Business risks are different. Some are more likely to happen and have bigger potential impacts than others. If you treat all risks the same, you’re likely to either overreact to small problems or underestimate serious ones.
This guide outlines a practical approach to categorizing risks and selecting the right response strategies using a client-centric approach that aligns risk decisions with business priorities and stakeholder expectations.
Key Takeaways
- Businesses face various risks, including strategic, operational, reputational, and legal risks, each requiring tailored response strategies.
- Identifying risk likelihood and severity helps determine appropriate strategies such as avoidance, reduction, transfer, or acceptance.
- A centralized risk management framework (RMF) helps organizations standardize how they address different types of risks.
- Onspring provides tools for risk identification, assessment, and compliance, enhancing risk response through automation and centralized management.
- Utilizing a systematic approach facilitates informed decision-making in risk management, aligning with business priorities and stakeholder expectations.
Table of Contents
Understanding Different Types of Risk
Businesses face many different types of risks. The majority can be classified as strategic, operational, reputational or legal risks. Once risks are categorized, the next step is determining how to respond based on their likelihood and potential impact.
Strategic Risks
Strategic risks affect a company’s ability to achieve long-term goals. They are usually associated with business strategy decisions that impact market competitiveness and determine an organization’s overall direction.
For example, Blockbuster faced a strategic risk when it failed to adapt to digital streaming. In the 1990s and 2000s, it was a dominant player in the industry of renting movies on video cassettes. However, its business model became outdated as internet-based streaming took over. By the time Blockbuster tried to go digital, competitors like Netflix had already taken the lead. The company filed for bankruptcy in 2010.
Operational Risks
Operational risks often relate to inadequate or failed internal processes and systems. They can also result from human-related activities in your company or external events beyond your control. Examples of operational risks include:
- System downtime or malformed data
- Third-party contract breach
- Unauthorized employee actions
- Natural disasters, such as hurricanes, that impact physical assets
Reputational Risks
Reputational risks are potential threats that can ruin an organization’s public image. They could happen when:
- The company fails to meet regulatory requirements, leading to fines or mass product recalls.
- Partners, such as suppliers, break the law or have unethical practices that attract negative media coverage.
- A security solution fails, leading to online attacks that expose sensitive customer data to cybercriminals.
- A significant number of consumers leave negative online reviews or participate in social media boycott campaigns.
- A senior leader in the company is involved in gross misconduct or makes controversial statements that damage public trust.
Legal or Compliance Risks
Legal risks are your organization’s potential exposure to legal penalties and monetary fines for failing to meet regulatory requirements or contractual agreements.
With a centralized governance, risk and compliance (GRC) platform, you can easily manage compliance requirements and different types of risks in one place.
Key Factors to Consider When Choosing Risk Strategies
After identifying and categorizing risks, you need to evaluate how likely each one is to occur and what the impact would be to select the appropriate risk strategy.
Risk Likelihood
Likelihood is the probability of a risk occurring, often ranked on a scale of 1–5. This table shows a common spectrum of likelihood you can use to evaluate risks:
| Risk Likelihood Score | Description | Probability |
| 1 | Rare | 0–5% |
| 2 | Possible | 6–20% |
| 3 | Likely | 21–50% |
| 4 | Very Likely | 51–80% |
| 5 | Almost Certain | Over 80% |
To estimate the chances of a risk happening, consider past incidents and the strength of existing controls. For example, if a system fails frequently, the risk is very likely to happen again. But if the system has never failed and you have strong safeguards to prevent downtime, the likelihood of that risk occurring is much lower (rare).
Risk Severity or Impact
Risk severity shows how much damage or disruption a risk can cause if it happens. This involves ranking risks based on impact, ranging from insignificant to catastrophic:
| Risk Impact Score | Description |
| 1 | Insignificant |
| 2 | Minor |
| 3 | Moderate |
| 4 | Major |
| 5 | Catastrophic |
Using a risk assessment matrix, you can rank risks based on both likelihood and impact scores. In short, calculate the risk score of each threat with this formula:
Risk score = Likelihood Score × Impact Score.
