4 Types of Risk Response Strategies to Tackle Risks at your Workplace
As a business owner, risk management is an essential part of your business strategy. To ensure that your workplace is safe, you must identify and assess risks. Once you have identified and assessed risks, the next question is – what to do?
Here, in this guide, we introduce you to planning risk responses. It’s the process of choosing the right risk response strategies to mitigate the discovered risks. Risk response strategies can be classified into four types. The method you choose depends on several factors internal to your business like your risk appetite, business structure, and so on.
Here, in this guide, we take a look at the four possible risk response strategies and help you choose the right option that best fits your business.
Risk Response Strategy #1: Avoid
One of the best and safest risk response strategies is to – avoid the risk entirely. Businesses that have zero appetites for a particular risk opt to avoid it altogether. Very often, risks that pose a threat to employee safety violate existing laws or threaten the company’s existence are best avoided.
Some examples of risk avoidance strategies include – halting the production of a faulty product or selling a part of the company. While avoidance is undoubtedly the safest option, it’s not always practical. Companies who choose too much avoidance tend to operate below their risk appetite, thereby lowering productivity.
Companies that rely too much on risk avoidance end up missing reasonable growth opportunities, thereby missing out on achieving their objectives.
So when to choose this option? Evaluate the risk. If there is zero tolerance, then its best avoided. For all other risks, you can choose any of the other risk response strategies.
Risk Response Strategy #2: Reduce
Next to avoiding the risk altogether, the second option to consider is mitigation or reduction of the risk. To explain it in simple terms, it means reducing the impact of loss due to the risk. This strategy works well for risks that are slightly higher than your risk appetite. By reducing the impact of the risk, you can bring it within your tolerance levels.
To explain this strategy in layman terms, let’s take an example from our daily lives. When we get into a car, we fasten the seat belt. This action does not eliminate the probability of an accident but reduces the impact during an accident. Another example is installing fingerprint entry into your office. A fingerprint scanner does not eliminate unauthorized entry (as intruders can piggyback behind authorized personnel). However, it reduces the chances of unauthorized entry.
Reducing the impact of a risk is a smart move and can be implemented easily with just a few tweaks to an existing system.
Risk Response Strategy #3: Transfer
The third option for responding to risks is to transfer the risk. Unlike options 1 and 2, you don’t eliminate or reduce the impact of the risk, but just transfer it to a third-party. Some common ways to do this is by purchasing insurance or signing contracts with vendors.
To give an example, a manufacturing firm signs a contract with a raw-material supplier. As per the contract, if the raw material is defective, then the responsibilities for it lie with the supplier and not the manufacturing company. It is a classic example of transferring the risk from one party to another. Another example is purchasing fire insurance for a building. Purchasing insurance doesn’t eliminate the probabilities of a fire accident but offers a financial safety net during a mishap.
However, note that, in this risk response strategy, transferring the risk occurs only after the event. The goal of risk transfer is to reduce the impact of the risk on your company. However, you still take a gamble on whether the risk occurs or not.
Risk Response Strategy #4: Accept
It is the last risk response strategy. In this option, you accept the risk as it is and do not take any precautionary or post-event actions. It’s mostly used for risks that have a low probability of occurring and low impacts, even when they occur. Very often, most companies set aside a budget for such risks and are ready to accept them, if at all, they happen.
Risks that have a very low probability of occurring – earthquakes in a less-prone zone, or emerging threats that are not likely to happen for the next few years – are usually placed in the accept response category.
Regular Monitoring of Risks – A Crucial Part of the Process
Irrespective of the risk response strategy you choose, it’s crucial to monitor all risks to stay on track. Risk response strategies change with time. For instance, certain risks that could easily be reduced may grow bigger in the longer run. In such cases, you have to alter your risk response strategy to transfer or avoid it altogether.
Risks need to be monitored regularly, so that management can act promptly and take the right action. To know more about the right risk responses for your business, get in touch with our risk assessment experts here at SAFIX, No.1 health and safety management experts in India.