Risk Analysis Management
Whatever your role, it’s likely that you’ll need to make a decision that involves an element of Risk Analysis Management at some point.
Risk is made up of two parts: the probability of something going wrong, and the negative consequences if it does.
Risk can be hard to spot, however, let alone prepare for and manage. In addition, if you’re hit by a consequence that you hadn’t planned for, costs, time, and reputations could be on the line.
This makes Risk Analysis an essential tool when your work involves risk. It can help you identify and understand the risks that you could face in your role. In turn, this helps you manage these risks, and minimize their impact on your plans.
What Is Risk Analysis?
Risk Analysis is a process that helps you identify and manage potential problems that could undermine key business initiatives or projects.
To carry out a Risk Analysis, you must first identify the possible threats that you face, and then estimate the likelihood that these threats will materialize.
Risk Analysis can be complex, as you’ll need to draw on detailed information such as project plans, financial data, security protocols, marketing forecasts, and other relevant information. However, it’s an essential planning tool and one that could save time, money, and reputation.
When to Use Risk Analysis
Risk analysis is useful in many situations:
- Planning projects, to help you anticipate and neutralize possible problems.
- Deciding whether or not to move forward with a project.
- Improving safety and managing potential risks in the workplace.
- Preparing for events such as equipment or technology failure, theft, staff sickness, or natural disasters.
- When you’re planning for changes in your environment, such as new competitors coming into the market, or changes to government policy.
How to Use Risk Analysis
To carry out Risk Analysis Management, follow these steps:
(1) Identify Threats
The first step in Risk Analysis is to identify the existing and possible threats that you might face. These can come from many different sources. For instance, they could be:
- Human – Illness, death, injury, or other loss of a key individual.
- Operational – Disruption to supplies and operations, loss of access to essential assets, or failures in distribution.
- Reputational – Loss of customer or employee confidence, or damage to market reputation.
- Procedural – Failures of accountability, internal systems, or controls, or from fraud.
- Project – Going over budget, taking too long on key tasks, or experiencing issues with product or service quality.
- Financial – Business failure, stock market fluctuations, interest rate changes, or non-availability of funding.
- Technical – Advances in technology, or from technical failure.
- Natural – Weather, natural disasters, or disease.
- Political – Changes in tax, public opinion, government policy, or foreign influence.
- Structural – Dangerous chemicals, poor lighting, falling boxes, or any situation where staff, products, or technology can be harmed.
You can use a number of different approaches to carry out a thorough Risk Analysis Management:
- Run through a list such as the one above to see if any of these threats are relevant.
- Think about the systems, processes, or structures that you use, and analyze risks to any part of these. What vulnerabilities can you spot within them?
- Ask others who might have different perspectives. If you’re leading a team, ask for input from your people, and consult others in your organization, or those who have run similar projects.
Tools such as SWOT Analysis and Failure Mode and Effects Analysis can also help you uncover threats, while Scenario Analysis helps you explore possible future threats.
(2) Estimate Risk
Once you’ve identified the threats you’re facing, you need to calculate both the likelihood of these threats being realized and their possible impact.
One way of doing this is to make your best estimate of the probability of the event occurring, and then multiply this by the amount it will cost you to set things right if it happens. This gives you a value for the risk:
Risk Value = Probability of Event x Cost of Event
As a simple example, imagine that you’ve identified a risk that your rent may increase substantially.
You think that there’s an 80% chance of this happening within the next year because your landlord has recently increased rents for other businesses. If this happens, it will cost your business an extra $500,000 over the next year.
So, the risk value of the rent increase is: 0.80 (Probability of Event) x $500,000 (Cost of Event) = $400,000 (Risk Value)
Don’t rush this step. Gather as much information as you can so that you can accurately estimate the probability of an event occurring and the associated costs. In addition, use past data as a guide if you don’t have an accurate means of forecasting.