Risk Analysis and Risk Management - Mind Tools

Learn how Risk Analysis can help you to identify risks, and adopt a strategy to manage any potential ... to explore your options when making your decision. MENU JoinMindTools Login SkillAreas Back SkillAreas LeadershipSkills TeamManagement StrategyTools ProblemSolving DecisionMaking ProjectManagement TimeManagement StressManagement CommunicationSkills CreativityTools LearningSkills CareerSkills LearningFormats Back LearningFormats Bite-SizedTraining BookInsights(Audio) CareerCafe ExpertInterviews(Audio) Forums Infographics Learningstreams MindToolsApp MyLearningPlan Quizzes TemplatesandWorksheets Videos ForYourOrganization Newsletter Blog AboutUs HomeDecisionMakingDecidingWhethertoGoAheadRiskAnalysisandRiskManagement BytheMindToolsContentTeam BytheMindToolsContentTeam (144) 144ratings 12MINREADRiskAnalysisandRiskManagementAssessingandManagingRisks   Riskismadeupoftwoparts:theprobabilityofsomethinggoingwrong,andthenegativeconsequencesifitdoes. Riskcanbehardtospot,however,letalonetoprepareforandmanage.And,ifyou'rehitbyaconsequencethatyouhadn'tplannedfor,costs,time,andreputationscouldbeontheline.Similarly,overestimatingoroverreactingtoriskscancreatepanic,anddomoreharmthangood. ThismakesRiskAnalysisanessentialtool.Itcanhelpyoutoidentifyandunderstandtherisksthatyoucouldfaceinyourrole.Inturn,thishelpsyoutomanagetheserisks,andminimizetheirimpactonyourplans. Byapproachingriskinalogicalmanneryoucanidentifywhatyoucanandcannotcontrol   ,andtacklepotentialproblemswithmeasuredandappropriateaction.Thiscanthenhelptoalleviatefeelingsofstressandanxiety,bothinandoutsideofwork. Inthisarticleandvideo,welookathowyoucanidentifyandestimaterisks.Youwillthenlearnhowastrategyofavoiding,sharing,accepting,andcontrollingcanhelpyoutomanageriskeffectively. Clickhere   toviewatranscriptofthisvideo. WhatIsRiskAnalysis? RiskAnalysisisaprocessthathelpsyoutoidentifyandmanagepotentialproblemsthatcouldunderminekeybusinessinitiativesorprojects.However,itcanalsobeappliedtootherprojectsoutsideofbusiness,suchasorganizingeventsorevenbuyingahome! TocarryoutaRiskAnalysis,youmustfirstidentifythepossiblethreatsthatyouface,thenestimatetheirlikelyimpactsiftheyweretohappen,andfinallyestimatethelikelihoodthatthesethreatswillmaterialize. RiskAnalysiscanbecomplex,asyou'llneedtodrawondetailedinformationsuchasprojectplans,financialdata,securityprotocols,marketingforecasts,andotherrelevantinformation.However,it'sanessentialplanningtool,andonethatcouldsavetime,money,andreputations. WhentoUseRiskAnalysis Riskanalysisisusefulinmanysituations: Whenyou'replanningprojects,tohelpyoutoanticipateandneutralizepossibleproblems. Whenyou'redecidingwhetherornottomoveforwardwithaproject. Whenyou'reimprovingsafetyandmanagingpotentialrisksintheworkplace. Whenyou'repreparingforeventssuchasequipmentortechnologyfailure,theft,staffsickness,ornaturaldisasters. Whenyou'replanningforchangesinyourenvironment,suchasnewcompetitorscomingintothemarket,orchangestogovernmentpolicy. HowtoUseRiskAnalysis Tocarryoutariskanalysis,followthesesteps: 1.IdentifyThreats ThefirststepinRiskAnalysisistoidentifytheexistingandpossiblethreatsthatyoumightface.Thesecancomefrommanydifferentsources.Forinstance,theycouldbe: Human–Illness,death,injury,orotherlossofakeyindividual. Operational–Disruptiontosuppliesandoperations,lossofaccesstoessentialassets,orfailuresindistribution. Reputational–Lossofcustomeroremployeeconfidence,ordamagetomarketreputation. Procedural–Failuresofaccountability,internalsystems,orcontrols,orfromfraud. Project–Goingoverbudget,takingtoolongonkeytasks,orexperiencingissueswithproductorservicequality. Financial–Businessfailure,stockmarketfluctuations,interestratechanges,ornon-availabilityoffunding. Technical–Advancesintechnology,orfromtechnicalfailure. Natural–Weather,naturaldisasters,ordisease. Political–Changesintax,publicopinion,governmentpolicy,orforeigninfluence. Structural–Dangerouschemicals,poorlighting,fallingboxes,oranysituationwherestaff,products,ortechnologycanbeharmed. Note: