Risk Analysis & Risk Management How to Properly Evaluate & Manage Business Risks

LEARN HOW YOU CAN CONDUCT AN ACCURATE RISK ANALYSIS TO PROPERLY IDENTIFY AND MANAGE THE RISKS THAT

YOUR ORGANIZATION MAY POSSIBLY FACE.

Whatever role you have in your company or organization, you will very likely need to make certain decisions along the way

that carry an element of risk.

There are two aspects of risk:

The probability that something will go wrong

The adverse consequences in the event something goes wrong

Risks are hard to foresee, let

alone get prepared for and

somehow manage.

If you get hit with the

consequences you never

planned for, in time, money

and reputation, quite a bit

could be at stake. It helps you pinpoint and

understand the kind of risks

that could affect you in your

role.

It also helps you

determine how to

manage these

potential risks, and

hopefully minimize

their impact on what

you have planned

for the future.

This is what makes good Risk

Analysis a vital tool when the

type of work you do is risky.

Risk Analysis is the process by which you identify and manage

any potential problems that might undermine your key

business projects and plans.

To reasonably undertake a Risk

Analysis, all possible things that could threaten your

business must be identified, and an estimate must be

made as to the likelihood that these situations would

actually occur. Doing a

proper Risk Analysis is not easy, it

can be very complex since you’ll need to have detailed

knowledge about security protocols, project plans, marketing

forecasts, a lot of financial data and other things of

relevance.

Once carried out, it serves as an essential

tool in planning and when used properly, something that will save you a lot of

time, money and your good name and

reputation.

What Does Risk Analysis Encompass?

When Risk Analysis Should be Used? Risk analysis is very useful in many different situations:

When making the

decision to either move forward or not with a particular project.

When preparing for things like a natural disaster, technology or equipment failures, theft or the sickness and absence of key staff members.

In the planning stages of projects, which helps you foresee and avoid or neutralize any potential problems.

When preparing for things like a natural disaster, technology or equipment

failures, theft or the sickness and absence of key staff members.

During safety improvements involving potential workplace risks.

How to Effectively Use Risk Analysis

Steps for conducting a Risk Analysis:

Identify Specific Threats 1 The first thing that must be done in a proper

Risk Analysis is to identify any existing and potential threats you might be facing.

The sources of these threats can be any number of things:

Any type of situation that could harm staff,

technology or products, such as toxic chemicals,

falling boxes, and/or poor lighting, etc.

Technical

Structural

Reputational

Political

Project

Advances or changes in technology and/

or technical failure

Loss of employee or customer loyalty and/or

confidence, damage to reputation.

Changes in governmental policy, public opinion,

tax laws, or foreign influence.

Taking longer than planned on key tasks,

going over budget, problems with the product or

quality of service.

Financial

Human

Natural

Operational

Procedural

A failure in business, fluctuations in the stock price,

changes in interest rates or non-availability of

credit and/or other sources of funding.

The illness, injury, death or loss by another cause of

a key part of the team.

A serious disease, severe weather event, or

natural disaster.

An interruption in operations, disruption of supplies,

losing access to vital assets, and/or failures in

distribution network.

Embezzlement and or/fraud caused by failures in

accountability, controls and/or internal systems

A variety of approaches can be used to carry out a thorough and complete analysis:

Review the list above to determine if any of these possible threats pertain to your business.

Run through the various processes, systems and/or structures used in your business and evaluate the potential risks of any aspect of these. Do you see any vulnerability?

Speak to others who may have a different perspective. If you lead the team, get input

from team members, and consult with others who work in the organization, or with people who have managed similar projects.

Use available tools like a Failure Mode & Effects Analysis, a SWOT Analysis that can help you in uncovering possible

threats. A Scenario Analysis can help you explore potential future threats.

Estimate Your Level of Risk 2

Once you’ve pinpointed and identified any threats you

may be facing, you must evaluate both the chances of

these threats actually happening and the possible

impact they would have on your business.

One way to do this is to make a best estimate in terms

of probability of this particular event happening, and

then multiply this probability by the amount of money

it could cost you to make things right in the event it

actually occurred. The result is a value attached to

this particular risk:

Probability of Event X Cost to Repair = Risk Value

For example, perhaps you’ve identified a risk and it has to do with the possibility your rent may be substantially increased. Your thought is that there may be an 80% of this actually happening in the next year. You’ve determined this because you know your landlord has

increased the rests for other businesses in the complex. If this does come about, it would cost an additional $500,000 over the course of the next year.

