What is Risk Mitigation? Process & Strategies for Businesses

There are various risks that can negatively impact a company's security, profits, operations, and reputation. For example, cyber-attacks on a company's software system can result in the loss of confidential information. On the other hand, natural disasters, like hurricanes, can delay the supply chain.

Management teams need to develop risk mitigation practices to protect their business from these unexpected threats.

What is Risk Mitigation?

what is risk mitigation 1612383964 4232

Risk mitigation is the strategy of preparing for and lessening the impact of threats a business may face. Businesses will outline a risk mitigation plan for potential situations that are either inevitable to happen or cannot be entirely avoided, such as weather changes and data breaches.

This practice does not focus on averting a risk, but rather, it helps companies identify the steps they need to take prior to reduce the possible effects of a problem and how to handle the aftermath in the case that a threat occurs.

Risk mitigation allows businesses to remain competitive in their industry because they are able to protect their brand and profitability.

4 Types of Risk Mitigation Strategies

4 types of risk mitigation strategies 1612383964 2803

Depending on the organization's structure and operation, management can employ various types of risk mitigation strategies.

  • Risk Avoidance
This method is used when businesses decide to not take on certain projects or activities to avoid any consequences it may pose.

For example, an environmentally conscious company may choose to not invest in a specific supplier because their manufacturing practices require the use of fossil fuels. By not partnering with the supplier, the company is avoiding any risks to its reputation and sales.

  • Risk Acceptance
Organizations may accept a certain risk for a given period if other mitigation efforts need to be prioritized first. Additionally, companies will use this strategy if they do not want to allocate a large sum of money to mitigate a risk that has a low chance of occurring.

  • Risk Transfer
This is when the responsibility of handling risk is given to a third-party. This is seen when companies outsource their customer service to another company.

  • Risk Monitoring
Risk monitoring is an ongoing process of risk mitigation. It refers to regularly monitoring projects or systems, tracking risk management strategies, and identifying new risks.

3 Steps to Risk Mitigation

To decide which risk mitigation strategy works best for a business, managers should follow these 3 essential steps.

1. Identify Risks

1identify risks 1612383964 7178

Management teams need to carefully uncover, analyze, and describe the various risks that can impact their business's operations or projects. It is also helpful to detail potential outcomes that may arise if the company experiences these threats.

2. Evaluate Each Risk

Once the risks are identified, managers can evaluate each one according to two classifications, the probability that it will occur and its impact.

These two factors will help provide visibility into which risk is more likely to occur or which will have a larger impact on operations. This insight can help management determine which risk they need to prioritize and what strategy could best mitigate it.

3. Risk Treatment

3risk treatment 1612383965 1966

Each of the 4 risk mitigation strategies can be categorized based on its cost and return. The cost refers to how much resources or time a business will have to dedicate to the strategy and the return is how effective results will be.

  • Risk Avoidance - High cost, high return
  • Risk Acceptance - Low cost, low return
  • Risk Transfer - Medium cost, high return
  • Risk Monitoring - Medium cost, high return

Therefore, once management determines the probability and impact of a risk, they can choose a strategy that has a reasonable cost and return.

For example, if one of a business's threats has a low chance of happening and a low impact, managers may want to use the risk acceptance strategy, since a low return would not be an issue. Additionally, they will be able to manage the risk without having to spend a large portion of their budget.

Best Practices for Mitigating Risks

Businesses can further enhance their risk mitigation strategy by implementing these best practices.

Collaborate with Stakeholders

collaborate with stakeholders 1612383965 1363

Stakeholders, such as employees, shareholders, and business teams, should be informed of all potential risks to the business. This will promote collaboration and the sharing of new perspectives and ideas, which can be beneficial for the development of an effective risk mitigation strategy.

Communicate When Risks Occur

In the case that a threat arises, executives must communicate with their entire organization and make sure that all staff is on the same page. This allows for effective strategy implementation and promotes transparency between management teams and employees.

Have Clear Risk Management Policies

have clear risk management policies 1612383965 1245

Managers should clearly and comprehensively outline risk management protocols to ensure that employees understand what steps must be taken in case of a threat. It is also helpful to create a training program and define the various responsibilities that each staff member has.

Regularly Monitor Risks

Businesses should regularly monitor their operations for potential threats and check their risk mitigation plan to make sure that it is working as intended. Making consistent improvements will allow companies to have a stronger foundation to defend themselves from risks.

Threats to a business can occur unexpectedly; therefore, thorough risk mitigation strategies should be developed and implemented. Following these best practices will help organizations to protect their operation and profitability.