Itisvitalthatyouconsideranyandallriskstoyourteammembers.Managersandleadershavea dutyofcare   ,andsowillhavelegalandmoralobligationstokeeptheiremployeessafe. Youcanuseanumberofdifferentapproachestocarryoutathoroughanalysis: Runthroughalistsuchastheoneabovetoseeifanyofthesethreatsarerelevant. Thinkaboutthesystems,processes,orstructuresthatyouuse,andanalyzeriskstoanypartofthese.Whatvulnerabilitiescanyouspotwithinthem? Askotherswhomighthavedifferentperspectives.Ifyou'releadingateam,askforinputfromyourpeople,andconsultothersinyourorganization,orthosewhohaverunsimilarprojects. ToolssuchasSWOTAnalysis   ,FailureModeandEffectsAnalysis   ,PMESII-PT   ,andPESTAnalysis   canalsohelpyouuncoverthreats,whileScenarioAnalysis    helpsyoutoexplorepossiblefuturethreats. Tip: BemindfulnottoconfuseRiskAnalysiswithRiskAssessment.Thelatteristheprocessofformallyanalyzingandmitigatingtherisksandhazardsofanactivitybyanemployeefortheirhealthandsafety. 2.EstimateRisk Onceyou'veidentifiedthethreatsyou'refacing,youneedtocalculateboththelikelihoodofthesethreatsbeingrealized,andtheirpossibleimpact. Onewayofdoingthisistomakeyourbestestimateoftheprobabilityoftheeventoccurring,andthentomultiplythisbytheamountitwillcostyoutosetthingsrightifithappens.Thisgivesyouavaluefortherisk: RiskValue=ProbabilityofEventxCostofEvent Asasimpleexample,imaginethatyou'veidentifiedariskthatyourrentmayincreasesubstantially. Youthinkthatthere'san80percentchanceofthishappeningwithinthenextyear,becauseyourlandlordhasrecentlyincreasedrentsforotherbusinesses.Ifthishappens,itwillcostyourbusinessanextra$500,000overthenextyear. Sotheriskvalueoftherentincreaseis: 0.80(ProbabilityofEvent)x$500,000(CostofEvent)=$400,000(RiskValue) YoucanalsouseaRiskImpact/ProbabilityChart   toassessrisk.Thiswillhelpyoutoidentifywhichrisksyouneedtofocuson. Tip: Don'trushthisstep.Gatherasmuchinformationasyoucansothatyoucanaccuratelyestimatetheprobabilityofaneventoccurring,andtheassociatedcosts.Usepastdataasaguideifyoudon'thaveanaccuratemeansofforecasting. HowtoManageRisk Onceyou'veidentifiedthevalueoftherisksyouface,youcanstarttolookatwaysofmanagingthem. Tip: Lookforcost-effectiveapproaches–it'srarelysensibletospendmoreoneliminatingariskthanthecostoftheeventifitoccurs.Itmaybebettertoaccepttheriskthanitistouseexcessiveresourcestoeliminateit. Besensibleinhowyouapplythis,though,especiallyifethicsorpersonalsafetyareinquestion. AvoidtheRisk Insomecases,youmaywanttoavoidtheriskaltogether.Thiscouldmeannotgettinginvolvedinabusinessventure,passingonaproject,orskippingahigh-riskactivity.Thisisagoodoptionwhentakingtheriskinvolvesnoadvantagetoyourorganization,orwhenthecostofaddressingtheeffectsisnotworthwhile. Rememberthatwhenyouavoidapotentialriskentirely,youmightmissoutonanopportunity.Conducta"WhatIf?"Analysis    toexploreyouroptionswhenmakingyourdecision. SharetheRisk Youcouldalsoopttosharetherisk–andthepotentialgain–withotherpeople,teams,organizations,orthirdparties. Forinstance,youshareriskwhenyouinsureyourofficebuildingandyourinventorywithathird-partyinsurancecompany,orwhenyoupartnerwithanotherorganizationinajointproductdevelopmentinitiative. AccepttheRisk Yourlastoptionistoaccepttherisk.Thisoptionisusuallybestwhenthere'snothingyoucandotopreventormitigatearisk,whenthepotentiallossislessthanthecostofinsuringagainsttherisk,orwhenthepotentialgainisworthacceptingtherisk. Forexample,youmightaccepttheriskofaprojectlaunchinglateifthepotentialsaleswillstillcoveryourcosts. Beforeyoudecidetoacceptarisk,conductanImpactAnalysis   toseethefullconsequencesoftherisk.Youmaynotbeabletodoanythingabouttheriskitself,butyoucanlikelycomeupwithacontingencyplan   tocopewithitsconsequences. However,it'simportanttobearinmindthateveryone'sdefinitionof"acceptablerisk"isdifferent,sobesuretocommunicatewithothersbeforeyoumakeadecision,andusetoolsliketheProspectTheory   topredictpeople'sdifferentreactionstorisk. ControltheRisk