Businesses that invest the time, labor, and funding necessary to create a detailed risk response plan can improve their overall risk management effectiveness.
With a detailed risk response plan, companies create a uniform approach to threat identification, reaction, and mitigation, promoting stability. Otherwise, businesses may be caught off-guard by emerging hazards that could compromise their operations.
Why Businesses Need a Risk Response Plan
Many businesses are overwhelmed before they even begin strategizing risk mitigation plans because they believe they need to outline every threat on their register.
However, a risk management plan does not have to outline every possible risk to be considered adequate. In fact, it is impossible to monitor and track every risk a business is exposed to regularly. Instead, companies should focus most of their efforts on threats with high frequency and significant impact.
In order to define these risks, organizations need to develop a ranking system that determines whether or not a threat is worth monitoring. While all risks are important to recognize, some are so minute that it would be a waste of time and resources to track them. On the other hand, some threats have the ability to compromise a business's operations and require response strategies.
The 4 Types of Risk Responses
Generally speaking, there are 4 types of risk response plans that companies can utilize.
In the avoid approach, businesses eradicate the threat or protect themselves from its impact. While this can be done in numerous ways, typically, companies will-
- Shift the focus of their project.
- Adjust their timeline and targets to avoid time-sensitive threats.
- Promote communication and transparency to avoid confusion and misunderstandings.
- Outsource experts to identify and mitigate technical issues.
Businesses can also transfer risk to an external party for mitigation. This can be done directly and indirectly.
- Directly - insurance, warranties, performance bonds
- Indirectly - agreement negotiations, legal opinions, pricing contracts
By practicing mitigation, organizations can reduce the impact and frequency of threats through thorough risk analysis.
However, this option is not always available and often requires additional resources, funds, and labor to orchestrate. This expense must be cross-examined with the value of the actual impact of the mitigation plan to estimate the return on investment (ROI).
Every business is exposed to risks at one point or another, making it critical for companies to accept the fact that they are already exposed to threats. Even when a project is first opened, there is the risk that the team will not meet the set objective. Therefore, companies should inform all stakeholders of potential risks, as well as document them in a register.
While an element of risk acceptance is responsive, as businesses must wait for threats to emerge, creating a response plan ensures they are taking a proactive approach.
Probability and impact are two underlying elements of risks that determine how a company should react. While probability describes the likelihood that a threat may occur, impact refers to its ability to damage the business.
By classifying threats by these characteristics, businesses can accurately create response plans.
Low Probability, Low Impact
Risks with low probability and low impact fall at the lowest end of the rating scale and are usually not even documented on the risk register.
High Probability, Low Impact
High probability, low impact risks are perceived as minor annoyances, but given their frequency, companies should make mitigation efforts.
Low Probability, High Impact
Risks with low probability and high impact require further evaluation as companies must determine their root cause and when they typically occur. During the assessment, managers should keep an eye out for any triggers that could potentially kick start hazards.
High Probability, High Impact
High probability, high impact risks are the most threatening, as they can potentially jeopardize a business's stability. Therefore, these risks are immediately reported to stakeholders and project managers for immediate action.
Considerations of a Risk Response
For the most part, risk responses are subjective to the business and can involve numerous principles. However, there are some elements that all organizations should take into consideration, such as-
- Agreeance between stakeholders
Like any other management process, a risk response requires time, resources, and labor to complete. Before beginning, managers should consult with financial directors to calculate the budget and determine how to remain within the budget throughout the project.
Depending on the company's risk response measure, businesses may also need to adjust their schedules, scope, and operations to optimize their risk management
An often overlooked part of developing a risk response plan is communication. Departments must communicate with each other in order to accurately outline risks and their impact on various operations. Only then can the business create a plan of action that can adequately mitigate hazards.