Risk Management Strategies

There are four strategies for managing risk and these can be undertaken in sequence. In the first instance, the organization should ask whether the risk, once recognised, can be transferred or avoided.

Transference

means passing the risk on to another party which, in practice means an insurer or a business partner in another part of the supply chain (such as a supplier or a customer).

Avoidance

means asking whether or not the organisation needs to engage in the activity or area in which the risk is incurred.

Reduction

If it is decided that the risk cannot be transferred nor avoided, it might be asked whether or not something can be done to reduce or mitigate the risk. This might mean, for example, reducing the expected return in order to diversify the risk or re-engineer a process to bring about the reduction or by risk sharing.

(Risk sharing involves finding a party that is willing to enter into a partnership so that the risks of a venture might be spread between the two parties. For example an investor might be found to provide partial funding for an overseas investment in exchange for a share of the returns)

Acceptance

Finally, an organisation might accept or retain the risk, believing there to be no other feasible option. Such retention should be accepted when the risk characteristics are clearly known (the possible hazard, the probability of the risk materialising and the return expected as a consequence of bearing the risk).