Ifyouchoosetoaccepttherisk,thereareanumberofwaysinwhichyoucanreduceitsimpact. BusinessExperiments   areaneffectivewaytoreducerisk.Theyinvolverollingoutthehigh-riskactivitybutonasmallscale,andinacontrolledway.Youcanuseexperimentstoobservewhereproblemsoccur,andtofindwaystointroducepreventativeanddetectiveactionsbeforeyouintroducetheactivityonalargerscale. Preventativeactioninvolvesaimingtopreventahigh-risksituationfromhappening.Itincludeshealthandsafetytraining,firewallprotectiononcorporateservers,andcross-trainingyourteam. Detectiveactioninvolvesidentifyingthepointsinaprocesswheresomethingcouldgowrong,andthenputtingstepsinplacetofixtheproblemspromptlyiftheyoccur.Detectiveactionsincludedouble-checkingfinancereports,conductingsafetytestingbeforeaproductisreleased,orinstallingsensorstodetectproductdefects. Plan-Do-Check-Act    isasimilarmethodofcontrollingtheimpactofariskysituation.Likeabusinessexperiment,itinvolvestestingpossiblewaystoreducearisk.Thetool'sfourphasesguideyouthroughananalysisofthesituation,creatingandtestingasolution,checkinghowwellthisworked,andimplementingthesolution. Alternatively,JamesReason'sSwissCheeseModelofSystemAccidentsexploreshowthereisnosinglesolutiontominimizingrisk,butratherusesacombinationofmethodstogetthebestresults. KeyPoints RiskAnalysisisaprovenwayofidentifyingandassessingfactorsthatcouldnegativelyaffectthesuccessofabusinessorproject.Itallowsyoutoexaminetherisksthatyouoryourorganizationface,andhelpsyoudecidewhetherornottomoveforwardwithadecision. YouperformaRiskAnalysisbyidentifyingthreats,andestimatingthelikelihoodofthosethreatsbeingrealized. Onceyou'veworkedoutthevalueoftherisksyouface,youcanstartlookingatwaystomanagethemeffectively.Thismayincludechoosingtoavoidtherisk,sharingit,oracceptingitwhilereducingitsimpact.Notonlycanthishelpyoutomakesensibledecisionsbutitcanalsoalleviatefeelingsofstressandanxiety. It'sessentialthatyou'rethoroughwhenyou'reworkingthroughyourRiskAnalysis,andthatyou'reawareofallofthepossibleimpactsoftherisksrevealed.Thisincludesbeingmindfulofcosts,ethics,andpeople'ssafety. Thissiteteachesyoutheskillsyouneedforahappyandsuccessfulcareer;andthisisjustoneofmany toolsandresourcesthatyou'llfindhereatMindTools.Subscribetoour freenewsletter,or jointheMindToolsClubandreallysuperchargeyourcareer! AddthisarticletoMyLearningPlan MarkarticleasComplete ShowRatings HideRatings Ratings Ratethisresource Freeloginneeded. Login / CreateLogin. GetUnlimitedAccesstoMindToolsandSave25% Make2022theyearthatyoutakeyourcareerandconfidencetothenextlevel.Accessourexclusivecontentandcareercoaches,andsave25%untilApril6! JoinMindTools JointheMindToolsClub SignupforourFREEnewsletter Comments(29) Overamonthago Michelewrote Himironat, Terrificsuggestion!And,thankyouforyourfeedbackonthearticle.WouldyouconsidercreatinganewpostintheCareerCafeForum?Withsomanypeopleworkingremotely,othersmayhavesuggestionsonhowriskmanagementcanbetackledvirtually. Michele MindToolsTeam Overamonthago mironatwrote Greatarticle.I'dbereallyinterestedinlearningabouttheapproachestoriskmanagementandriskworkshopsinavirtualenvironment!:) Overamonthago BillTwrote HiLonette, Thankyouforthefeedback.Wealwaysenjoyhearingfromourreaders,ithelpsustoimprovewhatneedstobeimproved. BillT MindToolsTeam ViewAllComments PreviousArticle Previous NextArticle Next SubscribetoOurNewsletter Receivenewcareerskillseveryweek,plusgetourlatestoffersandafreedownloadablePersonalDevelopmentPlanworkbook. ReadourPrivacyPolicy SubscribetoOurNewsletter Receivenewcareerskillseveryweek,plusgetourlatestoffersandafreedownloadablePersonalDevelopmentPlanworkbook. ReadourPrivacyPolicy GetUnlimitedAccesstoMindToolsandSave25% Accessourexclusivecontentandcareercoaches,nowwith25%offuntilApril6! JoinMindTools 1DaytoGo! AllowYourTeamtoLearnFromHome Discover MindToolsforBusiness-empoweringeveryoneinyourorganizationtothriveatworkwithaccesstolearningwhentheyneedit.  FindOutMore 1DaytoGo! 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