Risk plays a significant role in our daily lives. Whether personal risks, from crossing the road to playing the lottery, or business risks, like launching products and setting up a company in a new country, risk is simply unavoidable. Even though we have tools to estimate risk, these forecasts and predictive models can never be 100% accurate. Further, forecasts only identify risks: it is up to us to proactively manage, mitigate, and even control risk.
There are two main parameters that define risk. The first is impact: what is the predicted outcome if the risk comes to fruition? The second is likelihood: the estimated probability of the consequences occurring. Assigning high, moderate, and low labels for impact and likelihood (wherein high/high risks are the most critical, and low/low risks are less important) is a shrewd first step in risk evaluation.
Keep in mind that critical risks aren’t always a bad thing: if the outcome is positive, there will be good consequences for the company. The adage ‘with great risk comes often comes great reward’ bolsters this ideology. However, some business owners are risk-averse, finding safety and comfort in established routines. Regardless of your appetite for risk, it is important to define a risk management strategy.
- Prevention: the business changes direction to avoid, remove, or terminate the risk. If the risk is related to a pending action, the preventative strategy recommends not taking that action. Another facet of the preventative strategy is implementing countermeasures to mitigate the risk.
- Reduction: if the negative consequences of risk are unavoidable, business owners take proactive, decisive action to dampen the effect of the risk and/or reduce the likelihood of its recurrence.
- Transfer: the business can shift the burden of risk to a 3rd party, usually achieved through some form of insurance. Insurance is reliable protection against risks, however not all risks can be insured.
- Contingency: also known as a risk response plan, this strategy dictates a set of approved actions for a business to take if a risk crystallizes. Contingency plans are best suited to risks that are low in likelihood, but with moderate or high negative consequences.
- Increase: when a risk has predominately positive outcomes, businesses can take steps to increase the likelihood and impact of the risk.
- Acceptance: the risk is tolerated. This is an appropriate tactic when the negative consequences of the risk are not detrimental to the business.
In conjunction with these strategies, it can be beneficial to accelerate a risk, whether good or bad, in the interest of generating a favorable result. Accelerating a risk with negative consequences might mitigate the impact, whereas accelerating a risk with positive consequences will benefit the business sooner than expected.
The identification, evaluation, and management of risk are essential tools for business executives. With time, your business will find the right balance of risk-taking and risk-mitigation to achieve superior rewards.
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