Risk Mitigation for Organizations: The Complete Guide

Running a business involves taking calculated risks — but unexpected events can have devastating consequences. Risk mitigation is a process that helps companies identify potential risks and take proactive measures to mitigate them.

In this blog, we'll explore the importance of risk mitigation and how businesses can protect their assets, reputation, and financial stability.

What's risk mitigation? Understanding the scenes behind business risks

Risks are an inevitable part of any business operation. Risks come in countless shades — name something and there’s likely a risk, a potential loss or damage a business may face while pursuing its objectives. These risks can arise from both internal and external factors.

Internal factors can include:

• Poor management practices, such as improper decision-making and failure to recognize challenges, can decrease employee morale and productivity. This jeopardizes the organization's overall health.
• Inadequate employee training means employees may not be fully aware of legal requirements or industry standards — which can bring on regulatory fines and legal issues for your organization.
• Equipment and service failures can disrupt operations, causing delays in tasks and pose safety risks to employees and customers, particularly in industries like healthcare and manufacturing.

External factors can include:

• Natural disasters like earthquakes, floods, hurricanes, or wildfires can cause direct physical damage to business assets, disrupt supply chains, and lead to operational downtime.
• Economic downturns lead to decreased consumer spending, changes in market demand, and increased competition. So, your revenue can go down, and the organization can face cash flow problems and difficulty maintaining operational costs.
• Changes in laws and regulations can increase operational costs. As a result, you may need to invest in new technologies or processes to maintain compliance. Not doing so can result in legal penalties, fines, and damage to your organization’s reputation.

(Related reading: risk appetite vs. risk tolerance.)

Types of risks your organization can face

You can face different types of risks that can implicate your organization's operations and bottom line. These risks can broadly be categorized into:

Financial risks

Risks like interest rate changes, credit risks, currency fluctuations, and liquidity concerns are all financial risks. If a company’s customers fail to pay their debts, sudden changes in market conditions can affect its investments. To manage these risks effectively, you should:

• Carefully plan finances.
• Monitor financial markets.
• Implement appropriate controls.

For example, in 2018, General Electric (GE), a multinational organization with several divisions, faced a drastic 70% drop in share value due to losses in its energy and insurance sectors, including a $6.2 billion hit in its insurance division.

The situation worsened because GE's positive financial forecasts hid its economic problems. This fallout led to a $200 million SEC fine and required GE to infuse $15 billion in capital and overhaul its insurance business.

Manage and mitigate your financial risks to avoid crises like General Electric in 2018 — where hidden financial problems led to a massive share value drop and hefty fines.

(Learn about financial crime risk management.)

Reputational risks

Reputational risks refer to the potential damage to an organization's standing or image among its stakeholders, including customers, employees, investors, and the public. This can result from issues like:

• Internal crises or scandals
• Poor customer service
• Product failures
• Negative press

The impact of reputational damage can be far-reaching, affecting customer loyalty, employee morale, and financial performance. To mitigate these risks, businesses focus on building a solid brand, maintaining high ethical standards, and swiftly addressing any issues that could harm their reputation.

Consider Uber as an example. They faced reputational damage — leading to a $20 million settlement in a lawsuit with drivers who argued for employee classification. This payout, much lower than a $100 million offer, shows Uber faces challenges in resolving legal disputes and managing the gig economy worker debate.

The case was a potential threat to Uber's business model after a California Supreme Court ruling. Despite the settlement, the company still grapples with thousands of arbitration claims, contributing to ongoing reputational risks.

(See how to mitigate reputational risk.)

Legal risks

Legal risks mean facing lawsuits, fines, or other legal issues due to not following laws, regulations, contracts, or ethical norms. These risks occur particularly in industries heavily regulated by the government.

They can stem from labor law issues, breaches of contracts, intellectual property disputes, and failure to adhere to industry-specific regulations. To manage these risks, you must maintain strong legal counsel and keep abreast of changing laws and regulations.

(Explore compliance as a service.)

Operational risks

Operational risks are associated with the day-to-day functioning of an organization. They can arise from internal processes, people, systems, or external events. Examples of operational risks include:

• Supply chain disruptions
• Technological failures
• Human errors

To manage these risks, implement robust processes, invest in reliable technology, and prepare for contingencies through disaster recovery and business continuity planning.

For example, Riders Share, a rental motorcycle company, constantly dealt with liability, insurance, and fraud risks. People used fake identities to steal their motorcycles. Due to this, the company lost $1 million in 2022. But now, they’re working with sophisticated ML vendors to underwrite risk. Doing so helped them cut costs, turning a $1 million loss in 2022 into a projected $1 million profit in 2024.

