All organizations face risks. These risks may be internal, such as inaccurate sales projections or insufficient protection of valuable assets such as inventory. Risks may also be external, such as the risk of a natural disaster or an economic crisis. Whatever the cause, managers of organizations should be attentive to potential risks and how they can protect the organization from these risks.
Protecting an organization from the impact of risk events by using different techniques is called mitigating risks. Mitigation techniques aim to lower the potential impact of a risk and decrease the likelihood of the risk event from occurring. There are four primary mitigation techniques that may be used and together form the TARA framework: Transference, Avoidance, Reduction/mitigation, and Acceptance.
Transference is a risk mitigation technique that involves transferring all, or some, of the risk to another party. Take a minute and think if you can come up with an example of risk transference in your personal life. When do you transfer or share risk with another person or company?
Did you identify insurance, such as automobile insurance or health insurance? Think about what that insurance provides. In exchange for a fee, insurance companies will help you deal with the impact of a risk, such as a car accident or injury. This is exactly what companies and organizations can do with some of the risks they face. Through purchasing insurance, organizations can share exposure to certain risks with an insurance company.
Sometimes, the management can decide that the potential impact of a certain risk is not worth accepting. If the management does not want to deal with the risk, they can simply avoid it. However, note that avoiding the risk is not always an option.
As an example of avoiding risk, imagine a large company that wants to expand their operations into a volatile region of the world. While they may be able to lower costs or access a new market, they know that operating in a volatile region may include risks to their business, their employees, and their brand. After weighing the costs and benefits, if the company decides that the risk is not worth the potential reward and therefore does not expand, they are avoiding the risk. Avoidance occurs whenever something is not done because of the risk involved.
This means to reduce the risk exposure probably by carrying out the activity in a different way. For example, this strategy is suitable when the risk does not have significant impact but likely to occur. This is to reduce the likelihood of occurrence by using different method to carry out the activity. However if reduction cannot be done, company might have to accept the risk if it does not have significant impact or avoid it if otherwise.
This means to accept the risk and do nothing. For example, this strategy is suitable when the risk has a low impact and low probability of occurrence. This is because the risk is not really a matter even if it is realised.