10 Types of Risk Management Strategies to Follow

Having a strong approach to risk management is more important than ever in today’s dynamic risk environment. From natural disasters to pandemics to geopolitical unrest to supply chain disruption and cybersecurity threats, risks to organizations take many forms and strike from many angles. Following these ten types of risk management strategies can better prepare your business for a volatile risk landscape.

McKinsey found when banks shut branches and corporate offices, it altered how customers interact with them, forcing changes to long-held risk management practices in order to monitor existing risks and guard against new risk exposures.

Regardless of industry, how quickly and effectively risks can be identified and managed will determine how well companies and institutions will recover and rebuild — and this requires rethinking risk management strategies. As organizations increase their focus on identifying, mitigating, and monitoring risks in response to an ever more volatile risk environment, you may have questions about who is responsible for developing a risk management strategy and what types of different risk management strategies your organization can employ. Here’s everything you need to know to better address today’s top risk areas.

What Is a Risk Management Strategy?

A risk management strategy is a structured approach to addressing risks, risk exposures, and risk events, and can be used in companies of all sizes and across any industry. Effective risk management is best understood not as a series of steps, but as a cyclical process in which new and ongoing risks are continually identified, assessed, managed, and monitored. This provides a way to update and review assessments as new developments occur and then to take steps to protect the organization, people, and assets.

Identifying Risks

Risk identification can result from passively stumbling across vulnerabilities or through implemented tools and control processes that raise red flags when there are potential identified risks. Being proactive rather than reactive is always the best approach to risk reduction. In a mature risk program, organizations can, should, and do conduct periodic internal and external risk assessments that help identify unseen risk factors. Numerous compliance frameworks also require a formal risk assessment at least annually, so completing this step can knock out multiple birds with one stone. All identified risks, assessments, response plans, and resolution notes should be documented in a formal “risk register” or “risk inventory” that is regularly reviewed and updated.

Assessing Risks

Once potential risks have been identified, each risk should be assessed to determine the likelihood of the risk being realized, and the impact should the risk be realized— this helps teams prioritize each risk. Whether your team is conducting a risk assessment for Sarbanes Oxley (SOX) or focusing on other types of risks, your assessments should be systematic, documented, and, depending on your business, reviewed or redone at least annually. How often risk assessments are completed will differ, depending on the size and complexity of each business.

Responding to Risks

After assessing risks, the next part of the process involves developing and implementing treatments and controls, enabling the organization to address risks appropriately and effectively deal with each risk in a timely manner. There are four common ways to treat risks: risk avoidance, risk mitigation, risk acceptance, and risk transference, which we’ll cover a bit later. Responding to risks can be an ongoing project involving designing and implementing new control processes, or they can require immediate action, War Room style. Some specific risks may need a detailed action plan for coping with them, and decision-making around key risks should generally involve affected stakeholders.

Monitoring Risks

Risk monitoring is the ongoing process of managing risk by tracking risk management execution, and continuing to identify and manage new risks. Monitoring risks enables prompt action if the likelihood, severity or, potential impact of a risk exceeds acceptable levels. Continuing to monitor risks and execute on risk plans keeps an organization equipped to deal with the risk events that come their way, from enterprise risks, to financial risks, to strategic risks to external risks.

Why Is Having a Risk Management Strategy Important?

Project and operational risks are not uncommon to most businesses, but having risk management processes and strategies are essential in identifying your company’s strengths, weaknesses, opportunities, and threats (SWOT). There are many other benefits to effectively managing risks.

1. Operational Effectiveness and Business Continuity

No matter how well-prepared your business is, operational risks can surface at any time — and from sources you may not have been aware of in the past. Risks can take the form of a new cybersecurity threat, a supplier or service provider who’s no longer able to service your company, or an equipment failure. With all the moving parts both in a company and outside of it having an established risk management process and a strategy in place allows you to ensure internal controls are in place to to deal with other types of risk as they arise.

2. Protection of Your Company’s Assets

Whether it’s physical equipment, supplies, or information, protecting your company’s assets is imperative. A recent report by IBM showed over 8.5 billion records were compromised in data breaches between April 2019 and 2020 — with the average cost of a mega-sized data breach being $3.86 million US. In the one-year period ending April 2020, 80 percent of thefts were customer-related personally identifiable information (PII). This makes establishing a solid and actionable risk management strategy imperative for protecting assets and customer data.