The Risk Value of having a rent increase would be:

Probability of Event of 0.80 X Cost of Event of $500.000 = Risk Value of $400,000

A Risk Impact/Probability Chart can be used to assess your risk. This

helps to identify exactly which risks you should be focusing on. Take

your time and do not rush through this step. Collect as much

information as possible so that you are accurately estimating the

probability of a particular event actually happening as well as the

costs associated with setting things right and repairing the damage

.Past data can be used to guide you if you have no other way to

accurately forecast things.

low risk

Minimum risk

Moderate risk

low risk

low risk

low risk

High

risk

low risk

low risk

Minimum risk

Minimum risk

Minimum risk

Minimum risk

Moderate risk

Moderate risk

Moderate risk

Moderate risk

High

risk

High

risk

Extreme risk

Extreme risk

Extreme risk

Negligibile Minor Moderate Significant Severe

High

risk

High

risk

High

risk

How to Best Manage the Risk

Once you've estimated the value of the potential risks you face, you

can begin considering ways to manage these.

It only makes sense to find approaches that are cost-effective. You

do not want to spend more to eliminate a possible risk than it

would cost you if the event actually occurred.

It might make more sense to live with the risk than to go to great

lengths, spending way too much to eliminate it.

However, you do not want to compromise where personal safety or

ethics are concerned. These risks do need to be addressed.

Avoid the Potential Risk

• In some instances, it makes more sense to avoid the potential risk. This may mean not being involved in a new business venture, turning a project down, and/or just skipping a risky activity. • These are viable and good options when there is no advantage in assuming the risk, or when the potential costs of dealing with the effects are simply too much. • However you need to understand that in avoiding a possible risk, there is a chance of missing out on a good opportunity. • You may want to do a What If Analysis, exploring your options while making the decision.

Share Your Risk with Others Another option is to share the risk, as well as any potential gain, with others.

These could be individuals, teams, another company or organization or even third parties. For example, you already share the risk when you buy insurance for your office building and inventory with an insurance company (a third party), or when you take on a partner in a joint initiative to develop a product.

Decide to Accept the Risk You always reserve the option to accept this risk. This may be all you can do

when you cannot mitigate or prevent the risk, when any possible loss turns out to

be less than it would cost to insure against the risk, or when any possible gain is

worth taking the risk.

• For example, you might decide to accept the risk of launching a project late as long as the possible sales will cover the costs. • Prior to deciding to accept a risk, do an Impact Analysis to look at all the possible consequences of accepting the risk. • There may be nothing you can do about the risk, but it may be smart to decide on a contingency plan to deal with any consequences.

Controlling a Particular Risk If you decide to accept a particular risk, there are several ways that you can diminish its impact.

Conducting Business Experiments can be a good way to evaluate and reduce a risk. You would roll out whatever high-risk activity you are contemplating, but on a very small scale and in a manner that you can control. Experiments can be used to see where problems happen, discovering ways to detect and prevent risks prior to introducing this activity on a substantially larger scale.

• Detecting risks involves pinpointing the stages in a process when something could take a wrong turn, and putting specific steps in place to promptly rectify the problems should they happen. Detecting includes double-checking all financial reports, doing safety testing before the release of a product, and/or installing some type of sensors to find defects in products. • Preventing risks means striving to prevent a particular high-risk circumstance from occurring. This involves conducting training on health and safety, protecting corporate servers with firewalls, and totally cross-training team members.

• Plan Do Check Act can be utilized to control the impact a risky situation has on the company or organization. It is similar to conducting a Business Experiment since it has to do with testing the various ways you can diminish a risk. This particular tool provides four phases that guide you through a complete analysis of the whole situation, the creation of and testing of a certain possible solution, seeing how well it worked, and if successful, incorporating the solution.

Main Points

• Risk Analysis has been proven to be effective in identifying and assessing things that could potentially have an adverse effect on the success of a project or business. • It helps you examine the real or potential risks that you or your company or organization are faced with. It helps you determine whether to move forward on something or not. • You conduct a Risk Analysis to identify potential threats and estimate the possibility of them happening. • Once you’ve determined the value of your potential risks, you can begin to look at ways to effectively manage them. • You may decide to avoid the risk altogether, share it with others, or accept the risk and take steps to reduce the impact it could have. • It is critically important that you are thorough when conducting your Risk Analysis, and look at all the potential impacts they could have if the risks actually happened. • You must be mindful of the costs involved, all the ethical considerations and everyone’s personal safety.