Reducing Risk Exposure

Risk is an inevitable by-product of any activity.  It is often not possible, therefore, for organizations to eliminate their exposure to risk entirely. Rather, organizations must seek to understand the risks to which they are exposed and manage this exposure more effectively.  As the Financial Reporting Council Notes:

“A company's objectives, its internal organisation and the environment in which it operates are continually evolving and, as a result, the risks it faces are continually changing. A sound system of internal control therefore depends on a thorough and regular evaluation of the nature and extent of the risks to which the company is exposed. Since profits are, in part, the reward for successful risk-taking in business, the purpose of internal control is to help manage and control risk appropriately”

Through investing a little time and effort in risk management up front, organisations can derive enormous benefits by avoiding significant problems downstream.  Being proactive and treating the cause (the risk) is always preferable to being reactive and treating the symptoms (the impact).

Several approaches to the development of appropriate mitigation strategies are possible.  Broadly, they fall into one or more of the following categories:
•  Prevention:  It may be possible to identify an action that prevents the risk occurring, for example removing a potentially unreliable sub-contractor from the plan or agreeing a known effective change control procedure prior to project commencement
•  Reduction:  If prevention is not achievable then the probability and/or the impact of the risk may be reduced through some positive action.  It is therefore useful to specify the impact of the risk distinctly in order that appropriate mitigating actions can be identified
•  Transfer:  It may be possible to transfer the risk through insurance or to a third party if they are most able to manage the risk.  Remember, however, responsibility for the impact remains with the original owner
•  Absorb:  It may not be cost effective to reduce the probability or impact of the risk (for example, the impact/ probability of the risk is sufficiently low, or the cost of mitigation is too high).  A Contingency Plan should be prepared for any risks where the impact remains high in order to expedite the recovery process.

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