Risk acceptance is a formal business strategy, not an oversight. It’s a deliberate choice made when a risk’s potential cost is less than the cost to eliminate it, or if its potential impact is low. This decision is not a passive act but the start of an active management process to handle the consequences should the risk materialize.
Develop a Formal Contingency Plan
Once a business accepts a risk, its first step is to develop a formal contingency plan. This is a step-by-step guide for the immediate response when a risk occurs. The plan’s goals are to control damage, minimize disruption, and return to normal operations quickly. It specifies the actions to take, their sequence, and who is responsible for each step.
Consider a bakery that accepts the risk of its primary flour supplier failing a delivery. The contingency plan would not just say “find another supplier.” It would name a pre-vetted backup supplier, including their contact information, ordering procedures, and payment terms. The plan would also designate an employee, like the head baker, to be responsible for contacting this backup.
The plan must also detail subsequent actions. For the bakery, this could involve instructions for altering recipes to accommodate flour from the backup supplier. It might also include a procedure for assessing inventory to determine the size of the emergency order. This detail ensures an organized response, minimizing impact on production and customers.
Establish a Monitoring System
A business must also establish a system for monitoring the identified risk. This system is a proactive, early warning mechanism to detect signs that the risk is imminent. It involves tracking specific triggers or indicators that suggest the probability of the risk occurring is increasing, which is different from the reactive contingency plan.
For the bakery, this system would focus on its main flour supplier. An employee could track news about the supplier, like reports of financial trouble or labor disputes. Other triggers could include consistent delivery delays or a decline in product quality. These signals provide advance notice, allowing the bakery to activate its contingency plan before the supplier fails.
Allocate Sufficient Resources
A contingency plan is only effective if the resources to implement it are available. This involves setting aside specific assets exclusively for responding to the risk event. These resources fall into three categories: financial, human, and physical.
Financially, the business should establish a dedicated contingency fund. This is reserved cash to cover unexpected costs, like a higher price for an emergency flour order. For human resources, specific employees must be assigned and trained on their duties in the plan. The bakery’s head baker, for example, would be trained on contacting the alternate supplier. Physical assets include items like documented contact information and any necessary equipment.
Create a Communication Protocol
A business also needs a clear communication protocol to run alongside the operational response. This plan manages the flow of information to all relevant parties. A well-defined protocol protects the company’s reputation by ensuring communication is timely, accurate, and consistent, which prevents misinformation and maintains trust.
The protocol must identify who to inform, what information they need, and when. Internally, this means informing employees about the situation to prevent confusion. For the bakery, this would involve telling staff about the supplier issue and temporary changes to their tasks. Externally, it means communicating with customers about potential delays, reassuring them that the situation is under control.
Implement a Regular Review Process
Finally, the risk acceptance strategy must be a dynamic process, not a one-time project. A regular review process ensures that the contingency plan, monitoring triggers, and allocated resources remain relevant and effective. Since the business environment changes, a plan can quickly become obsolete without periodic updates.
A business should schedule these reviews quarterly or annually. During the review, the team reassesses the likelihood and potential impact of the accepted risk. For the bakery, this means checking if its primary supplier’s stability has changed or if the backup supplier is still viable. This ongoing evaluation ensures the business remains prepared to manage the accepted risk.