Every risk is unique, and that means each requires a different approach to preventing it from causing problems — or worse — for your organization. This is the art of risk mitigation.
In this article, we’ll explain what risk mitigation entails, why it’s so important for every organization to engage in, and dig into some of the most effective methods for getting the job done.
What is risk mitigation?
Risk mitigation is the part of the risk management process where you take action to limit your exposure to various risks and dampen the adverse effects that they could have on your organization if they do materialize. It involves identifying the most effective strategies and controls for each of the risks you identified earlier in the risk management process, putting them into place at the appropriate points in your organization, monitoring them for effectiveness, and finding ways to improve them over time.
Since every organization’s risk landscape looks different, each must develop its own unique risk mitigation strategies based on the specific risks it faces.
What are the benefits of effective risk mitigation?
Mitigation is a critically important part of the risk management process. None of the work you’ve done to catalog your organization’s existing risks, stay on top of emerging risks, and monitor your risk landscape over time will mean anything if you don’t take any action to head off or respond to the potential consequences of one or more of them turning into a risk event.
Having good risk mitigation plans in place helps organizations:
- Stay ahead of the negative consequences of risk and protect their revenue, reputation, and competitive position.
- Build trust with clients, investors, and other stakeholders by being able to prove that they’re doing everything they can to mitigate risk.
- Streamline audits, reduce the likelihood of negative findings, and make compliance with regulatory requirements easier.
- Increase efficiency by preventing disruptions to business operations.
- Keep their teams focused on important, strategic work instead of constantly putting out risk-related fires.
4 common risk mitigation strategies (plus examples)
So how can risk management teams go about mitigating risk? There are four common methods that are standard across the industry — avoidance, reduction, transference, and acceptance — and each involves multiple methods and techniques for mitigating risk.
Risk avoidance
The most obvious way to mitigate risk is to simply not engage in activities that expose your organization to a particular risk. That said, this strategy comes with some serious opportunity costs: By choosing to avoid a risk entirely, you also forgo participation in a potentially lucrative market, partnership, or other business activity. This could impact your competitive position or bottom line.
A less extreme version of this approach is to put robust testing processes in place to catch issues that could lead to risk exposure, such as product defects or cybersecurity vulnerabilities, and remove or address any detected problems to eliminate the possibility of it triggering a risk event.
Risk avoidance example
A major healthcare system opts not to do business with a small technology provider due to concerns around the firm’s cybersecurity maturity and abilities to prevent data breaches. Though partnering with the tech firm could significantly improve the system’s digital health offerings, enhance its patient experience, and boost its reputation, it considers the potential for loss of sensitive health data to be too risky to do so.
Risk reduction
When you choose not to avoid a risk entirely, either because assuming the risk at some level is critical to your business’s operations or the benefits of doing so are deemed to outweigh the risks, it’s still wise to find ways to reduce the potential impacts of the risk. This can take many forms, but common methods include putting controls and safeguards in place, developing business continuity and operational resiliency plans, and conducting employee training programs to improve organizational risk awareness.
This strategy differs from the risk avoidance method described above in that it’s reducing the risk potential, not entirely eliminating it.
Risk reduction examples
- A large organization that processes lots of sensitive information is concerned about experiencing a breach from a phishing attack, but knows it simply cannot function in today’s digital economy if it avoids any form of digital communication like email or direct messaging, and that employees likely engage with these technologies on the internet outside the organization’s boundaries. To reduce the risks associated with relying on this technology, the company implements regular employee cybersecurity training and leverages technology that can conduct simulated phishing attacks to increase awareness of the problem across the company.
- A mid-size financial institution is concerned that its capital concentration in a particular area is exposing it to liquidity risk, so it diversifies its customer base to account for this and reduce its risk exposure.
Risk transference
Another option for mitigating risk is to find ways to shift the effects of the negative consequences to a third-party. This is known as risk transference, and it’s the reason the insurance industry exists. Traditional insurance typically covers loss of physical property, work-related injury or death of employees, and legal trouble, but as more companies rely on the internet to conduct operations and cyber attacks become more frequent, many insurers are also now offering cybersecurity insurance.
Transference can also be written into contracts between your organization and the third-parties it works with, guaranteeing that you’re compensated for any impact on your business as a result of mismanagement, downtime, or other issues on the vendor’s end.
Risk transference example
A major global manufacturer that relies on advanced technology to run its operations knows that a successful ransomware attack could cripple its operations for days or weeks. To protect itself from any revenue lost as a result of downtime, it obtains a cyber insurance policy that would help it recoup the losses.
Risk acceptance
Sometimes taking a risk is so crucial to your business’s success that there’s just no avoiding it, and you’re limited in the ways you’re able to transfer or reduce your exposure. Or, the risk is so trivial that the benefits far outweigh taking it on. In this case, the risk must simply be accepted.
Assuming a risk without any mitigants in place is the least ideal situation for any risk manager to find themselves in, but it’s not an uncommon one. You should still keep an eye on the risk, monitoring it to make sure it doesn’t become more of a problem than it was when you first took it on.