Then use the matrix to visualize the overall level of each risk (low, medium, high, extreme) based on its score. These risk levels will help you choose the most appropriate risk response strategies.
Common Risk Response Strategies
Businesses use four main strategies to respond to risks.
Risk Avoidance
Avoidance involves eliminating risks with unmanageable or catastrophic potential consequences. For example, a company may avoid collecting sensitive customer data if it lacks the resources to comply with strict privacy regulations.
Risk avoidance is suitable when:
- The potential impacts of the risk are disastrous, such as bankruptcy or permanent license revocation.
- The costs of reducing or managing the risk are higher than the potential benefits.
- The risk threatens long-term business viability.
Risk Reduction
Another strategy is to minimize the likelihood or impact of risks. Even if you can’t totally avoid a risk, you can take steps to reduce it to acceptable levels.
Risk reduction is appropriate when:
- The risk is unavoidable.
- The costs of mitigation are lower than the potential loss.
- The risk has a high impact that must be reduced to be tolerable.
Risk Transfer
Risk transfer shifts risk impacts to third parties, such as insurance companies. For example, instead of avoiding innovative digital technology because of cybersecurity concerns, your business can buy cyber liability insurance to cover post-attack costs, such as forensic investigations, notification costs and litigation expenses.
Risk transfer works when the financial impact of a risk is too costly to handle on your own or when regulations in your industry, such as financial services, require insurance.
Risk Acceptance
Risk acceptance involves recognizing a risk without attempting to eliminate, reduce, or mitigate it. Risk acceptance is a deliberate decision, not inaction, based on cost-benefit trade-offs. This response may be appropriate in at least one of the following circumstances:
- The cost of addressing a risk is higher than the risk’s potential impact.
- The risk is unlikely to happen, and its potential impacts are relatively insignificant.
- Using other risk strategies could prevent business growth or weaken your competitive advantage.
How Organizations Use Risk Severity and Likelihood to Select the Right Risk Strategies
When you clearly evaluate the likelihood and impact of each risk to your organization, you can choose the most appropriate response strategy based on actionable insight rather than guesswork. You also avoid responding to all risks the same way.
This table summarizes how to match different risks to suitable risk strategies using likelihood and impact:
| Risk Likelihood | Risk Impact | Risk Level | Risk Response Strategies |
| Very likely or almost certain | Major or catastrophic | Extreme | Avoid or reduce |
| Rare or possible | Major or catastrophic | High impact and low probability | Reduce or transfer |
| Very likely or almost certain | Insignificant or minor | Low impact but frequent | Reduce |
| Rare or possible | Insignificant or minor | Low impact and likelihood | Accept |
| Likely | Moderate | Medium | Reduce or accept |
The Role of Risk Management Frameworks
A risk management framework (RMF) provides a set of guidelines and principles for handling risks. Examples of RMFs that businesses use and accept internationally include:
- COSO Enterprise Risk Management — Integrating with Strategy and Performance
- ISO 31000
- NIST Risk Management Framework
Different teams in an organization are often responsible for managing different risks. For example, the legal department typically handles legal risks, while the operations team focuses on operational risks.
An RMF lays out a standard approach for identifying, analyzing, evaluating, treating, monitoring and communicating risks across a company. By implementing a framework, different teams can use the same guidelines to make decisions about identified risks.
Improve Your Risk Response With Onspring
Onspring provides a centralized, automated platform that connects risk identification with actionable mitigation strategies. The software supports:
- Creating a risk register based on your industry knowledge, so you have a clear picture of all your risks and their potential consequences in a single place
- Mapping risks to multiple regulatory and risk management frameworks
- Automating risk assessment workflows and prioritizing risks by criticality
- Identifying root causes of risks and interdependencies to respond effectively
- Accessing real-time risk reports and dashboards for making informed decisions on risk acceptance and mitigation
Book a demo today to see how Onspring can simplify and improve governance, risk and compliance processes in your organization.
