Risk Control: What It Is, How It Works, Example

What Is Risk Control?

Risk control is the set of methods by which firms evaluate potential losses and take action to reduce or eliminate such threats. It is a technique that utilizes findings from risk assessments, which involve identifying potential risk factors in a company's operations, such as technical and non-technical aspects of the business, financial policies and other issues that may affect the well-being of the firm.

Risk control also implements proactive changes to reduce risk in these areas. Risk control thus helps companies limit lost assets and income. Risk control is a key component of a company's enterprise risk management (ERM) protocol.

How Risk Control Works

Modern businesses face a diverse collection of obstacles, competitors, and potential dangers. Risk control is a plan-based business strategy that aims to identify, assess, and prepare for any dangers, hazards, and other potentials for disaster—both physical and figurative—that may interfere with an organization's operations and objectives. The core concepts of risk control include:

• Avoidance is the best method of loss control. For example, after discovering that a chemical used in manufacturing a company’s goods is dangerous for the workers, a factory owner finds a safe substitute chemical to protect the workers’ health.
• Loss prevention accepts a risk but attempts to minimize the loss rather than eliminate it. For example, inventory stored in a warehouse is susceptible to theft. Since there is no way to avoid it, a loss prevention program is put in place. The program includes patrolling security guards, video cameras and secured storage facilities. Insurance is another example of risk prevention that is outsourced to a third party by contract.
• Loss reduction accepts the risk and seeks to limit losses when a threat occurs. For example, a company storing flammable material in a warehouse installs state-of-the-art water sprinklers for minimizing damage in case of fire.
• Separation involves dispersing key assets so that catastrophic events at one location affect the business only at that location. If all assets were in the same place, the business would face more serious issues. For example, a company utilizes a geographically diverse workforce so that production may continue when issues arise at one warehouse.
• Duplication involves creating a backup plan, often by using technology. For example, because information system server failure would stop a company’s operations, a backup server is readily available in case the primary server fails.
• Diversification allocates business resources for creating multiple lines of business offering a variety of products or services in different industries. A significant revenue loss from one line will not result in irreparable harm to the company’s bottom line. For example, in addition to serving food, a restaurant has grocery stores carry its line of salad dressings, marinades, and sauces.

No one risk control technique will be a golden bullet to keep a company free from potential harm. In practice, these techniques are used in tandem with one another to varying degree and change as the corporation grows, as the economy changes, and as the competitive landscape shifts.

Example of Risk Control

As part of Sumitomo Electric’s risk management efforts, the company developed business continuity plans (BCPs) in fiscal 2008 as a means of ensuring that core business activities could continue in the event of a disaster. The BCPs played a role in responding to issues caused by the Great East Japan earthquake that occurred in March 2011. Because the quake caused massive damage on an unprecedented scale, far surpassing the damage assumed in the BCPs, some areas of the plans did not reach their goals.

Based on lessons learned from the company’s response to the earthquake, executives continue promoting practical drills and training programs, confirming the effectiveness of the plans and improving them as needed. In addition, Sumitomo continues setting up a system for coping with risks such as outbreaks of infectious diseases, including the pandemic influenza virus.