The TARA Framework for Risk Management
Risk management is an extremely vital component in the business and accounting work, and plays a crucial role in ensuring a business’s success and sustainability.
Managing risks effectively requires the use of various strategies and frameworks, and one of the most practical and simple risk management strategies is the TARA framework.
Definition of the TARA Risk Management Framework
The TARA framework is a structured approach to assess and manage risks by classifying them into four easy to understand categories:
- Transfer
- Avoid
- Reduce
- Accept
Transfer
Transferring risks involves moving the potential impact of a risk to another party.
This often takes the form of insurance or outsourcing.
Business will often choose to transfer risks when it is more cost-effective or the external party has more knowledge and expertise to manage the risk.
Avoid
Risks classified under “Avoid” involve identifying and eliminating the risk entirely.
This strategy is chosen when the potential damage of a risk is deemed too high to bear, and the business decides to steer clear of the risk altogether by not engaging in certain activities or practices.
Reduce
Reducing risks involve a conscious effort to reduce the probability or impact of the risk.
This is often achieved by implementing preventative measures or improving existing processes to minimalize potential negative outcomes.
Accept
Some risks are unlikely to ever occur, and even if they do, the potential consequences are minimal.
In this case, businesses would just accept the risk, and won’t take any specific action to mitigate or eliminate it.
Implementing the TARA Framework
For a business to successfully adopt the TARA risk control framework, the following steps can be followed:
Step 1. Identify Risks
Begin by identifying potential risks that could affect the business.
These can encompass a wide range of scenarios, such as operational, financial, market, or compliance risks.
Step 2: Risk Analysis
Conduct a thorough analysis of each risk, assessing the probability of occurring, the potential consequences, and the overall impact on your organization (ie financial, reputational etc).
Step 3: Categorise Risks
Once potential risks have been identified, they need to be catgorised into either Transfer, Accept, Reduce, or Avoid based on their characteristics and potential impact.
This can be logged in a Risk Register.
Step 4: Develop Strategies
Based on the risk categorisations, strategies will need to be created to deal with each category.
For example, if a risk has been categorised into the “Reduce” group, a strategy will need to be developed to effectively diminish that risk.
Examples of the TARA Framework
To further illustrate the practical application on the TARA framework, let’s now look at some real-life examples of how it can be implemented for each category:
Transfer
Risk: The risk of property damage due to natural disasters like hurricanes, earthquakes, or floods.
Strategy: Transfer the risk by purchasing property insurance that covers damage from these events. In case of a disaster, the financial burden is moved to the insurance company.
Risk: The risk of cyber-attacks and data breaches that could impact the security of customer data.
Strategy: Transfer the risk by outsourcing IT services to a specialist firm with expertise in cybersecurity.
Risk: The risk of production delays or quality issues in manufacturing.
Strategy: Transfer the risk by subcontracting the manufacturing process to a reliable third-party company with a proven track record in quality and timeliness. They now take on the risk associated with production.
Accept
Risk: The risk of short-term market volatility affecting investment returns.
Strategy: Accept the risk and maintain a long-term investment strategy, understanding that market fluctuations are inherent in investing, and over time, the returns are likely to align with financial goals.
Risk: The risk of losing key employees, potentially disrupting operations.
Strategy: Accept the risk by investing in employee development and retention programs. While turnover may occur, these programs help ensure a steady workforce and minimise the impact of departures.
Risk: The risk of increased costs in the supply chain due to market fluctuations.
Strategy: Accept the risk by maintaining a flexible budget that accounts for potential cost increases in the supply chain. This allows for adjustments without major disruptions.
Reduce
Risk: The risk of data breaches and cyber-attacks due to weak security protocols.
Strategy: Reduce the risk by implementing robust cybersecurity measures, such as firewalls, regular software updates, employee training on security practices, and regular security audits.
Risk: The risk of product defects or quality issues in the manufacturing process.
Strategy: Reduce the risk by implementing strict quality control processes, conducting frequent quality checks, and investing in advanced manufacturing technology to minimize defects.
Risk: The risk of legal and financial penalties due to non-compliance with industry regulations.
Strategy: Reduce the risk by employing comprehensive compliance management software, conducting regular compliance audits, and implementing internal policies and training programs to ensure adherence to regulations.
Avoid
Risk: The risk of significant financial losses through high-risk financial derivatives trading.
Strategy: Avoid the risk by adhering to a conservative investment strategy and refraining from speculative trading in high-risk derivatives.
Risk: The risk of entering a new market with unknown challenges and regulatory complexities.
Strategy: Avoid the risk by initially focusing on markets where the business has expertise, and gradually expanding into new markets once a solid understanding is achieved.
Risk: The risk of environmental damage, health issues, and legal liabilities associated with the use of hazardous chemicals.
Strategy: Avoid the risk by transitioning to environmentally-friendly and safe alternatives, thereby eliminating the use of harmful chemicals in the production process.