Business enterprises look for ways and techniques to curb the interference of a disruptive event with their commercial objectives. Also known as risk mitigation, this stage of the business continuity and disaster recovery process comes right after the business impact analysis (BIA) stage.
Various Approaches to Mitigating Risks
The kind of strategies adopted depends on a combination of factors that collectively define a company’s business model. The company’s willingness to hazard risks, also known as its risk appetite, is also an influencing factor. Risk mitigation strategies differ in their cost to the company and the time required for implementing the strategy. The four main types of risk mitigation methods have been detailed below:
- Risk Acceptance
- Risk Avoidance
- Risk Limitation
- Risk Transference
Risk Acceptance
This is not a risk mitigation approach in the conventional sense as it does not curb a risk’s probability of occurrence. High expenses involved in managing risks comprehensively through other mitigation strategies are one of the main reasons why companies accept risks as occupational hazards.
Example – A wobbly tree branch might fall down and damage a vehicle parked beneath. Insurance firms can proactively get rid of the branch and eliminate the possibility of damage to the vehicle. But this would imply a cost to the firm. And in all probability, the tree branch might not fall or the vehicle might not be parked underneath when it does. From the insurance company’s point of view, there is no guarantee that the risk will occur to justify the expense on mitigating the risk.
Pros & Cons
Different companies have their own reasoning for not having a response in place. But it is important for an organization to carefully weight out the pros and cons of accepting a risk. The consequences of risk acceptance are determined by a combination of the probability of risk’s occurrence and the intensity with which it can occur.
Financial Implications
Risk acceptance saves enterprises money that would otherwise have been spent on various mitigation plans. But this cost benefit lasts only as long as there isn’t an incidence of business disruption. The moment a crisis occurs expenditure tends to rise exponentially until the necessary measures are taken to stabilize the situation.
Conclusion
Small enterprises are more prone to risk acceptance and a limited budget is often cited as justification. While risk acceptance has its benefits in the short term, especially during periods of stability, entrepreneurs must bear in mind that it turns into a rather costly affair in the long run.
While mitigating a risk does imply a cost, not all risk mitigation strategies need to be expensive. Small companies should look at available cost effective mitigation options or develop strategies of their own.
Risk Avoidance
Risk avoidance is the exact opposite of risk acceptance.
Example – If the insurance firm in our earlier example was to adopt a risk avoidance strategy, all wobbly branches would be cut down proactively in order to avert the possibility of damage to a vehicle parked below.
Pros & Cons
Risk avoidance is a company’s safest bet as time and money are invested to rule out the exposure of business operations to any hazardous scenario. However, such a high level of security comes at a price and risk avoidance measures are usually extremely expensive.
Financial Implications
Risk avoidance measures imply a huge monetary investment for companies. The price of averting data loss is an entirely redundant data system. Personnel shut down systems and transport them to an alternate location before the advent of a disaster such as a hurricane.
While the initial investment might seem like a deterrent, the long term benefits of risk avoidance are extremely high. In fact, the costs incurred by companies that have adopted risk avoidance measures are particularly low, especially after the occurrence of a business disruption.
Conclusion
Risk avoidance might not always be the most feasible option available. But its long term benefits are manifold, especially in the case of companies looking to safeguard their mission critical data and systems
Risk Limitation
Risk limitation is the next best thing to risk avoidance. While the latter looks to completely avert exposure to a hazard, risk limitation looks at ways to minimize the exposure of a company’s operations to risks.
This entails a set of actions that need to be taken to minimize the impact of risks on business processes.
Risk limitation is by far the most commonly adopted mitigation strategy.
Example – Backup sites don’t have redundant hardware. Nevertheless, environments can be recreated hardware that is obtained as soon as an incident occurs. This way, long term losses are avoided while expenditure on less important systems is kept to a minimum.
Backing up data on a daily basis is another way of limiting risks. The probability of disk drive crashes occurring are still the same. However, in the event of a disk drive failure, a recovery measure is in place that can quickly restore business as usual.
Pros & Cons
Risk limitation strategies intend to strike a healthy balance between risk acceptance and risk avoidance. Risk limitation practices are commonplace across companies of all types and include regular and routine activities such as:
- Data Safety Measures
- Implementing Firewalls
- Fire Escape Execise Drills
Financial Implications
While most risk limitation options are quite feasible in terms of financial expenditure, business continuity managers must still ensure that the consolidated cost of risk limitation does not exceed the overall impact of the risk itself.
Conclusion
Risk limitation is the approach that the majority of companies settle for as it provides a balanced approach to tackling hazardous incidents.
Risk Transference
In risk Transference, an organization outsources the responsibility of dealing with business disruptions to an external vendor. Some organizations prefer contracting the specialist services of third party vendors who are contractually bound by SLAs to ensure business continuity instead of having to develop their own in-house resiliency capabilities. This allows enterprises to focus on their core commercial objectives. Such a strategy can extend to various business operations such as customer support, order processing and payroll related work such as salary, appraisal, incentives, perks, tax calculation, full and final settlements and so on.
Example
Employee salary processing can be outsourced to a third party vendor company that is located in a different and relatively safe geographical region to mitigate the impact of disruptive events on payroll processing.
Insurance coverage for assets and resources is another commonplace risk transference practice.
Pros & Cons
Organizations prefer contracting the services of experts who can render a specialized service that allows them to realize their resiliency objectives. However, companies must carefully choose a third party vendor that has the capabilities to mitigate the specific types of risk that the organization’s operations entail. SLAs and contractual clauses must also be drafted in line with the organization’s business continuity goals and hold vendors accountable in the event of nonconformity.
Monetary Implications
Risk transference come with a cost range similar to risk limitation, although with additional expenditure towards initial payment and renewals. A key difference between risk limitation and risk transference from an expenditure perspective is that while expenditure to implement risk limitation measures is finite, risk transference can imply a recurring expense. So, a lot would depend on how the company wants to plan its capital expenditure.
Conclusion
Risk transfer is a feasible option for commercial establishments who don’t have the time or expertise to develop their own in-house mitigation strategies. The responsibility of ensuring business continuity is transferred to an able third party vendor who owns and takes responsibility for the risk.
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