It may seem an obvious observation to make that every organisation faces risks. However, not every risk that your business faces will be of the same type, which will necessitate a toolbox of approaches for addressing those risks.

So, what does your own organisation need to know about strategic risk management, and what strategies for managing risk should you be looking to put in place?

risk management strategy

What is a risk management strategy

Your organisation should be constantly tracking risk as part of its broader risk management lifecycle. The latter should entail you pinpointing the risks that your business faces, and considering the likelihood of those dreaded events occurring. It is also as part of this process that you will need to be assessing the possible impact of those events if they do come to pass.

The term ‘risk management strategy’, however, applies to the next component of risk management – specifically, exactly how to treat the risks that confront your organisation. The approach you ultimately take to a particular risk will be your risk management strategy.

Why is having a risk management strategy important?

As we will set out below, there are four broad risk management strategies that your business could look to implement in any one instance: risk acceptance, risk transference, risk avoidance, or risk reduction.

It is of paramount importance to always select the appropriate risk management strategy (or ‘risk treatment option’, to cite another term often used) for each given risk your organisation encounters.

Making the right choice will enable your business to manage the particular risk as effectively as possible. On the other hand, choosing an ill-suited risk management strategy could mean highly damaging consequences for the business.

Types of risk management strategy

Risk acceptance

This particular strategy involves accepting the risk in question, without taking any action to mitigate it. While it might initially seem an undesirable course of action to not take any action at all in the face of an identified risk, this is actually not always the case. Sometimes, it can be so expensive to mitigate against a particular risk, that the cost ends up exceeding the cost of the risk itself.

In that situation, it may make greater sense to simply accept the risk. The downsides of this approach, however, are obvious: nothing is being done to reduce the impact of the risk or to prevent the feared risk from materialising.

As an organisation, you will therefore need to consider whether you would be able to deal with the risk if it was to come to pass. Ideally, your organisation would only accept a given risk if it had a low chance of occurring, or if it would only cause minimal damage if it did materialise.

Risk transference

As the term suggests, risk transference is a strategy of transferring a particular risk elsewhere. More specifically, it involves transferring the risk via a contract to a third party, which takes on the risk on behalf of the organisation.

A simple analogy for explaining this would be taking out an insurance policy. If you purchase buildings insurance, you are not eliminating the risk of the insured building burning down. Instead, the risk continues to exist, and you are transferring responsibility for that risk and the financial consequences of it occurring to another party – in this case, the insurer.

Risk avoidance

If you deploy a risk avoidance strategy in response to a particular risk, this means you are taking the approach of not carrying out any course of action that would lead to that risk occurring. It is a risk treatment strategy that aims to completely eliminate any chance of that risk coming to pass.

An example of a risk avoidance strategy would be if you analyse the risks associated with a particular investment opportunity, and decide not to proceed with that investment opportunity, on the grounds that it is simply too risky.

This isn’t a strategy that your organisation should be using for every single risk it comes across. After all, your business avoiding every single risk it encounters would mean it would almost certainly miss out on some positive opportunities over time.

Nonetheless, it is a strategy you might opt for in cases where the risk is so great that significant damage would be caused to your organisation, were the risk to come to pass.

Risk reduction

Finally, a strategy of risk reduction is aimed at lowering the risk posed by a particular situation. It is about making a given risk less severe by taking actions to prevent it from happening, or to minimise its impact if the feared event does occur.

In order to use this common risk treatment option, you will need to figure out which actions or measures would likely be effective in reducing the risk in question, to help make the risk more manageable.

An example of this could be if new regulations are introduced in your industry. You may be fearful of your organisation not being compliant with these regulations, so you may choose to put in place a digital solution that would help you manage the regulatory requirements and minimise the chances of non-compliance.

How do you measure and manage strategic risk?

The exact means by which you measure and manage a certain risk will, on the basis of the above, depend greatly on the risk in question. You can measure a given risk in much the same way you measure business results – for instance, by considering how much economic capital would be required from your organisation in order to cover losses if the risk did occur.

It will be especially crucial, however, for you to completely understand the natures of the risks facing your own organisation, so that you can make informed choices from the possible risk treatment options we outlined earlier.

Using software to manage your risk

We touched above on the potential worth of a digital solution for managing the risks posed to your business. Unquestionably, the right centralised platform could help streamline crucial processes so that your organisation benefits from greater real-time visibility of its risks.

That, in turn, will help make your personnel more aware of the risks that apply to your organisation right now, with an improved ability to quickly identify those risks and decide on the most appropriate course of action for tackling each one.

Would you like to learn more about how Vision Pro could be that software platform? If so, we would be pleased to introduce you to the many features and benefits of our all-in-one solution, when you call us to book a demo.