If companies operated in a utopia, they could easily keep costs low, prevent fraud, avoid geopolitical tensions, and sidestep cyberattacks.
Their processes, systems, and people would never fail, and they would never struggle to fulfill their financial obligations or achieve their strategic objectives. Natural disasters would not adversely impact them, and neither would regulatory changes.
Sounds too good to be true?
It’s impossible to achieve this utopia because risk gets in the way. Risk is a part of corporate operations, regardless of company size, type, or industry. Since no company can completely evade risk, the only thing they can do is manage it.
Your firm can prevent some risks and minimize the impact of others with the right risk response strategies. Two such strategies are risk avoidance and risk mitigation.
This article explores the differences, advantages, and disadvantages of each of these strategies so you can make informed decisions about what will work best for your organization.
What Is Risk Avoidance?
Risk avoidance is one risk treatment (or risk control) strategy in enterprise risk management (ERM). Avoidance means taking some action to prevent the risk from occurring. For instance, you may shut down a site or facility in bad weather to avoid the chances that someone might get hurt.
It could also mean not taking an action that could result in a risk from being realized. For instance, if a particular investment could adversely affect your company’s finances because it is “high risk,” you can choose not to go ahead with the investment to avoid potential losses.
The risk avoidance strategy focuses on removing any threat, hazard, or risk event that might have a negative impact on the organization. It seeks to minimize the probability of the risk causing harm to the organization. You should consider risk avoidance as the preferred risk treatment option when the risk is likely to significantly impact your organization.
What Risk Avoidance is Not
Risk avoidance is not the same as ignoring a risk or failing to identify it. Rather, it is a risk management strategy that deflects threats and removes the chances that they could result in unexpected or damaging consequences.
Like all other risk management strategies, risk avoidance also requires careful thinking, risk analysis, planning, and execution. Before implementing this risk treatment option, you must analyze the probability and negative impact of an identified risk.
If you have identified one or more specific risks or vulnerabilities that could have costly or highly disruptive consequences, follow a methodical process to avoid them. This requires a thorough risk assessment and risk quantification followed by actions to eliminate the probability of damage to the company.
It is essential to determine the benefits of avoiding this risk and compare those benefits to the costs of risk avoidance with potential risk mitigation methods.
Risk Avoidance Pros and Cons
To ensure that you can benefit from its advantages, it’s essential to understand when it makes the most sense to adopt a risk avoidance strategy.
The most significant advantage is that you can eliminate a risk that can greatly damage and even potentially destroy your organization. You can thus minimize losses and protect the company from future shocks. Risk avoidance can also ensure business continuity, long-term sustainability, and competitiveness.
- By not going ahead with a risky investment, you can avoid financial risk
- By controlling cash flow, capital expenditures, and employee turnover, you can avoid strategic risk
- By avoiding operating in a country with weak anti-fraud laws, you can avoid geopolitical risk
- By not dumping factory waste into a river, you can avoid environmental risk
- By implementing controls in the accounting department, you can avoid financial and compliance risk
- By ensuring that employees don’t use insecure open-source software, you can avoid cybersecurity risk
However, risk avoidance has some downsides. It can hinder a company from pursuing potentially advantageous and profitable opportunities. It can also slow down operations because stakeholders must adhere to strict rules that are meant to avoid risks.
In the medium and long term, such a “myopic” approach may prevent the organization from carrying out its mission or achieving its vision.
When to Adopt Risk Avoidance – and When Not To
The avoidance strategy may be your best bet if a risk could have a costly effect on the organization. However, if you analyzed and quantified the risk and found that it is unlikely to have a significant impact, the avoidance treatment may not be feasible. In fact, it may be too costly to avoid the risk.
Avoiding every risk is rarely a good idea because not all risks are negative. Some risks can be positive and lead to desirable results. These risks are known as opportunities. Taking advantage of positive risks could increase business value. For example, it could lead to higher revenues, improved customer conversions, or a stronger competitive posture.
By avoiding these risks, you won’t be able to leverage available opportunities, which would result in negative consequences like financial losses or weakened competitiveness. For risks with a small or medium potential impact and for long-term risks, the risk mitigation strategy may be more suitable. Let’s explore this next.
What Is Risk Mitigation?
Risk avoidance aims to completely remove the probability of a risk from being realized and eliminate its ability to adversely impact the organization. Risk mitigation is not about removing the likelihood of a risk but about reducing its impact to an acceptable level.
Risk mitigation follows from risk acceptance. You accept that a risk may affect your organization and implement strategies and tactics to mitigate its impact. You don’t avoid the risk. Rather, you acknowledge the risk, proceed with the activity, and create a risk mitigation plan to curtail the possible negative consequences of that risk.
Risk Mitigation Plan
Risk mitigation accepts that some risks are inevitable. If a risk could have a negative impact on operations, finances, cybersecurity, compliance posture, or some other area – but cannot be avoided – it should be mitigated.
Risk mitigation incorporates multiple steps to reduce the adverse effects of a risk:
- Risk identification
- Assess its likelihood and potential impact
- Devise an actionable risk management plan
- Execute actions to mitigate the risk and minimize its impact
- Track risks, monitor progress, and update the risk management process and mitigation plan as required
A risk mitigation plan is a systematic and documented approach to reduce the impact of potential risks. It enables the organization to prioritize planning and execution around risk impact so even if the worst does come to pass, your organization is prepared to deal with the situation.
How Risk Avoidance and Risk Mitigation Work Together (Plus Pros and Cons)
Not all risks can be avoided, and not all risks can be mitigated. That’s why it’s vital to include both risk avoidance and risk mitigation as treatment options in the ERM program. Which response you implement depends on the type of risk, probability, and possible impact. For instance, is the risk long-term? If yes, you may not be able to avoid it entirely.
Cybersecurity risk is a good example. In the digital economy, it’s almost impossible for any organization to avoid the risk of a cyberattack or data breach. However, you can mitigate the risk by implementing security controls like firewalls, antivirus software, and endpoint detection and response (EDR) solutions.
Similarly, you may not be able to completely avoid third-party risk. But with due diligence, audits, policies, contingency planning, and business process controls, you can decrease the risk level and reduce its impact.
Other types of risk mitigation strategies include:
- Regularly backup business-critical or sensitive data
- Create business continuity and disaster recovery plans
- Diversify capital, resources, and third parties to reduce volatility and risk
- Implement equipment protocols to ensure personnel safety
- Establish operational standards, codes of conduct, and training programs to guide risk-averse business practices and decision-making
Risk mitigation is suitable when a risk cannot be avoided entirely. Plus, with this strategy, the organization won’t miss out on potential high-risk/high-reward opportunities. On the other hand, for a potentially catastrophic risk, mitigation may not be a suitable strategy for managing risk so you need to consider actions to completely avoid it.
Manage Risk with Reciprocity ZenRisk
Regardless of which risks affect your organization, you need a user-friendly software solution to help you choose the proper treatment and risk limitation option. Only then can you better manage risks and mitigate business risk exposure.
ZenRisk will give you greater visibility across your organization’s risk landscape. This user-friendly, all-in-one platform can help identify and monitor risks in your enterprise. It will even help you prioritize each risk and determine whether to avoid it or mitigate it.
With ZenRisk, risk management and risk reduction are simplified so you can utilize your precious time and resources for more pressing concerns and strategic objectives.
To get started with worry-free risk management, schedule a demo today.