This shows that taking an innovative risk management approach can help you overcome legal and operational challenges.

Early risk detection and assessment

Creating a risk management plan involves several key components, each ensuring that the plan is effective. Here’s how a risk management plan works step by step:

Step 1. Identify the risk

Risk identification begins by examining project requirements, technology dependencies, and potential weak points. Identifying these uncertainties that could affect your organization is the first step. A thorough analysis is conducted to uncover potential challenges or vulnerabilities.

(Know the relationship between vulnerabilities, threats & risk.)

Step 2. Assess the risk

Risk assessment evaluates and assigns a level of severity to identified risks. It then quantifies the impact of each risk and prioritizes them based on significance and the possible consequences they might carry.

Let’s look at a security risk as an example. To conduct a successful assessment, cyber risk managers will:

1. Evaluate the probability of a security breach.
2. Estimate the financial impact of system downtime.
3. Determine the risk associated with the company’s decisions.

Step 3. Mitigate the risk

Risk mitigation strategies address vulnerabilities and enhance the project's threat resilience. Implementing these actions ensures that potential risks are managed and mitigated throughout the project lifecycle.

Keep reading for the most common risk mitigation strategies, in the next section.

Step 4. Continuous monitoring & reviewing

Monitoring and reviewing is the last step — yet the most important one. Risk managers identify new risks and validate the ongoing efficacy of existing risk mitigation strategies. They scan security systems and their performance to track system metrics.

Doing so helps organizations to adapt their risk mitigation approaches based on real-time data and emerging technology trends.

(Splunk can handle all your monitoring needs. Learn more.)

Mitigating the different types of risks

There are several risk management frameworks organizations can adopt. Before you get too detailed with frameworks, there are four straightforward ways you can mitigate risk of any kind:

• Risk avoidance
• Risk transfer
• Risk reduction
• Risk acceptance

Risk avoidance

Risk avoidance is a strategic approach where an organization refrains from engaging in activities or adopting technologies that pose potential risks.

You shouldn’t adopt technologies that have not been thoroughly tested or adequately secured. For example, a company wouldn’t opt to integrate a cutting-edge but unproven software solution due to concerns about its reliability or potential security vulnerabilities.

Consider a scenario where a software development team decides against using a newly released programming language for a critical project. The team may perceive the language as having insufficient community support and stability — opting for a more established language to avoid potential project delays and compatibility issues.

Risk transfer

In the risk transfer strategy, organizations shift potential risks to third parties — through contractual agreements, insurance policies, or outsourcing.

They find external vendors with expertise in those areas and let them handle the work. Leveraging insurance policies to cover financial losses stemming from security incidents also transfers the financial risk associated with such events.

For example, a SaaS company can outsource its server maintenance and security monitoring to a specialized third-party provider. By doing so, the company transfers any associated risks with server management to the external service provider.

(Learn about third-party risk management.)

Risk reduction

Risk reduction also known as risk remediation, minimizes the impact of potential risks by implementing controls, safeguards, and best practices. For example, continuously integrating security measures throughout the software development lifecycle encompasses regular security audits and penetration testing to address known vulnerabilities.

An organization adopting a risk reduction strategy can implement a comprehensive cybersecurity framework that includes:

• Regular code reviews
• Automated vulnerability scanning
• A rapid response system for addressing and patching identified security issues

(Rapid cybersecurity response: sign up for alerts from SURGe by Splunk.)

Risk acceptance

Risk acceptance is a conscious decision by an organization to recognize a potential risk without implementing specific mitigation measures. This strategy is chosen when the cost or effort of mitigating the risk exceeds the perceived impact.

It happens when the potential risk is deemed low in impact or probability, and the resources required to mitigate it are considered disproportionate.

Suppose a software development team identifies a minor functionality bug in a non-critical component of their application. After a risk assessment, the team accepts this risk without allocating resources to fix the bug immediately — only if the impact on overall system performance is minimal.

Simply put, each risk mitigation strategy has potential impacts. Consider the possible unintended consequences of each strategy before adapting to it.

Protect your business from risks with risk mitigation strategies

Risk mitigation is not a one-time process. Think of it as an ongoing practice — it requires continuous monitoring to ensure that the strategies in place are still effective and relevant. However, taking a proactive approach to managing risks minimizes the negative consequences of unexpected events and improves overall performance.