Internal Audit

Risk mitigation strategies and their impacts on business operations

Risk Mitigation strategies are the process of identifying, assessing, and executing actions to reduce or eliminate the potential impact of risks on a project, organization, or individual. It comprises recognizing potential dangers and then taking proactive steps to lessen the likelihood and impact of those risks. The importance of risk management cannot be overstated. Risks can have a significant impact on projects, businesses, and individuals. By proactively identifying and resolving potential risks, organizations can avoid costly delays, damages, and reputational damage.

Types of Risks

• Financial Risks

Financial risks are those that have an impact on the financial well-being of an organization. Such risks include interest rate, currency exchange rate, and stock market changes. Another sort of financial risk is credit risk, which occurs when a borrower defaults on a loan or fails to repay a debt.

• Operational Risks

Internal processes, people, and systems are the sources of operational risks. These risks include technological breakdowns, system flaws, and employee blunders. External factors like natural disasters, cyber-attacks, or supply chain interruptions can all offer operational risks.

• Strategic Risks

Strategic risks are those posed by external factors that have an impact on an organization’s ability to achieve its goals. Market changes, changes in client behavior, and legislative changes are examples of such risks. Strategic risks include competitive risks, in which a competitor joins the market and disturbs the status quo.

• Reputational risks

Reputational risks arise because of unwanted publicity or a tarnished reputation. These risks can be created by a variety of factors, such as poor product quality, environmental problems, or immoral behavior. A company’s reputational risks can have a significant impact on its brand, client loyalty, and financial performance.

Risk Mitigation Strategies

Risk mitigation strategies are essential for organizations to prevent potential losses or harm caused by accidents, natural disasters, or other negative events. Here are five different risk mitigation strategies that organizations can use to minimize the impact of risk:

1. Avoidance Risk Strategy: This strategy involves completely avoiding any activity that presents a risk of injury or illness in the workplace. This can be achieved through the use of engineering controls or by designing out the cause of hazardous conditions. By implementing engineering design reviews during a project’s life-cycle process, high-risk factors of new products or processes can be identified before operations begin. This allows organizations to avoid future injury or illness and other consequences. The “avoidance approach” helps to establish policies and procedures that foresee and avoid high-risk situations.
2. Acceptance Risk Strategy: This strategy involves accepting the risk associated with a product or activity when the estimated field failure rate is sufficiently low. The decision to accept risk is partly based on an estimate or prediction that may incorrectly forecast the future. Therefore, organizations must closely monitor performance or establish early warning systems. Hazard substitution can also be used as an acceptance risk strategy.
3. Reduction or Control Risk Strategy: This strategy involves using administrative controls such as hazard analysis, failure mode and effects analysis (FMEA)^[1], and other risk prioritization tools to reduce the probability of occurrence and the severity of the consequences of an unwanted product failure. If it is not possible to reduce the occurrence or severity of the risk, then implementing administrative controls is an effective option. For instance, teams can avoid unwanted failures using detection and root cause analysis.
4. Control or Transfer Risk Strategy: This strategy involves transferring the burden of each risk consequence to another party. This may include giving up some control, yet when something goes wrong, the organization is not responsible. However, this approach will not protect an organization’s brand image if the product or service is associated with it. For example, even if a power supply vendor pays for all damages due to failures, the customer only knows that the organization’s product has failed and caused damage.
5. No Blame Safety Strategy: This strategy involves creating a non-punitive no-blame learning environment that empowers employees and subcontractors by removing the fear of reprisal from employers when reporting near miss and close call events. Adopting a No Blame Safety Strategy is a win-win for an organization’s bottom line. The benefits include higher production rates, lower cost and quality of construction, enthusiasm, confidence, supportive morale, and discipline at a person or group level. Safety professionals around the world agree that no one wants to be blamed for a workplace injury or illness, and that’s why a non-punitive no-blame learning environment liberates EHS professionals, safety managers, and competent persons’ effectiveness in high-hazard industries.

Implementing Risk Mitigation Strategies

After identifying and prioritizing risks, it’s time to implement risk mitigation strategies. This involves putting plans in place to control, reduce, or eliminate the identified risks. Below are three important steps to consider when implementing risk mitigation strategies.

1. Risk Management Plan:

A risk management plan is a detailed outline of the processes, procedures, and protocols that an organization will implement to mitigate risks. A risk management plan typically includes the following:

• Risk identification: This involves identifying all the potential risks that an organization faces.
• Risk analysis: This involves analyzing the risks to determine their probability of occurrence and their potential impact on the organization.
• Risk evaluation: This involves evaluating the risks to determine which ones require immediate attention and which ones can be addressed at a later time.
• Risk treatment: This involves selecting and implementing risk mitigation strategies to reduce or eliminate the identified risks.
• Monitoring and reviewing: This involves monitoring the effectiveness of the risk mitigation strategies and reviewing the risk management plan on a regular basis.

2. Communication Plan:

Effective communication is critical when implementing risk mitigation strategies. A communication plan outlines how an organization will communicate with its stakeholders about the risks and the strategies being implemented to mitigate them. A communication plan typically includes the following:

• Stakeholder identification: This involves identifying all the stakeholders who need to be informed about the risks and the mitigation strategies.
• Communication channels: This involves determining the most effective channels to communicate with the stakeholders.
• Message development: This involves developing clear and concise messages that convey the risks and the mitigation strategies.
• Message dissemination: This involves disseminating the messages to the stakeholders in a timely and effective manner.

3. Monitoring and Reviewing:

The final step in implementing risk mitigation strategies is monitoring and reviewing. This involves regularly reviewing the effectiveness of the risk mitigation strategies and adjusting as needed. Monitoring and reviewing typically includes the following:

• Monitoring progress: This involves tracking the progress of the risk mitigation strategies to ensure they are being implemented effectively.
• Reviewing results: This involves reviewing the results of the risk mitigation strategies to determine if they are effective in reducing or eliminating the identified risks.
• Adjusting: This involves adjusting the risk mitigation strategies as needed based on the results of the monitoring and review process.

Conclusion

Therefore, Risk mitigation is a critical part of organizational operations, and there are various strategies available for managing risks, including avoidance, acceptance, reduction/control, transfer, and no-blame safety strategy. It’s essential to select the appropriate strategy based on the risk and context. Developing a risk management plan, communication plan, and monitoring and reviewing process are vital steps in implementing risk mitigation strategies effectively.

Read our Article: Operational Risk Management (ORM): An overview