Methods of risk management
A. understand the main risk management methods;
B. identify the risk management methods most suitable in your business.
There is always a chance that something will go wrong. The things that might go wrong are called risks, and a wise manager identifies them early enough so that he or she can do something about them. Of course, risk management is an ongoing activity, so you should carry on identifying and recording new risks as they come up.
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Identifying and evaluating the risks is a good starting point; then you need to know how to manage them effectively.
What are the risk management methods and which one should you choose?
There are 5 main ways to manage risk: acceptance, avoidance, transference, mitigation or exploitation.
Accepting the risk means that while you have identified it and recorded it; you take no action. You simply accept that it might happen and decide to deal with it if it does.
This is a good strategy to use for very small risks. It could take a lot of time to put together a risk management strategy so it’s often a better use of your resources to do nothing for small risks.
Risk acceptance is also common in pharmaceutical companies when developing a new drug. The cost of research and development does not outweigh the potential for revenue generated from the sale of the new drug, so the risk is deemed acceptable.
You can choose to adapt your plans to avoid the risk. This is a good strategy for when a risk has a potentially large impact on your project.
For example, a business could refuse purchasing a building for a new retail location if the risk of the location not generating enough revenue to cover the cost of the building is high. A hospital or small medical practice may avoid performing certain procedures known to carry a high degree of risk to the well-being of the patient.
Although avoiding risk is a simple method to manage potential threats to a business, the strategy also results in lost revenue potential.
Transference is a risk management strategy where you transfer the impact and management of the risk to someone else.
Risk transfer typically takes place by paying a premium to an insurance company in exchange for protection against substantial financial loss. For example, property insurance can be used to protect a company from the financial losses incurred when damage to a building or other facility takes place. If you are transporting equipment and the van is in an accident, the insurance company will be liable for providing new equipment to replace any that was damaged.
In practice if the insurance company or contractor go bankrupt or end up in court, the original risk is likely to still revert to the first party. The insurance policy simply provides that if an accident (the event) occurs involving the policy holder then some compensation may be payable to the policy holder that is commensurate with the suffering/damage.
Mitigating is probably the most commonly used risk management technique, especially when business risks are unavoidable. It’s also the easiest to understand and the easiest to implement. Mitigation means that you limit the impact of a risk or the likelihood of the risk happening.
For example, if you are launching a new product and the sales team has to demonstrate it to customers, there is a risk that the sales team doesn’t understand the product and can’t give a good demonstration. As a result, they will make fewer sales and there will be less revenue for the company.
A mitigation strategy for this situation would be to provide good training to the sales team. There could still be a chance of not understanding the product well but the impact of the risk will be reduced as the majority of the team will be able to demonstrate the new producteffectively. You can mitigate against the impact, but you can also mitigate against the likelihood of it happening.
You’ll probably find yourself using a combination of techniques, choosing the strategies that best suit the risks on your project and the skills of your team.
Acceptance, avoidance, transference and mitigation are great to use when the risk has a negative impact on the project. But what if the risk has a positive impact? For example, the risk that the new product is so popular that we don’t have enough sales staff to do the demonstrations? That’s a positive risk – something that would have a benefit to the project and the company if it happened. In this case we want to maximize the chance that the risk happens!
Exploitation is the risk management strategy to use in these situations. Look for ways to make the risk happen or/ and for ways to increase the impact if it does. For example, you could train another sales person to also give product demonstrations and do some extra marketing, so that the chance that there is lots of interest in the new product is increased, and there are people to do the demonstrations if needed.
Protecting Your Business: Risk Management Planning, Research & Development by: Dr. Christine Taylor Berry, Director of Insurance Studies
Check out this short animated story that contains the basics of risk management.
"Facing the future of risk - Managing business risk to take opportunities and grow" by PwCUK
TIPS AND TRICKS:
- Put a risk management plan in place and you’ll spend less time worrying about your business and more time building it;
- Create a risk aware culture, discuss your risk management plans with your colleagues/ employees and make sure they are trained on what to do in the event of an emergency;
- Consider a general liability insurance to protect your business but don't solely rely on your insurance.
- It is not enough to identify potential risks, you need to decide how to manage them;
- There are 5 main risk management methods but risk management strategies are different in each business;
- Risk avoidance can result in lost revenues;
- Risk acceptance is a good strategy for small risks or when potential gains of a risky clearly outweigh the costs;
- Mitigation or limiting the impact of a risk is the most commonly used technique.
THINK OF SOME ANSWERS TO THE FOLLOWING QUESTIONS
What are the main risk managment methods?
Which risk management methods do I apply in my business and why?