3. Customer Satisfaction and Loyalty

Your company’s logo, brand, digital presence, and reputation are an asset — and your customers take comfort in seeing and interacting with them daily. When your business has a well-thought-out and developed risk management plan and acts on it, your customers can maintain a sense of security and confidence in your reputation and brand. Your risk strategies and processes help you protect your brand and reputation by safeguarding these assets. It also ensures customers maintain faith in your ability to be there and deliver the products and services to which you’ve committed. The result is a higher degree of customer satisfaction, customer retention, and loyalty.

4. Realizing Benefits and Achieving Goals

A significant part of finishing projects on time and achieving intended goals relies on how effectively risks are managed. Risk management identification, assessment, and management practices expose vulnerabilities faster — and allow your company to remove projects and activities that don’t produce a return on investment. This increases the chance of achieving your expected project portfolio and wider business objectives and reaping the anticipated benefits.

5. Increased Profitability

The bottom line for most businesses is remaining profitable. Often when something like a breach occurs, there is a substantial financial impact — and it usually involves tedious hours working with legal and insurance teams to conduct lengthy investigations. Managing market, credit, operational, reputational, and other risks is vital to keeping your company’s bottom line healthy.

4 Common Risk Responses

Managing risks can involve applying different risk responses to deal with varying types of risk. Not every risk will warrant the same response. You’ve likely heard the adage, “Avoidance is not a strategy.” Well, believe it or not, when it comes to risk management strategies, avoidance is a common risk response — along with reducing, accepting, and transferring. Here’s what you need to know about each risk response and when they might work best.

1. Avoiding Risks

Avoidance is an option that works to remove the chance of a risk becoming a reality or posing a threat altogether. If a product or service poses more risks than benefits, then it may behoove an organization not to invest in that product or service. If there are geopolitical risks that can threaten an organization’s projects, it may be a better choice to avoid those risks and select a different region to launch a project.  An avoidance strategy shouldn’t necessarily be used with frequency or for longer-term threats. Eventually, this response should be re-evaluated to find other sustainable risk responses that address underlying issues.

2. Accepting Risks

Sometimes avoidance isn’t an appropriate response, and acceptance may be the better practice. When a risk is unlikely to occur or if the impact is minimal, then accepting the risk might be the best response. Timing also plays a role — it could be that a risk doesn’t pose any imminent concern, or it won’t impact your company’s strategic outlook. One example of this might be a change to vendor pricing down the road. This does pose a financial risk, but is nearly unavoidable — vendor prices inevitably increase. It’s important to keep re-evaluating these types of risks periodically: their impact on your company and its projects could change.

3. Mitigating Risks

Mitigating risks is the most commonly discussed risk response — however, it isn’t always practical or possible. It may be the best option if a risk poses a real threat or problem, and avoidance or acceptance won’t suffice. If a risk creates a negative impact and one that could be costly to your company, employees, vendors, or customers, then that risk should be mitigated. This means identifying the risk, assessing all possible solutions, devising a plan, taking action, and monitoring the results.

4. Risk Transferring

There are when challenges or issues arise and you or your team may not be able to avoid, accept, or mitigate them. One example may be a lack of expertise or training required to address the risks. In this case, it may be a good idea to outsource or transfer the risk to another party — sometimes in-house, sometimes from an external third or fourth party. Some risk can also be transferred to an insurance company, which may reimburse organizations for certain realized risks.

Who is Responsible for Developing a Risk Management Strategy?

Determining who will be the best person or function to identify, assess, and develop a risk management strategy won’t necessarily be the same each time — it will depend on the scope, nature, company structure, complexity, resource availability, and team capabilities. So who is responsible for developing a risk management strategy? It might be the responsibility of a risk management committee member, an audit team member, a project manager, a risk specialist, or someone else – like an external consultant. When deciding which direction to go, other things to consider include:

• The drivers and benefits behind developing a risk management strategy.
• The end-to-end process, from initiation to completion.
• Other parties who can bring additional insight and value.
• How and where to document the risk management strategy.
• Risk management software and tools to simplify and streamline work.
• Conducting a formal review of the findings.
• Timing for presenting the findings.

