Mitigation vs Contingency
Risk management is defined as the identification, assessment, and prioritization of risks or the effect of uncertainty in investment decision making. It is very important to manage risk to avoid unbearable losses or bankruptcy. Mitigation and contingency are two strategies that are used in the management of risk. Risk mitigation and contingency planning are very closely related to one another as they are steps used in the larger risk management process. There are, however, a number of differences between the two and the timings in which they are needed. The article offers a clear explanation of each risk management strategy and explains the similarities and differences between the two.
What is Risk Mitigation?
Mitigation is the process of solving problems that were caused or reducing the effect of the risk once it arises. In other words, risk mitigation strives to minimize a risk that materializes. Risk mitigation can also be seen as a method used to control damage that has already being done, and to reduce the ‘blow’ or consequences that it may have on the organization.
Even though risk mitigation is done after the damage occurs, the strategies for mitigation should be pre planned and communicated across the organization so that they can be properly implemented during the time of a crisis. For example, In the event that there is a union strike within a firm there will be no employees working, which will halt production and sales. In order to solve this problem or reduce the damage caused in this situation, the company will negotiate with the union and try to meet employees’ demands. This is the risk mitigation process that is used to deal with the crisis.
What is Contingency Plan?
Contingency is a planning process in which the company will come up with a few backup plans in the event that the risk materializes. A contingency plan is also known as the action plan for the worst case scenario. Such plans are essential to an organization as it helps organization quickly adapt to changes while suffering less consequences. For example, a company may introduce a new product to the market with the expectation that the product will not face much competition till one year’s time (which is the time that might be needed to develop a similar product by the competitors). However, a competitor releases an identical product to the market within 6 months. A company should have done some contingency planning to determine what steps could be taken in the event that such a situation materializes.
What is the difference between Mitigation and Contingency?
Risk management is essential for organizations to ensure the long term smooth running of the business. There are two parts to risk management; risk mitigation and contingency planning. There are a number of differences between the two strategies. Risk mitigation is carried out after the risk materializes, as a measure to ‘clean up the mess’; contingency planning is used way before the risk actually arises and is the process of coming up with a backup plan to deal with the risk if things go wrong. Risk mitigation is aimed at reducing the consequences of the crisis, whereas contingency planning is used to determine how problems can be solved if a crisis occurs. An important part of both risk mitigation and contingency planning is the requirement to identify risks before they materialize. Risk weighing and prioritizing is also an important process needed for mitigation and contingency as risk management should be focused mostly on the most significantly damaging risks.
Summary:
Mitigation vs Contingency
• Risk management is essential for organizations to ensure the long term smooth running of the business. There are two parts to risk management; risk mitigation and contingency planning.
• Mitigation is the process of solving the problems that were caused or reducing the effect of the risk once it arises.
• Contingency is a planning process in which the company will come up with a few backup plans in the event that the risk materializes.
• Risk mitigation is aimed at reducing the consequences of the crisis, whereas contingency planning is used to determine how problems can be solved if a crisis occurs.