Examples of Risk Management Techniques

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In order to be successful, companies must understand and use strategies for sound risk management. This can save them a lot of time, money and legal entanglements down the road. Depending on the situation and circumstances, there are specific techniques that companies can use to effectively manage risk.

Avoidance

  • Knowing how and when to properly avoid unhealthy risk is an important technique when analyzing a situation. For individuals, this could mean not crossing the street when cars are racing toward you. For businesses, this could include a company deciding not to expand into a certain market because it lacks the expertise or brand recognition that's required to be successful in that area. Weighing the potential hazards and benefits of a situation and avoiding those where the negatives clearly outweigh the positives, can be an effective risk management strategy.

Mitigation

  • Mitigation is a risk management technique that's designed to lessen the negative impact of a certain risk. This technique is most often used when a risk cannot be avoided, and efforts are focused on minimizing damage or loss. At the business level, an example of this could be a company facing a possible automobile recall. In such a scenario, experts and analysts within the company will gauge the cost of a recall against the cost of paying damages to those who are injured by the automobile malfunction. If the cost of paying customer damages is significantly less then the expense of a recall, then the company may choose not to do the recall, thus mitigating the company's risk.

Transfer

  • Sometimes risk can be transferred to a third party. This technique is often used when the risk being analyzed can best be dealt with by a third party. For example, if you're the owner of a paper company and you're worried that a careless employee might burn down your business, you may decide to purchase extra fire insurance coverage. In this case, the third party (insurance company) would bear the brunt of the expense should the risk scenario actually occur. It's important to know when to use the assistance of a third party when deciding how to handle risk.

References

  • Photo Credit risk and gain image by Photosani from Fotolia.com
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