Fri, Aug 26, 2022
In its simplest definition, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity, often focusing on the negative, undesirable consequences.
There are many facets of “risk mitigation” that most of us are familiar with on a personal level: assessing risk tolerance on investments; purchasing insurance to protect us from property or financial loss in the event of an emergency; getting annual physicals to detect any health issues early.
At the business level, enterprise risk management is a holistic approach to anticipating, assessing, and controlling the impact of risk across an organization. It identifies and examines the full range of risks company can face that could have a cascading impact on its strategic goals and put it in elevated danger of going out of business. Some of these may include safety incidents, financial loss, competitive threats, compliance violations, cybersecurity attacks on digital assets, reputational loss, legal issues, and operational breakdowns.
Risk mitigation is the process of identifying, assessing, and prioritizing risks to prepare for reducing the effects faced by a company, and reduce or eliminate the likelihood of these happening, or repeating themselves.
Protecting a business means addressing the risks and concerns with risk mitigation strategies to develop guiding policies and procedures.
Let’s examine the most common types of risk, then the strategies for mitigating them.
Health and Safety Risks
Mitigating workplace health and safety risk helps to prevent workplace injuries and illnesses, improve the health, wellbeing and capacity of workers, and improve quality and productivity.
Health and safety risks can be presented in various forms whether it be in an office or a construction site, and all these hazards must be identified and assessed. These identifiable hazards could be biological, physical, chemical, ergonomic, and much more, and the appropriate control or risk mitigation measures must be set up for employees’ physical and mental wellbeing so they feel safe.
In assessing the likelihood of a hazard causing injury, illness or damage to a person’s health, organizations can evaluate the potential impact and fix the problem or work through other alternatives such as eliminating the hazard from the workplace.
An organization’s reputation is one of its biggest assets – and one that a company must constantly maintain with all stakeholders, as reputational damage can be devastating.
Negative press can be very costly, and today’s digital landscape and social media add a layer of complexity to control reputation. Brand perception can be affected by incidents that happen where the company may or may not be liable, and any other actions that can affect public perception.
Operational risk comes from the potential risk of loss that can disrupt the flow of business operations. This could be from external events, systems, people, or failed processes. COVID has shown us the impact that an unexpected global crisis can have on organizations. These unexpected events and others such a data breaches, global outbreaks, system and equipment failures, and many more can create losses that are directly or indirectly financial.
As operational risk is pervasive, risks are to be reduced and controlled to an acceptable level, and organizations must consider every aspect of its objectives to ensure business continuity in the event of operational disruption.
All organizations have strategic objectives that lay the foundation for future success. There are strategic internal and external risks that need to be analyzed to identify obstacles and address them before it is too late for a business to accomplish its goals.
Strategic risks can be regulatory where it is important to stay updated on all relevant regulations and identify upcoming changes as soon as possible for proper risk response.
Compliance risk is in relation to how an organization can comply with any rules, regulations, standards, and laws, and the consequences that may arise if they fail to comply.
When there is non-compliance, organizations can be presented with massive legal and financial implications, so they must be aware of changing rules and regulations to achieve business objectives and to keep operating.
Mitigating financial risk allows organizations to avoid cash loss from future potential situations that could affect cash flow where obligations cannot be met.
There are different types of financial risk that include credit risk, liquidity and leverage risk, foreign investment risk, and any risk which is associated to cash flow.
All risks need to be researched and planned for the different situations which may arise to match as much as possible to the risk appetite.
To minimize any negative impact, there should be a risk mitigation plan to anticipate and respond to any future financial risks.
Why is Risk Mitigation Important?
Maintaining a safe work environment for all your workers – whether contractors or company employees – is a key component of risk mitigation and risk management. If your workers go home in the same condition as when they arrived, creating this safe workplace substantially lowers your overall business risk and keeps your company running with business as usual.
Risk Mitigation Strategies
Here are 5 strategies that show why mitigating risk in all areas of your business has a positive impact across all parts of the company:
1) Risk Avoidance
When the potential outcome of a risk is too large to be accepted by an organization, risk avoidance strategy will be used to be able to avoid the identified risk completely.
This does not mean that there is no damage at all, as there are potential impacts from deciding not to take the risk. This could be a loss of potential revenue from not undertaking a deal for example. If used extensively, risk avoidance could deprive an organization of many opportunities, and may not be able to achieve its objectives.
An example is a company shutting down a construction site in bad weather to avoid the risk that someone will get hurt.
2) Risk Acceptance
So, how is risk retention vs risk acceptance different? These two terms are technically one and the same.
As it is virtually impossible to eliminate all risk, risk acceptance or risk retention is when an organization understands what the consequences may be and decides to accept this as it has been judged that the gains can outweigh the possible negative outcomes. It is sometimes not cost-effective to do any type of risk treatment, which can be deemed as risk avoidance, where an organization determines it is not worth the risk to engage in an operation and they shut it down completely.
This is the best strategy when business risk is small or unlikely to happen and can be active or passive. Passive acceptance only requires the action of documenting the risk, and the risk is dealt with as it occurs. Active acceptance requires the design of a contingency reserve to recover the losses of money, time, or resources.
An example of risk mitigation is allowing company executives to take flights to a project site which is a risk but is accepted.
3) Risk Control
Sometimes there are situations where the risk cannot be avoided at all, so organizations need to come up with ways to control the degree of impact.
For example, if there are issues or flaws with the project budget, the organization can work around the available budget and eliminate additional costs in creating a plan.
4) Risk Transference
Transferring the potential risk — and the consequences of that risk to a third party —lets companies outsource the risk so the liabilities are assumed by someone else. To compensate, the organization will often provide the third party with payments.
An example of risk transference is subcontracting some key elements of a project to a contractor or partner and letting them absorb some of the risk.
5) Risk Monitoring
The strategy of monitoring risk can be particularly helpful when it is difficult to know and evaluate the outcomes of specific actions as changes occur in potential risks. The effects of the risk are continuously monitored so management can act promptly if the impact goes out of acceptable levels.
An example is, especially for outdoor worksites like a construction project, continuously monitoring the weather forecast so if bad weather is predicted, the company would put in some additional controls to assure the workers are safe and not at risk, even if it means closing down and securing the site.