The concept of risk management is as old as business itself, but it’s fair to say that the nature of risk continues to change in line with social, technological and economic evolution. The next 12 months will be no exception to this rule, with recent studies suggesting that Brexit and cyber threats will pose the biggest threat to commercial growth in 2019.
In the case of Brexit, the biggest concern revolves around lost access to the single market and regulatory changes, many of which cannot be tackled until the terms of the UK’s exit have been confirmed.
In this post, we’ll consider three potential risk management strategies and ask why they’re successful in certain instances.
Accept or Avoid the Risk
The key to successful risk management lies with decisiveness, as you look to identify a specific risk and deal with it directly.
One option is to either accept or avoid the risk in question, based on your knowledge and analysis of how it’s likely to impact on your business.
For example, when accepting a risk, you’re acknowledging its presence and making a conscious decision to deal with it if and when it impacts on your venture. This is a good strategy when dealing with relatively small risks, as it negates the need to invest in a costly and time consuming management strategy that’s largely unnecessary.
Conversely, you could adapt your plans to ensure that you avoid the risk. This is an excellent way of dealing with known risks such as impending legislation or regulatory changes, with training providing a simple solution that sidesteps this issue entirely.
Mitigate or Transfer the Risk
In some instances, risks may be too large or overt to simply accept or avoid, meaning that you’ll need to invest in more detailed and complex management strategies.
You could choose to mitigate the risk, for example, which is arguably the most common strategy used when dealing with direct threats to a commercial venture. This technique simply requires you to limit the potential impact of a particular risk, or minimise the chances of it affecting your business in the first place.
Transferring risk is another strategy that can help when engaging in multi-party agreements, and one that requires you to shift the impact and management of the threat to a third-party.
This is commonplace when managing pension funds, particularly those in which a small number of pensioners assume a large portion of overall liability. In this instance, the risk can be transferred and ultimately reduced through a buy-in that covers the highest individual liabilities, with service providers like Hymans capable of assisting in this respect.
Exploit the Risk
Now we come to the most fascinating and risk-laden approach, which involves exploiting a particular risk to increase profit and drive growth.
This is an excellent technique when dealing with a slightly more complex risk-reward ratio, or in instances where a threat can also have a positive impact on markets, businesses and investors alike.
The best example of this exists in the financial markets, where currency investors often leverage the marginal nature of derivatives to profit even as values depreciate.
In this case, market risks and downturns are directly leveraged through individual trades, in a bid to achieve a profit that’s far higher than the original sum of capital invested.