Risk Mitigation vs Risk Treatment: Definitions, Differences, and Applications

Risk mitigation and risk treatment are two risk management processes that sound incredibly similar. While it is true that there is some overlap in the activities, they are both different parts of the wider discipline of risk management.

All businesses, regardless of their size or industry, need to have a risk management strategy. With such strategies in place, organisations will be able to successfully take calculated risks and manage the fallout from decisions that do not go well. Risk mitigation and risk treatment will be just two of the processes used here.

But which is used where, and why are they important? Let's explore these two processes and the role they play in the much larger risk management strategy all businesses need to adopt.

What is risk mitigation?

Risk mitigation is the corrective actions that are taken to reduce the likelihood or impact of risks. This proactive approach requires early identification of risks so that their full potential impact can be observed.

The mitigation itself can take many forms. True mitigation sees an active attempt to reduce the likelihood or severity of the risk. Establishing a risk appetite, where businesses establish the level of risk they are willing to accept in pursuit of their objectives, will be key.

The risk officer may also decide to transfer the risk to another department or a third party, for example, deciding to pass the management of a cybersecurity risk over to the IT department. Though this shifts the management and burden of the risk, it does not fully mitigate it as nothing is being done to reduce or control the risk.

A typical risk mitigation process involves:

• Identifying the risk
• Assessing its likelihood and potential impact
• Creating an actionable mitigation and management plan
• Executing the actions laid out in the plan
• Tracking the risk, monitoring the mitigation process, and updating the plan and protocols as required

Why do organisations need risk mitigation?

Risk mitigation strategies do not require us to completely eliminate the likelihood of a risk. After all, progress in business can often be made through taking calculated risks. Risk mitigation is an important part of this, as it allows businesses to acknowledge the risks associated with certain actions and proceed in a way that minimises or avoids the potential negative impact of them as much as possible.

What is an example of risk mitigation in practice?

Let's take the example of a financial services firm. They operate across multiple jurisdictions, and in each are subject to strict regulatory and compliance practices that must be adhered to yet differ across every area. Should they fail to follow these requirements, they could be subject to hefty fines and even legal investigation, not to mention the potential breakdown in customer trust and reputation.

To ensure they are compliant with these regulations at all times, the firm ensures that their internal systems and transactions are linked to a specific regulatory technology platform. This monitors for anomalies such as suspicious transactions or KYC documentation gaps, and generates real-time reports and flags to help the company stay compliant.

Not only does this demonstrate to regulators that the firm is taking active steps to develop and utilise a robust compliance framework, but it also reduces the chance of human error or oversight and creates an efficient process for identifying and resolving potential compliance violations. The software can also track annual compliance training for employees, notifying them when their certification expires, and provides an easily managed foundation for inspections and audits.

What is risk treatment?

Risk treatment is a plan that outlines the strategies, activities, and actions a company will undertake to effectively address a threat. In doing so, they may even be able to manage it in a way that is beneficial or profitable to them. What might have started out as a strategic risk could soon be transformed into an action that actually benefits the company in the long run.

Risk treatment takes place after identification and evaluation. Identified risks should be put through a risk treatment process, but identification is not part of the treatment itself. Likewise, mitigation might be one treatment chosen as part of a risk reduction strategy, but other types of treatment do not involve mitigation at all.

A typical risk treatment process will include:

• Selecting the correct risk treatment option to use in the given scenario
• Planning treatment based on the option chosen
• Monitoring the effectiveness of the chosen option
• Determining whether the residual risk is acceptable or not
• If unacceptable, determining and implementing a new risk treatment option

Why do organisations need risk treatment?

Risk assessment and identification are sometimes just the beginning of what might ultimately lead to the need for complex risk management processes and expert handling. Some organisations take the approach of risk avoidance, accepting a certain level of risk and hoping that it will not impact the company too much. This is not an accurate or sensible way of managing risk in the long run. Risk treatments provide solid management practices that can help to minimise or even completely avoid the damage that risk could otherwise cause to a company.

What is an example of risk treatment in practice?

Let's look at an example of risk treatment in practice, this time through the example of a logistics firm. Fuel is one of the largest operating costs for this industry, and a sharp and sudden increase in price can dramatically affect profit margins.

As a risk treatment strategy, the logistics firm enters a fixed-rate agreement with suppliers. At the same time, it invests in more modern, fuel-efficient vehicles and route optimisation software. Its in-house analytics team is given training to help them better forecast fuel demand and analyse weather and traffic data, leading to a reduction in overall fuel consumption for the company.

Once the initial fixed-rate agreement expires, the organisation is in a better position than competitors as they have taken the time and resources to optimise their operations. They can now also market themselves as a fuel-resilient and carbon-smart carrier, potentially attracting new sustainability-conscious customers and contracts.

How do both fit into a wider risk management plan?

Risk mitigation is a valid risk treatment strategy, and both should play their part in a wider risk management plan. All companies should conduct comprehensive assessments to determine their risk appetite and tolerances, and then proceed to a broader analysis phase where they identify how to mitigate and address identified potential risks.

A full risk management process will always differ company to company, or even risk to risk within a single organisation, but creating a plan to mitigate risks could resemble these steps:

1. Establish context

Define the objectives and KPIs of the business or project. Make sure to include internal factors like staff or resources in addition to external factors like regulations or market influence. This is the stage where risk appetite and tolerance are established. Roles and responsibilities need to be identified and assigned so incident responders fully understand their next actions during an adverse event.

2. Identify risks

Information and data about potential risks can be gathered from a variety of sources, including but not limited to historical internal data, industry benchmarks, stakeholder input, and workshops. Every risk established should be documented with a short description, category, and potential triggers.

3. Analyse risks

Assess the likelihood of each risk occurring and the impact that could be felt by that risk. Analyse and categorise each risk to better organise them and establish an order of priority based on urgency, impact, and interdependencies and relationships with other parts of the business. High priority risks could be those that are more likely to affect an organisation, or those that could potentially result in a complete company shutdown if they come to pass, and so should be addressed first.

4. Develop risk treatment strategies

Every risk identified needs an appropriate treatment strategy. For some, this may include mitigation to actively reduce the likelihood or impact of the given risk. Action can then be taken to ensure a plan is in place to mitigate said risks. This could include:

• Defining specific control measures or response strategies, such as system redundancies, policy changes, training, and automation.
• Assigning owners, deadlines, and required resources.
• Documenting these actions in a risk register or action plan.

5. Monitor and review risks

Continuously track identified risks and stay vigilant for new ones that may emerge in the future. Scenarios and stress tests are useful tools to use here to assess the effectiveness of mitigation and other treatment strategies without having to deal with a real-life crisis. The risk plan should be shared with relevant stakeholders and personnel, and a communication protocol should be established for escalation and reporting. Review and modify these plans regularly.

Manage your risk with C2 Meridian

Effective risk management needs to be centralised. When documents are scattered across departments and everyone has a different plan of action for when disaster hits, no risk is fully addressed or dealt with. A proactive, unified approach is the best way to handle this important operational task. By gathering all relevant information in one place, nothing can slip through the gaps and cause an issue later on. With increasingly complex threat landscapes and growing regulatory scrutiny, your risk response needs to be more than reactive. It must be strategic.

C2's Meridian BCMS is the platform you need to best manage risk and your organisation's response to a crisis. Streamline your approach to operational resilience and ensure that your risk response is well organised and up-to-date. With Meridian at your fingertips, you can ensure that your risk procedures are set up so the right people are being notified and the correct next steps are being taken to correct the issue and minimise its impact. Get in touch and book a demo today to find out how Meridian can transform the way your organisation handles risk and resilience.