Now, let’s say there was an over/under latitude of only 2 cents… It was somewhat of a relief to know I had this cushion, but if it happened all of the time, the store would have reason to be suspicious. At my store, we were allowed some latitude, specifically an “over/under” of up to $3 meaning, if my drawer was missing $1.80, the store would just write it off. In business, spending too much to reduce a risk can be a waste of time and resources…to illustrate, I’m going to go back to my first job as a cashier at a grocery store.Ī big responsibility of a cashier is to make sure your drawer balances at the end of each shift. Notice though that this action does not reduce the chance of an accident occurring – if that is your goal, then you would need to just stay home.
When we get in our car to go somewhere, we put on a seatbelt to reduce the potential impact of an accident. On a personal level, we all employ risk reduction in one way or another in our daily lives. If the risk is just slightly above your appetite and tolerance level, then reduction is a reasonable strategy for bringing it down to within acceptable limits. What this means in ERM speak is to take steps to reduce the likelihood or impact of a loss. To learn more, check out What to Do When Risks are Unavoidable. However, if you’re absolutely certain there is zero tolerance for the risk in question, then the avoid option is the appropriate risk response. Now on the surface, this may seem like an attractive option, but it’s not always practical or advisable as we’ll explain in risk response strategy #5 below. Other examples of this option can include halting the production of a particular product, selling a division of the company, or deciding against an expansion. Most organizations decided to avoid the risk of their employees getting sick. Like I discuss in the intro section above, executives and managers will choose this option for any risks that could get the company in major legal trouble or lead to someone getting killed.Ī recent example of this is the shift to working from home to prevent employees from contracting COVID-19. When you choose to avoid a risk, you are cutting off any possibility of it posing a threat to your enterprise. Risk Response Strategy #1 – AvoidĪs the name implies, quitting a particular action or opting to not start it at all is an option for responding to a risk. Without further ado, below are 5 potential risk response strategies to consider for handling strategic, operational, legal, or other risks and opportunities. (To learn more check out Risk Monitoring: 6 Considerations for Understanding this Make or Break Moment for ERM.) Remember too that your risk response strategy can change over time as conditions warrant, which is why consistent monitoring of risks and the broader environment is so important. Risk appetite is one of several tools for helping you determine the right response strategy, but contrary to the original version of this article, it is by no means the only or always the best as this piece from Norman Marks explains. The first four response strategies below are very traditional in nature and, as Hans Læssøe discusses in his book Prepare to Dare on the different levels of risk management, well established.Ī variety of factors internal to your organization will drive which of the following options management chooses. It’s a common misnomer that risk management is all about reducing harm or averting failure, but as we’ll get into more later, this isn’t always the case and can, in fact, lead to failure. In some cases, reducing or avoiding risks is the best choice, especially if the alternative means breaking the law or someone getting hurt or killed. You, your team, executives, and risk owners have done the work of identifying, assessing, and analyzing risks and opportunities, so the question that naturally comes up is – now what? The core theme of this piece from the beginning has really been about answering one basic question. Like other popular posts, such as this comparison of traditional risk management and ERM, it’s important to take a step back and re-examine this topic for two main reasons: changes in perspective since the article was first published and the blog‘s considerable growth has resulted in more resources to support the sections below. The original version of the following article has been one of the most popular here at my blog. Risk and uncertainty are much the same I suppose… We can’t control what people say to us – we can only control our response.