Risk mitigation acts as the "defense line" of an organization, crucial for detecting and preventing incidents. But what exactly is risk mitigation, and how is it implemented? Let's explore this in the article below.
Risk mitigation is a process of identifying, assessing, and measuring potential risk events affecting a company or a project, to prevent and minimize negative outcomes and devise suitable solutions.
Due to the complexity of risks, involvement and commitment of all levels within the company are crucial for effective risk mitigation.
In 2020, Covid-19 caused a major global crisis, impacting over 65 countries and severely disrupting business operations worldwide. As a result, around 5 million companies faced supply chain disruptions.
Without proper risk management strategies, businesses were vulnerable to the pandemic's effects, leading some large companies to shut down. This highlights the importance of risk management.
Risk mitigation is vital as it helps companies make informed decisions and handle potential risks. It reduces damage by identifying and addressing risks early, while also enhancing operational efficiency through preparation for adverse situations. Additionally, it creates opportunities by viewing risks as potential gains and ensures proper cash flow management, which maximizes profitability.
Risk avoidance means not engaging in activities that harm the organization. For example, this could include not acquiring a particular technology or not expanding to the new market. This measure may appear safe, but it can sometimes lead to missed opportunities for profit increase. Therefore, organizations need to consider this approach and only apply it when the risk is significant and the likelihood of occurrence is high.
This method focuses on trying to minimize losses to the business rather than eliminating the risk. The goal of this solution is to prevent losses, contain them, and avoid serious consequences.
This approach involves the business transferring the risk to a third party by contract, such as using insurance to cover damages or transferring asset risk to an insurance company.
This is where a business transfers the risks from an individual to a group. For example, if a business fails, instead of one individual bearing the risk, each investor or contributor might share a portion of the risk.
Some risks cannot be eliminated even after intensive measures. At this point, the business will need to persevere and accept living with these risks. This is suitable for small risks that offer significant benefits.
| Description | When to Use | Example | |
| Avoidance | Eliminating the risk by not engaging in the risky activity | When the risk is too high and the potential negative impact outweighs the benefits | Not entering a volatile market to avoid political/economic risks |
| Reduction | Implementing measures to reduce the likelihood or impact of the risk | When the risk is significant but can be minimized through specific actions | Enhancing cybersecurity to reduce data breach risks |
| Transfer | Shifting the risk to a third party through insurance or contracts | When the risk is too large to bear alone or can be better managed by another party | Purchasing insurance to cover natural disaster losses |
| Sharing | Distributing the risk among multiple parties | When spreading the risk can reduce the burden on any single entity | Partnering with other companies to share the cost and risk of a large project |
| Acceptance | Acknowledging the risk and accepting the potential consequences | When the risk is low or the cost of mitigation exceeds the potential loss | Accepting minor equipment breakdown risks due to high maintenance costs |
Evaluate threats such as legal regulations, market trends, and technological advancements. Gather data from suppliers, customers, experts, and employees to recognize potential risks and identify key risk indicators (KRI).
KRI is a metric used to monitor and signal the potential emergence of risks that could adversely affect an organization. By monitoring KRIs, companies can proactively address risks before they escalate into major issues.
Examples of KRIs include:
Determine the probability and impact of risks, ranked by severity. This helps in understanding and making informed decisions. The table below can be used for references when evaluating risks:
| Consequences | ||||
| Likelihood | Minor | Moderate | Major | Catastrophic |
| Rare | Low | Low | High | High |
| Unlikely | Low | Low | High | Extreme |
| Likely | Low | High | Extreme | Extreme |
| Certain | High | High | Extreme | Extreme |
When managing risks, it’s essential to implement strategies tailored to the risk’s nature and potential impact. For "High" and "Extreme" risks, focus on strategies like risk avoidance, reduction, or transfer. These approaches aim to either eliminate the risk, minimize its impact, or shift the burden to another party, such as through insurance.
For "Low" risks, consider risk acceptance, where the potential impact is deemed manageable, or risk sharing, which involves distributing the risk across multiple parties to lessen the overall burden. Each strategy should align with the organization's risk tolerance and objectives.
Businesses are dynamic and constantly evolving, making it crucial to continuously monitor risks and reassess their mitigation strategies. Regular risk reviews can be integrated into weekly meetings or daily stand-ups to ensure timely updates.
Additionally, the key risk indicators should be revisited periodically and adjusted based on changes in the business environment. It is necessary to develop real-time tracking dashboards, and set up baseline and threshold measurements. This proactive approach ensures that any emerging risks are quickly identified.
Risk mitigation is a subset of risk management. While risk mitigation focuses on specific actions to reduce risks, risk management is the overall process that includes identifying, analyzing, and addressing risks through various strategies, including mitigation.
| Risk mitigation | Risk management | |
| Focus | Risk mitigation is specifically about reducing the impact or likelihood of a risk. It involves implementing strategies and actions to lessen the severity or probability of a risk occurring. | Risk management is a broader, overarching process that involves identifying, assessing, prioritizing, and addressing risks. It encompasses all aspects of handling risks, including mitigation, acceptance, transfer, and avoidance. |
| Objective | The primary goal is to minimize potential damage or loss if a risk event does occur. For example, a company might improve its security measures to reduce the likelihood of a data breach. | Risk management aims to ensure that risks are systematically identified and managed to achieve organizational objectives and minimize their potential impact on the business. |
| Actions | Examples include adopting new technologies, changing processes, or introducing safety protocols. | Risk management includes risk assessment, risk planning, risk control, and continuous monitoring of risks. It involves creating a risk management plan that outlines how risks will be managed in various scenarios. |
Yes, several standard frameworks are widely used for risk management. Here are two prominent ones - the COSO ERM Framework and the ISO 31000:2018.
Speaking of cyber risks only, according to a report by the Institute of Directors (IoD), approximately 50% of small businesses that experience a major risk event (such as a data breach or significant financial loss) fail within two years.
Thus, serious investment in risk management is crucial. I hope this article helps businesses understand risk management better and build suitable solutions to prevent risks, contributing to growth and success.