10 Types of Risk Management Strategies

It’s important to realize there are many different risk management strategies, each with its own benefits and uses. Here are ten types to follow.

Type 1: Business Experiments

Business experiments as a risk management strategy are useful in running ‘what-if’ scenarios to gauge different outcomes of potential threats or opportunities. From IT to marketing teams, many functional groups are well-versed in conducting business experiments. Financial teams also run experiments to gauge return on investments or assess other financial metrics.

Type 2: Theory Validation

Theory validation strategies are conducted using questionnaires and surveys of groups to gain feedback based on experience. If a new product or service has been developed or there are enhancements, it makes sense to get direct, timely, and relevant feedback from end users to assist with managing potential challenges and design flaws, and thus better manage risks.

Type 3: Minimum Viable Product Development

Developing complex systems offering nice-to-have features isn’t always the best route. A good risk management strategy considers building products using core modules and features that will be relevant and useful for the bulk of their customers — this is called a Minimum Viable Product (MVP). It helps to keep projects within scope, minimizes the financial burden, and helps companies get to market faster.

Type 4: Isolating Identified Risks

Information technology teams are used to engaging with internal and external help to isolate security gaps or flawed processes which leave room for vulnerabilities. In doing so, they become proactive in identifying security risks ahead of an event, rather than waiting for a malicious and costly breach to occur.

Type 5: Building in Buffers

Whether it’s a technology or audit project, project managers recognize the need to build in a buffer. Buffers reduce risks by ensuring initiatives stay within the intended scope. Depending on the project, buffers may be financial, resource, or time-based. The goal is to make sure there are no surprises that would lead to unforeseen risks.

Type 6: Data Analysis

Data gathering and analysis are key elements in assessing and managing a wide variety of risks. For instance, qualitative risk analysis can help identify potential project risks. Conducting a thorough qualitative risk analysis helps to isolate and prioritize risks, and to develop strategies to address, monitor, and re-evaluate them.

Type 7: Risk-Reward Analysis

Conducting an analysis of risks versus rewards is a risk strategy helping companies and project teams unearth the benefits and drawbacks of an initiative before investing resources, time, or money. It’s not only about the risks and rewards of investing funds to take on opportunities — it’s also about providing insight into the cost of lost opportunities.

Type 8: Lessons Learned

With every initiative or project your company completes or abandons, there will inevitably be lessons to be learned. These lessons are a valuable tool that can significantly reduce risks in future projects or undertakings — but lessons are only useful if teams take the time to document them, discuss them, and develop an action plan for improvement based on what’s been learned.

Type 9: Contingency Planning

While having a plan is great, it’s seldom enough as things don’t always go according to the book. Companies need to prepare to have multiple plans or options based on various scenarios. Contingency planning is all about anticipating things that will go wrong and planning alternate solutions for unforeseen circumstances that can surface, enabling successful response and recovery.

Type 10: Leveraging Best Practices

There’s a reason best practices are mentioned under risk management strategies. They are tried and tested ways of doing things. Best practices may differ from industry to industry and project to project, but they always ensure companies don’t have to recreate the wheel, ultimately reducing risks.

Effectively managing risk has always been critical for success in any company and industry — but never more so than today. Being able to identify and properly assess risks reduces missteps and saves money, time, and valuable resources. It also clarifies decision-makers and their teams and helps leaders recognize opportunities and the actions they need to take. An important part of your risk strategy should also involve managing your company’s risks by using integrated risk management software that facilitates collaboration and visibility into risk to increase the effectiveness of your risk management programs. Get started with RiskOversight today!

Frequently Asked Questions About Risk Management Strategies:

What are the components of a risk management strategy?

A good risk management strategy involves a continuous cycle of identifying, assessing, responding to, and monitoring risks.

Why Is Having a Risk Management Strategy Important?

Having an effective risk management strategy can yield improvements in operational effectiveness, business continuity, asset protection, customer satisfaction, achieving goals, and increased profitability.

What are 4 common risk responses?

The four common treatments for risk are: Avoid, Transfer, Mitigate, and Accept.

What are 10 types of risk management strategies?

The 10 types of risk management strategies and tips we cover here are: business experiments, theory validation, minimum viable product (MVP) development, isolating identified risks, building in buffers, data analysis, risk-reward analysis, lessons learned, contingency planning, and leveraging best practices.

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