Risk control is the set of methods through which firms evaluate potential losses and take proactive steps to reduce or eliminate these threats. By using insights from comprehensive risk assessments—covering the technical, financial, and procedural aspects of a company—businesses strive to mitigate risks and limit potential losses. Risk control is a cornerstone of any company’s enterprise risk management (ERM) strategy.
Key Benefits of Risk Control
- Risk Identification and Evaluation: Risk control helps in recognizing potential risk factors within a business’s operations, such as tech malfunctions, policy issues, and non-technical disruptions.
- Proactive Risk Mitigation: Implementing strategies to minimize these risk factors prevents substantial loss and promotes operational resilience.
- Enhanced ERM Protocols: Effective risk control is crucial for running thorough, productive enterprise risk management protocols.
Implementing Risk Control: Techniques and Practices
Modern businesses are constantly surrounded by obstacles, rivals, and potential dangers. Effective risk control uses strategic planning to preemptively address any risks to the organization’s operations and objectives. Here are some core risk control techniques:
Avoidance
Avoidance is an effective loss control method. For instance, if a chemical used in production is deemed hazardous, the company switches to a safer alternative. However, avoidance isn’t always feasible.
Loss Prevention
Loss prevention accepts a risk but works to minimize its impact. For scenarios like warehoused inventory theft, measures like security patrols and cameras are employed. Insurance is another preventative approach outsourced to a third party.
Loss Reduction
Loss reduction involves limiting losses when a threat manifests. If a company stores flammable materials, installing advanced sprinkler systems to mitigate fire damage exemplifies this approach.
Separation
Separation involves distributing key assets to ensure that a calamity at one site only impacts that particular location. This can mean utilizing a geographically varied workforce to ensure operational continuity if one facility faces issues.
Duplication
Duplication creates backup plans, often using technology. For instance, having a backup server ready if the primary one fails ensures uninterrupted business operations.
Diversification
Diversification allocates resources for creating multiple business lines in different industries. For instance, a restaurant diversifying into grocery lines ensures significant revenue loss from one sector doesn’t drastically affect the bottom line.
Utilizing a Risk and Control Matrix (RACM) for Effective Risk Management
A Risk and Control Matrix (RACM) helps organizations understand and optimize their risk profiles by mapping relationships between risks and control measures. Components include:
- Risk Identification: Listing potential risks.
- Risk Assessment: Assessing risks based on their likelihood and impact.
- Control Measures: Detailing measures to mitigate risks.
- Control Effectiveness: Evaluating control measures’ effectiveness.
- Action Plans: Improving control measures by addressing identified gaps.
Examples of Risk Control
Sumitomo Electric and Disaster Resilience
Sumitomo Electric developed business continuity plans in 2008 to ensure continued core activities during disasters. Following the Great East Japan earthquake, the company updated plans based on practical drills and training programs, ensuring better preparedness.
British Petroleum Oil Spill
Following the 2010 Deepwater Horizon spill, BP implemented several risk control measures to prevent reoccurrences. Measures included improving safety culture through training, leveraging advanced technology, and systematizing risk assessment and management.
Starbucks’ Supply Chain
Starbucks employs various risk control measures to manage supply chain risks, such as a diversified sourcing strategy and comprehensive supply chain standards. Additionally, it utilizes real-time monitoring software for preemptive risk mitigation.
How Does Risk Control Differ from Risk Management?
While risk management involves identifying, assessing, and prioritizing risks, risk control specifies strategies to mitigate these risks. Risk management is about planning; risk control is about application.
Beyond Elimination: Understanding the Scope of Risk Control
Complete risk elimination is unattainable. Risk control aims to manage risks, reduce their likelihood, and mitigate their impact rather than entirely remove them.
Identifying Emerging Risks
Identifying new risks involves staying updated with industry trends, engaging in scenario planning, utilizing data analytics and AI tools, fostering transparent communication, and having a dedicated risk team.
Interconnection of Risk Control and Corporate Social Responsibility
By implementing risk control measures, companies align with corporate social responsibility principles. This approach reduces potential harm, builds public trust, and maintains the company’s reputation, supporting sustainable business practices.
Conclusion
Risk control is a vital business management element that allows companies to identify, assess, and mitigate threats effectively. Techniques like avoidance, loss prevention, and diversification can minimize exposure and increase resilience. Examples from industry giants like BP and Starbucks show the importance of robust risk control strategies. As the business landscape evolves, companies must continuously adapt their risk control efforts to ensure long-term sustainability and success.
Related Terms: risk assessment, risk avoidance, risk reduction, ERM, CSR.
References
- Sumitomo Electric. “Risk Management”.
- NOAA. “Deepwater Horizon oil spill settlements: Where the money went”.
- NC State University. “How Did BP’s Risk Management Lead to Failure”?
- Reuters. “Slack management exposed BP to high safety risk -leaked report”.
- British Petroleum. “Safety and Operational Risk Update”.
- SKF Corp. “Starbucks: An analysis of supply chain risk and mitigation strategies”.
- New York Times. “Starbucks, Flush With Customers, Is Running Low on Ingredients.”
- Solatech. “Starbucks: An analysis of supply chain risk and mitigation strategies”.
- Harvard University. “Starbucks global supply chain and climate change”.
- Supply Chain Drive. “Starbucks’ real-time alerts allow for disruption response in days, not weeks”.
