Risk is unavoidable in every industry, but that doesn’t mean businesses shouldn’t be prepared.
A risk management strategy is crucial when companies face natural disasters, supply chain disruptions, cybersecurity threats, or employment gaps. Take a proactive step toward identifying and mitigating these potential threats before they halt your business operations.
Continue reading to discover safe and effective risk management strategies that move businesses forward.
What is a risk management strategy?
A risk management strategy addresses risks, exposures, and events that might leave companies vulnerable. Organizations of all sizes can use this strategy to ensure teams are aligned and have precautionary measures in place. Risk management is best done in a full cycle, continuously identifying, assessing, managing, and monitoring factors.
The five types of risk management are:
- Avoidance: Through avoidance measures, business leaders work to prevent problems. However, it's worth noting that this approach doesn’t solve the problem—it just skirts around it.
- Retention: Rather than looking at insurance options or finding an effective solution to mitigate risks, some organizations retain the risk of loss and pay for expenses out of pocket. Companies select risk retention when they decide that the price of assessing risks will be more costly than paying for damages. It is essential to remember that this approach can lead to more financial losses than anticipated.
- Spreading: Duplicating and storing records in different buildings can prevent lost documents if a fire occurs. Spreading teams across locations can also make managing potential risks easier.
- Transfer: Businesses can use the risk transfer method by purchasing insurance or acquiring protection from a third-party provider. Additionally, having multiple layers of protection can give business leaders better peace of mind.
- Loss prevention and reduction: When risks can’t be avoided, teams may reduce the loss in severity and frequency. Reduction strategies include safeguarding problems from fully derailing operations and training employees to handle project risk and response.
The importance of a strong risk management strategy
An effective risk management strategy helps companies identify weaknesses, strengths, threats, and opportunities for improvement.
While a risk management strategy assists with the protection of assets, it also helps keep customers loyal and satisfied. That's because when customers know a business is doing everything possible to keep them out of harm’s way, they’re generally more likely to continue their partnership.
Additionally, strong risk management strategies help companies:
Operate efficiently
Risks can appear when you least expect them. Even if businesses are prepared and aware of previous risks, new challenges can come from any direction. Examples can include a supplier that no longer works with an organization, an unexpected cybersecurity breach, or a technology failure.
By creating a strategic business continuity plan, teams can align on how to respond to risks and identify and document each person’s role and responsibilities. This alignment provides continuity in mitigating loss and delivering consistent quality service.
Achieve goals
Operational risk mitigation strategies create specific targets for companies to meet. Such goals could include better customer retention, quicker response times after equipment failures, or improved workforce training engagement. Building a plan allows companies to pinpoint initiatives and provide easier ways to track performance and success beyond hoping for fewer business disruptions.
Proactively make decisions
When organizations position themselves as proactive decision-makers, they’re more prepared for long-term sustainability and success. They can easily navigate uncertainties and flourish over time by anticipating and quickly adapting to changing circumstances.
Seven risk management strategies to try
Who’s responsible for creating and maintaining risk management strategies? The short answer: employers and C-suite executives. However, all employees need to be aligned for the strategy to be beneficial.
To make identification, recovery, and rebuilding a smoother process, companies can test the effectiveness of these risk mitigation strategies:
1. Business experiments
Running what-if scenarios may help teams understand the outcomes that could follow potential threats. These pilot projects or experiments allow businesses to test ideas and see how they’ll work to mitigate risk before going through the implementation process. Once teams identify threats, organizations can brainstorm multiple solutions and realistically test each to determine the best courses of action.
2. Build buffers
Reduce risk exposure by ensuring initiatives stay within an intended scope that leaves a buffer in case something goes wrong. Depending on the type of projects or services a company provides, safeguards may be financial, resource-related, or time-based to contain any problems during the project lifecycle. This risk mitigation strategy aims to reduce the number of surprises that could derail the company and lead to unforeseen delays or disruptions.
3. Risk-reward analysis
This practice helps teams determine if the risk is worth the reward by reviewing the return on investment of certain actions. Before investing assets or time into initiatives or market opportunities, a risk-reward analysis can highlight the benefits and drawbacks of any decision. For some organizations, risks are worth taking if the rewards outweigh the potential issues. When done correctly, this practice can also keep businesses from missing out on fruitful opportunities, especially those that may have been previously overlooked due to potential threats.
4. Contingency planning
Even the best-laid plans can go off-track, forcing teams to scramble. Companies can benefit from preparing multiple plans or options based on various risk scenarios. Contingency planning is anticipating issues that could arise and then creating alternative solutions for those circumstances. Being prepared can enable proactive companies to recover quickly and with minimal disruption.
5. Learn from past scenarios
Organizations can gain insights from evaluating what went wrong during an incident rather than just moving on. By documenting specific instances of risk and recovery, organizations can use past situations as learning opportunities for future problems.
6. Data analysis
If teams have available data, gathering and analyzing those insights can help them assess and manage potential problems. Companies have many internal audit options, but a qualitative risk analysis is generally the most popular. This analysis can identify and rank threats based on their likelihood of occurrence and potential loss.
Organizations can assemble risk specialists who know how to organize and analyze data. After isolating potential vulnerabilities, the team can document and assign them an appropriate ranking. Risks with the highest probabilities will be top priorities to focus on. This process can help organizations determine where to allocate their resources first.
7. Educate and train employees
To effectively prevent and avoid risk, organizations can train employees in risk reduction strategies. Human error contributes to various risks, making education a critical aspect of successful companies. Training employees on risk awareness, compliance, and safety measures can reduce the likelihood of mistakes and improve overall risk management.
A company’s workforce knows how things run, and their insight can help guide business leaders. During training sessions, give employees opportunities to ask questions and share concerns about missing processes or potential gaps in operations.
Choosing a proper risk management process has its own unique risks because management strategies shouldn’t be one-size-fits-all. Business leaders can better understand which strategy to select by fully understanding their organization’s threat levels.
To start, teams can consider how their internal risk management operates. Is it generally ignored until it reaches the point of halting operations? Does an organization member play an active role in negative risk mitigation?
Once executives know the risks their organizations are up against and how they are being handled, the appropriate strategies will crystallize. However, risk mitigation can utilize different tactics. Many teams need to select a handful of strategies to mitigate risk effectively.
Mitigate risk with the help of Marsh McLennan Agency
With the right risk management strategy, your business can prepare for whatever comes its way. Create proactive solutions with built-in buffers for potential challenges with the help of our team.
Get to the root of problems and take proactive action with customized solutions for your company based on research, data, and carrier partnerships. Some of the specialized solutions we offer include:
- Benchmarking and loss trend identification
- Business continuity risk management
- Regulatory compliance
- Strategic risk assessment
- Workforce strategies
Let us partner with you to take some of the burden off your team’s shoulders and deliver cost-effective solutions customized for your organization.
Reach out to a specialist today.
