industry. It will assist managers in deciding whether a goal can be achieved or whether changes need to be made.
After risks have been given ratings, it will be clear which ones need to be prioritised. Before deciding how to treat the risk, relevant information will need to be completed. Techniques to manage the risk, costs and people involved are necessary to pick the correct option. Controls will be needed to treat them and reduce the probability of a risk materialising. Measures to be implemented during this stage include risk management strategies such as avoiding and transferring.
It is not enough to implement measures. Regular checking and monitoring of the risks and controls need to take place to ensure continuous effectiveness. Adjustments might be necessary over time as the risk environment is always changing. New threats might become prominent and the business might develop new goals and develop new plans. Managers need to review the risk management process and report changes.
Risk management strategies
Once risks have been identified there are four strategies the business can take to address them.
-Avoiding the risk
-Accepting the risk
-Reducing the risk
-Transferring the risk
Avoiding the risk
This strategy removes the risk from the plans of a business. The company might choose to alter its objectives or not take any action that could cause a risk to materialise. It is not easy to completely eliminate a risk as avoiding it usually means missing out on opportunities and delaying business growth. An example of risk avoidance could be an organisation not picking up a project.
All business decisions carry some kind of risk. Avoidance should not be used frequently as it could become disadvantageous in the long term. It is also appropriate for all kinds of business activities. A lot of managers use this strategy as a backup plan or last resort and review it over time to ensure that it is beneficial.
Accepting the risk
Acceptance involves a business acknowledging the risk and its impact but taking no action to address it. It is not a mitigation strategy but it is a risk management strategy, also known as ‘’risk retention’’. Businesses may use this approach for many reasons and apply it to different situations. It might be because the impact of the risk is not severe enough or costly enough to be worth the cost of addressing, or the actions taken to address it could do more damage. It is best to use this strategy with small risk, with low frequency and low likelihood as it is hard to predict the future and the threat will always be present.
Reducing the risk
Reduction, also referred to as mitigation, reduces the likelihood of a risk occurring. This strategy usually utilises measures such as auditing to reduce the probability of the risk and emergency procedures to minimise its impact. An example of risk reduction could include an international business paying suppliers with their country’s currency to reduce the impact of exchange rates. Each risk will require its own technique and managers will need to follow the risk management process to ensure a higher possibility of success. The managers also need to decide which risks need to be mitigated and if there is a better strategy to use.
Transferring the risk
Also known as risk-sharing, refers to a situation where a company cannot handle the risk or is unable to control it. It can transfer the risk to a third party which will assume the burden of the risk. This approach does not mitigate or eliminate the risk. It is still present but another party is responsible for liabilities. The best example is insurance which will cover costs related to workplace injury in exchange for a fee. Unfortunately, it is not possible to transfer every risk. Organisations also need to consider if the likelihood and cost of the risk is worth the price they have to pay to transfer it
It is not easy to pick which strategy to choose or understand what risks your company is facing. There are many challenges that appear every day and the business environment is always changing. Employers need to stay updated and adapt their strategies to different scenarios and threats they are facing. By following the risk management process, managers can identify the issues the company has to address and develop a more successful strategy. Each risk requires its own approach that might need adjustments as the business grows and makes new decisions.
Book a Demo Now
Learn more about how Polonious can help you with your risk management strategies.