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Risk Treatment (With Examples)

Published on February 01, 2021

According to Investopedia, business risk is "the exposure a company or organization has to factor(s) that will lower its profits or lead it to fail."

In terms of business management, risk may occur in the form of a challenge or threat that could affect a firm's performance according to set strategy and its effectiveness in achieving the objectives.

If dealt with accurately, the risk might function as an opportunity to grow and expand the business. After all, successful companies take risks to succeed. However, when managed inappropriately, it might lead to severe consequences: from putting the company's information security in peril, through endangering the firm's liability, to even legal repercussions. Thus, developing a solid risk management strategy is considered necessary for every aspiring company. It will ensure adequate response to the threats and make taking risks more profitable in the long run.

The successful strategy should include risk treatment and the assessment of possible consequences along with the needed input, calculation of costs and benefits, and a solution to deal with risk in the most strategic way. To understand this concept better, let's put it into context.


Different Types of Risks

As risks are an inherent part of business management, they are bound to occur in every company and take many forms.

Firstly, we might distinguish risks emerging from different areas, such as business-related risks, economic risks, social risks, etc. The threats might take various forms, like an action (somebody making a mistake) or an event (like the global pandemic). Lastly, they may have both positive and negative impacts and lead to different outcomes.

Whether favorable or not, the expected outcome may be heavily dependent on the risk management strategy implemented. That's why it's crucial to develop the proper risk management in the face of any threats and adequate risk treatment to take control over and deal with the risk in the best way possible in any given situation.


Risk Treatment As a Part of Risk Management

Risk treatment is a collective term for all the tactics, options, and strategies chosen to respond to a specific risk, bound to achieve the desired outcome concerning the threat.

Consequently, risk treatment is not a concept functioning on its own. On the contrary, it should always be examined, understood, and implemented as a part of a bigger whole, i.e., risk management.

Simply put, the risk management process is a firm's policy, composed of different steps taken to ensure proper management of occurring threats. In general, risk management's actions include:


  • Risk identification: The inspection process and identifying the organization's potential risks meant to ensure all the threats are recognized.
  • Risk assessment and evaluation: The analysis is bound to reveal the threat's consequences, the outcome, the likelihood, and severity. Thus, the analysis examines both the risk factor and the harm that it is bound to produce.
  • Risk treatment: The plan of implementing various strategies, activities, and actions to appropriately deal with the threat and manage it in a possibly profitable way.
  • Risk monitoring: The implementation of a continuous control system over the threat after treating it.


Notably, risk treatment should always go hand in hand with other processes enlisted in the company's risk management plan to ensure the alignment of the tactics with the firm's policy.


Five Steps of Risk Treatment

In the risk treatment process, it's recommended to follow five main steps ensuring correct logistics and effectiveness of the strategy:

  1. Brainstorming and selecting the right risk treatment option.
  2. Planning and use of options chosen.
  3. Examining the effectiveness of the chosen tactics.
  4. Deciding whether the level of the remaining risk, i.e., residual risk, is acceptable or not.
  5. If it's not acceptable, implementing new risk treatment activities to reduce the residual risk.


Risk Treatment Options

There are typically used several risk treatment strategies To deal with the risks. Notably, one kind of treatment cannot apply to all possible threats. It's crucial to review each threat individually to predict the effect of each solution.

Notably, the risk treatment options should be chosen based on a detailed analysis of the accompanying factors: the overall risk strategy of the company, its resources, the objectives of the organization, as well as predicted costs against the benefits.

The risk treatment options include:

Avoidance

If the risk assessment concludes that the risk is too high to be mitigated, it's possible to avoid the risk by resigning from performing specific actions or processes. The avoidance strategy is linked to interpreting the risk as unfavorable to the point that it should be excluded entirely. To avoid the risk, the company might choose to perform another action instead, as the alternative generating a lower threat.

For example, suppose the launch of a new product line is identified as high-risk, and the impact of the expected cost is deemed as not acceptable. In that case, the product line will be exited and replaced with the one expected not to generate a threat.


Loss Prevention and Reduction (Mitigation)

To reduce the likelihood of risk or to bring its consequences down to an acceptable level, the company might implement safeguards, or controls, carefully chosen from the range of the available control processes. By diminishing the risk to the required level, this option ensures the needed level of security.

The controls might occur in different forms, such as fire-suppression systems, joint application design, or best practices in employee training. It's essential to ensure that all tactics are bound to reduce risk to a sufficient level to continue doing business.

When risk controls reduce the risks, it is possible to examine the residual risk, i.e., the threat remaining after implementing the loss reduction treatment.


Transfer

Transferring risk is related to passing a specific portion of the threat to another party to reduce its likelihood or the impact on the organization. However, it's vital that another party - for example, an insurance company - is informed about the consequences of the sharing, the impact of the risk, and the expected transfer cost.

This type of risk treatment might be executed by signing a contract with a service provider or purchasing errors insurance.

Notably, this option does not mitigate the risk itself, as it deals only with its consequence. Thus, the transfer treatment should be typically implemented along with other treatment plans.


Accept

Suppose the analysis concludes that the risk rating is at the acceptable levels, or the mitigation cost of the implemented strategy is higher than the expected damage. In that case, the appropriate treatment might be to accept the risk and not take any actions to treat it. However, assuming the risk should always go hand in hand with implementing a system that would continuously control and monitor the given risk, along with its possible development.



Risk Treatment Plan

It's recommended to create a Risk Treatment Plan to avoid confusion in planning treatment activities. A Risk Treatment Plan is a document in which the company's policy regarding risk treatment is outlined in detail. The outline should contain information about the parties responsible for implementing each control option, the date and the timeframe, the available budget, etc. The detailed form will ensure a clear and unified strategy that will be easier to follow.


ISO/IEC 27005

More specific information regarding risk management processes, available treatment plans, and correct responses to possible threats can be found in the risk management standard ISO/IEC 27005.

This set of standards developed by the International Organisation for Standardisation (ISO) and the International Electrotechnical Commission (IEC) provides guidelines for ensuring information security and recommended processes and models concerning risk management. It is also applicable to all kinds of businesses that wish to develop concrete strategies and gain knowledge on risk management.


Conclusion

Risks are an inherent part of any business, and each company is bound to face them multiple times at every stage of its development. That's why adequate risk management policies need to be implemented while planning the overall management plan.

To ensure fast and adequate action in the face of a threat, it's crucial to regularly do a thorough analysis of the risk strategy and keep improving the risk management plan, including risk identification, risk assessment, risk treatment, and risk monitoring. Preferably, the appropriate treatment plan should be created, whose implementation could ensure each treatment activity responds to specific risk types.

When choosing the adequate risk treatment, it's important to remember to review the company's available resources and ensure the project's alignment with good policies as defined by ISO. Only a thorough understanding and correct implementation of all those factors will provide correct risk responses and, consequently, constitute the firm's success.