Find out how to do a risk
with James Manktelow and Amy Carlson.
Whatever your role, it's likely that you'll need to make a decision that involves an element of risk 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. And, 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 idenfity 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.
In this article, we'll look at how you can use Risk Analysis to identify and manage risk effectively.
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 reputations.
Risk analysis is useful in many situations:
To carry out a risk analysis, follow these steps:
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:
You can use a number of different approaches to carry out a thorough analysis:
Once you've identified the threats you're facing, you need to calculate out 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 to 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 percent 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)
You can also use a Risk Impact/Probability Chart to assess risk. This will help you to identify which risks you need to focus on.
Once you've identified the value of the risks you face, you can start to look at ways of managing them.
In some cases, you may want to avoid the risk altogether. This could mean not getting involved in a business venture, passing on a project, or skipping a high-risk activity. This is a good option when taking the risk involves no advantage to your organization, or when the cost of addressing the effects is not worthwhile.
Remember that when you avoid a potential risk entirely, you might miss out on an opportunity. Conduct a "What If?" Analysis to explore your options when making your decision.
You could also opt to share the risk – and the potential gain – with other people, teams, organizations, or third parties.
For instance, you share risk when you insure your office building and your stock with a third-party insurance company, or when you partner with another organization in a joint product development initiative.
Your last option is to accept the risk. This option is usually best when there's nothing you can do to prevent or mitigate a risk, when the potential loss is less than the cost of insuring against the risk, or when the potential gain is worth accepting the risk.
For example, you might accept the risk of a project launching late if the potential sales will still cover your costs.
Before you decide to accept a risk, conduct an Impact Analysis to see the full consequences of the risk. You may not be able to do anything about the risk itself, but you can likely come up with a contingency plan to cope with its consequences.
If you choose to accept the risk, there are a number of ways in which you can reduce its impact.
Business Experiments are an effective way to reduce risk. They involve rolling out the high-risk activity but on a small scale, and in a controlled way. You can use experiments to observe where problems occur, and to find ways to introduce preventative and detective actions before you introduce the activity on a larger scale.
Plan-Do-Check-Act is a similar method of controlling the impact of a risky situation. Like a Business Experiment, it involves testing possible ways to reduce a risk. The tool's four phases guide you though an analysis of the situation, creating and testing a solution, checking how well this worked, and implementing the solution.
Risk Analysis is a proven way of identifying and assessing factors that could negatively affect the success of a business or project. It allows you to examine the risks that you or your organization face, and helps you decide whether or not to move forward with a decision.
You do a Risk Analysis by identify threats, and estimating the likelihood of those threats being realized.
Once you've worked out the value of the risks you face, you can start looking at ways to manage them effectively. This may include choosing to avoid the risk, sharing it, or accepting it while reducing its impact.
This ensures that you don’t lose your plan.
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