Risk acceptance example
A tech startup is planning on making a big bet on developing a new product offering that it believes will be a game changer, allowing it to expand into a larger, more lucrative market. Despite positive signals from market research and a well-received prototype, there’s always the chance that the product could flop, leading to reputational damage and wasted investment of time and money. The firm accepts that risk and moves forward with the project.
Different risk mitigation strategies to try
The above strategies represent the most common and proven approaches to risk mitigation, but they’re not the only options available to you. Here are a few other ways to approach mitigating risk:
Hedging or buffering
This method of risk mitigation involves setting aside resources in a “rainy day fund,” allocating more resources than completely necessary to an initiative, or putting contingencies — such a back up supplier, for example — into place to account for the potential problems a risk could cause and absorb its impact.
Establishing key risk indicators
One of the best ways to mitigate risk is to ensure you’re constantly monitoring for risks that are close to or already crossing established thresholds for action. This can be done by designing and tracking effective key risk indicators. These metrics act as early warning systems, and using them to build a centralized dashboard means you’ll be able to keep a close eye on your entire risk landscape at all times, so you can proactively manage risk instead of responding to it once it has already become an issue.
Tabletop exercises and simulations
Conducting regular simulations of what could happen if a risk event occurs and how bad things could get is a great way to make sure you’re not caught off guard when the real thing happens and that all of your business continuity plans are up to date and in working order.
4 steps for designing and implementing a risk mitigation strategy
1. Prioritize your risks
Earlier in the risk management process, you took stock of your full risk landscape to paint a complete picture of all the threats your organization is facing. The first step in the risk mitigation phase of risk management is to take those risks and prioritize mitigating them according to their severity. There are a few ways to go about doing this, but all of them fall into two categories: qualitative assessment and quantitative assessment.
Qualitative methods typically involve interviewing stakeholders and reviewing available data, then organizing that information into a risk matrix or some other form of visualization. Quantitative assessment involves using cyber risk quantification methods, like the Open FAIR model or Monte Carlo simulations to tie each risk to its potential financial impact. Using quantitative methods is quickly becoming the preferred approach due to its accuracy and its effectiveness as a method for communicating risk in a common language across your organization.
2. Decide on mitigation strategies for each risk
Once you have a reliable list of prioritized risks, you can start to evaluate each one and settle on the most appropriate strategies to mitigate it.
Consider the all-to-common risk of a data breach. These risk events are becoming more and more common for every company as the frequency and sophistication of cyber attacks increases. Despite your best efforts to use risk reduction or avoidance to prevent them with cybersecurity training and network security measures, there’s always the chance you could experience one, so it’s a good idea to use risk transference and obtain a cyber insurance policy to help you recover if it does happen.
On the other hand, the risk of someone experiencing a minor injury on the factory floor is typically considered part and parcel to doing business, and might warrant the use of the risk reduction and acceptance strategies in the form of workplace safety training, proper cautionary signage and markings throughout the facility, and simply accepting the fact that someone may experience injury. Risk transference could come into play here in the form of liability insurance and worker’s compensation programs.
Or, say you’re worried about dropping the ball on compliance with regulatory requirements and having negative findings come up in your next audit. Obtaining technology that can help you automate the processes of auditing, evidence collection, and controls testing is an effective approach rooted in the risk reduction and avoidance strategies.
3. Implement your strategies and monitor for performance
Having settled on your mitigation strategies for each risk, it’s time to put them into action to start improving your risk posture and continuously monitoring them to both make sure they’re working and ensure you’re catching risks that have the potential to cause problems before they lead to risk events.
To improve the chances that you’ll be able to obtain support to put all of your mitigation plans into place, it’s a good idea to bring leadership in and communicate the necessity in clear terms. The work you did on risk quantification and establishing your KRIs can help tremendously here.
Otherwise, start identifying the correct people across your organization to own each risk and its corresponding mitigation strategy, and make sure those strategies are well-documented to ensure they’re carried out correctly.
4. Report your results
Risk mitigation is a marathon, not a sprint, and you’ll need to make sure you’re constantly updating, revising, and evaluating your strategies for effectiveness. You’ll need leadership’s continued support along the way, so make sure you establish a regular cadence for reporting the results of your mitigation efforts.
Mitigate risk more effectively with modern GRC software
Risk mitigation is a complex, multi-layered activity, and while it’s possible to manage it using traditional tools like spreadsheets and documents, there’s a far more effective way to streamline, automate and enhance your mitigation programs: modern GRC technology.
Modern GRC platforms like LogicGate Risk CloudⓇ include all of the tools you need to centralize your risks, automate the processes you’ll need to implement to put your mitigation plans into action, and build dashboards for monitoring and reporting the results.
Schedule a demo today to learn how Risk Cloud can take your mitigation efforts to the next level and improve security across your organization.
SOC 1®, SOC 2®and SOC 3®are registered trademarks of the American Institute of Certified Public Accountants in the United States. The AICPA Trust Services Criteria for Security, Availability, Processing Integrity, Confidentiality, and Privacy is copyrighted by the Association of International Certified Professional Accountants. All rights reserved.
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