Risk mitigation refers to the identification, evaluation, prioritization, monitoring, and minimization of risks that could have a negative impact on a business. It is taking the necessary steps to reduce the adverse effects of these unfortunate events. Risk mitigation involves the acceptance of the effects of risks, learning how to avoid exposure to risk, taking action to limit the company’s exposure to the effects of risk, or transferring the risks to or sharing the risks with a willing third party.
Other options include designing new business processes with an adequate amount of risk control and containment measures built-in, as well as periodically reassessing risks that have been accepted in ongoing business processes. Some aspects of business that carry risk include accounts receivable, accounts payable, competitors, customers, the economy, suppliers, staff, sales, location, reputation, information technology, internal controls, finances, etc. Small businesses should always have risk management plans in place so that they are prepared to accept, avoid, control, or transfer risks to the business.
Here are four risk mitigation and management strategies in more detail.
Risk acceptance, or risk retention.
Even though acceptance of risk does not actually mitigate any ill effects, it is still a very popular option when other risk management strategies are costlier than the cost that the risk itself brings upon the company. All risks that are not avoided, transferred, shared, or limited are retained and accepted by definition. Where risk retention becomes a viable strategy is when a risk would be so large that it could not be insured against, when the risk is so small that the cost of insuring against it would be bigger than allowing it to happen, or when a risk has a very low chance of occurrence. Any amount of potential risk over the amount that is insured is also retained risks.
This strategy aims to avoid any exposure to the negative effects of a risk altogether, and it is often the most expensive of all the risk mitigation strategies. This can include not performing any activity that could possibly carry risk. While this might seem like a great strategy for all risks that may affect the business, total avoidance of all risks means that there is no way that you can take advantage of potential benefits from engaging in risky activities or retaining the risk
Risk limitation, also known as risk reduction or risk optimization.
This is by far the most common risk mitigation strategy in business, and it involves taking some action with the goal of lessening the negative effects that a risk will have on the company, or lessening the likelihood that a risk will occur in the first place. Some examples of risk limitation include outsourcing to vendors that are more capable of managing and mitigating risks, or accepting that some software or hardware may fail and avoiding serious problems by having backups on hand.
Risk transference and risk sharing.
This strategy involves either handing risk off to a willing third party, or sharing the load of risk with them. A small business can benefit greatly from transferring or sharing risk if the risk is not central in importance to that company, and it allows the small business to focus more on what is most important to the business. The two main ways a small business can transfer or share risk is through outsourcing risks to others or through buying insurance.
Companies will want to develop these strategies to fit their profile and may adopt different strategies for different departments, processes, and risks.