Find out how to do a risk analysis,
with James Manktelow and Amy Carlson.
Almost all of the things that we do at work involve risk of some kind, but it can sometimes be challenging to identify risk, let alone to prepare for it.
Risk Analysis helps you understand risk, so that you can manage it, and minimize disruption to your plans. Risk Analysis also helps you control risk in a cost-effective way.
In this article, we'll look at how you can identify and manage risk effectively.
Risk Analysis helps you identify and manage potential problems that could undermine key business initiatives or projects.
Risk is made up of two things: the probability of something going wrong, and the negative consequences that will happen if it does.
You carry out a Risk Analysis by first identifying the possible threats that you face, and by then estimating the likelihood that these threats will materialize.
Risk Analysis can be quite involved, and it's useful in a variety of situations. To do an in-depth analysis, you'll need to draw on detailed information such as project plans, financial data, security protocols, marketing forecasts, or other relevant information.
Risk analysis is useful in many situations, for example, when you're:
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:
It's easy to overlook important threats, so make sure that you do as thorough an analysis as you can. You can use a number of different approaches to do this:
Tools such as SWOT Analysis and PEST Analysis can also help you uncover threats, while Scenario Analysis helps you explore threats that you might encounter in the "different futures" that your organization might face.
Once you've identified the threats you're facing, you need to work 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 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, let's say 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. By using these charts, you can quickly 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.
When you do this, it's important to choose cost-effective approaches - in many cases, there's no point in spending more to eliminate a risk than the cost of the event if it occurs. So, it may be better to accept the risk than it is to use excessive resources to eliminate it. Be sensible in how you apply this, though, especially if this involves ethical decisions or affects people's safety.
You can manage risks by:
Once you've carried out a Risk Analysis and have managed risks appropriately, conduct regular reviews. This is because the costs and impacts of some risks may change, other risks may become obsolete, and new risks may appear.
These reviews may involve re-doing your Risk Analysis, as well as testing systems and plans appropriately.
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 decide whether or not to move forward with a decision.
You do a Risk Analysis by identify threats, and by then 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 using existing assets, developing a contingency plan, or investing in new resources.
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