Knowing how to perform a risk analysis is useful for almost any type of decision-making process — regardless of your role or professional sector. When you analyze risk, you can develop soft skills such as critical thinking and problem-solving.
In this article, we explore what it means to analyze risk and discuss how to perform risk analysis in business decisions.
Table Of Contents
1 What is Risk Analysis?
2 5 Risk Analysis Methods You Should Know
2.1 1. Bow tie analysis
2.2 2. Delphi
2.3 3. Analysis SWIFT
2.4 4. Probability/consequence matrix
2.5 5. Decision tree analysis
3 What are the Stages in Conducting a Risk Analysis
3.1 1. Identify the risks
3.2 2. Determine the level of uncertainty
3.3 3. Estimate the impact of uncertainty
3.4 4. Complete the risk analysis model
3.5 5. Analyze the results
3.6 6. Apply the solution
What is Risk Analysis?
Risk analysis helps identify potential problems that can arise during a project or process. You can analyze risks for: According To ProjectManager Risk Analysis How to Analyze Risks on Your Project – Project Management Training
- Reduce the impact of negative events.
- Evaluate whether there is more benefit to a project than risk before initiation.
- Plan the company’s response to emergencies or other adverse events.
- Eliminate risk during the process.
Risk analysis is a useful tool to use in the decision-making process. This allows you to identify the potential benefits and drawbacks of each option, evaluate the likelihood of problems occurring and decide whether to move forward considering the risks.
Once you have identified potential risks, you can determine how to manage them and even develop a comprehensive prevention plan.
5 Risk Analysis Methods You Should Know
If you are interested in conducting a risk analysis, there are several methods to choose from, including these five:
1. Bow tie analysis
Bow tie analysis is a risk analysis method used to manage and reduce risk. You begin this process by looking at potential risks and dividing them into two categories: one that includes all potential contributing factors and another that lists all potential consequences.
From there, you can create a new practice that addresses each potential cause and consequence.
For example, if you work in the food sector, you could perform a Bow tie analysis to determine which event could cause a power outage and how it would affect your suppliers and the food you store on site.
After that, you will list all the potential ways to avoid a power outage as well as what to do in the event of a power outage.
2. Delphi
The Delphi technique is a risk analysis method similar to brainstorming, but the difference is that the Delphi technique relies heavily on using expert opinion throughout the process.
This opinion makes it possible to evaluate, identify and analyze risks individually. From there, each expert reviews the other risks to create a list of risks, which can include all potential risks and consequences.
Someone who works in retail, for example, might take the time to review studies on theft and what experts believe are key risk factors.
This would allow the company to review the safety of its workspace and install cameras or hire personnel to keep it safe.
3. Analisis SWIFT
The SWIFT approach, or “ structured what-if technology ” includes a team-based approach in a workshop environment. This process involves assessing how changes from a recently implemented plan or design might affect a potential project.
Using “what if” questions, the team can determine how the change might affect a future project or initiative.
For example, you can perform a SWIFT analysis when your company has to change protocols to meet new security restrictions imposed by the country. This will allow the company to determine whether the new protocol is effective or how to improve it to match.
4. Probability/consequence matrix
The probability/consequence matrix method is a prominent method for assessing the severity of risk when conducting qualitative risk analysis and can assess risk at all levels of the enterprise.
The probability/consequence matrix is a practical method for ranking the severity of various risks by calculating the potential impact of the risk.
This not only allows the company to better determine the overall risk severity, it also allows you to determine the main factors that contribute to each potential risk.
Gym owners interested in conducting a risk analysis can use a probability/consequence matrix to assess the rules and procedures regarding equipment and cleanliness in their facility. The probability/consequence matrix can help them determine which areas of the hygiene guidelines need attention to keep their business operating safely.
5. Decision tree analysis
Decision tree analysis methods help people and companies determine the best course of action in a scenario. To implement this method, the company begins by analyzing the proposed decision and mapping out the various potential outcomes of that decision.
Once you have listed all the potential outcomes, as well as the likelihood of them occurring, it is then possible to decide on the best course of action for each problem.
For example, if you work in the beauty industry, you might want to change your model to only accept appointments and not direct customers.
You can use this method to determine whether it is financially feasible to focus on appointments only, or whether it would be profitable and sustainable to offer a combination of the two types of appointments.
What are the Stages in Conducting a Risk Analysis
You can follow these six steps to analyze risk for most situations:
1. Identify the risks
List the potential risks you could face as a result of the actions you are considering. There are many different sources for potential problems, so be sure to be as thorough as possible when you analyze these risks.
To consider all threats, brainstorm potential risks with team members who may have different perspectives. Ask for input from other teams who have tried to analyze risks for similar projects.
You can also use tools like SWOT analysis, which stands for strengths, weaknesses, opportunities, and threats. This analysis allows you to compile a list of internal and external factors that can affect a project.
The factors can be both positive and negative, meaning you can effectively analyze risks and evaluate positive influences that can help you reduce those risks.
2. Determine the level of uncertainty
Once you have identified potential sources of risk, the next step is to understand how much uncertainty surrounds each source.
The degree of variation with each potential risk makes it difficult to quantify uncertainty. However, the uncertainty of each potential risk is important to have an estimate of the impact and to determine how significant the impact of each risk is.
For example, you may not know the exact price a new competitor will charge for their product, but you can estimate it by calculating the costs of production, marketing, distribution, and other factors.
3. Estimate the impact of uncertainty
Once you have identified the sources of risk and the degree of uncertainty associated with them, you can estimate their impact. To estimate the value of risk, the easiest method is to calculate the probability of an event occurring and multiply it by the cost of the event.
Value of risk = Probability of events x Cost of events
Example: Say you want to assess the risk that the cost of your product’s components will increase substantially. You estimate that there is a 75% chance of the event occurring based on market conditions. The cost to your business will be around 100,000,000 if the price of the components increases. You will calculate the risk value as follows:
Risk value = 0.75 x 100,000,000
Risk value = 75,000,000
It is important to be thorough in analyzing the risk. Gather as much information as possible about the potential costs and probabilities of events occurring so that you can make accurate estimates of possible losses.
Other risk management tools, such as a risk assessment matrix, can help you identify risks associated with a project and map out how to address them. Historical data can be a useful guide if you don’t have access to up-to-date information or forecasts.
4. Complete the risk analysis model
With the risks identified and the level of uncertainty estimated, you should now have a basic model of how to perform a risk analysis.
You can build a complete model by compiling all your inputs, which is your uncertainty. Then, evaluate the outputs, which are the result of different uncertainties and the probability of one or more occurring during the project.
Since your input is an approximate value, the output will be a range, not an exact result.
You can explore the output further by simulating the model using a computer program. Such a program can identify each risk and its probabilities, then calculate the probabilities of the different outcomes.
Each program uses a possible value for the uncertain input, then calculates the model output for that value. Simulations can yield average yield values, but are also useful for reviewing a wide range of potential outcomes, especially when there are multiple sources of uncertainty in the model that could interact in unexpected ways.
5. Analyze the results
Once you have your results, you can find the best way to interpret your findings, which may depend on the type of risk you are assessing.
Summarize the potential results using a chart or graph. Visuals help convey potentially complex statistical information quickly and efficiently.
Sensitivity analysis, which uses mathematical software to determine the uncertainty in the outputs to different assumptions in the model inputs, is another useful tool for analyzing the results of risk analysis models.
6. Apply the solution
Find the solution with the least risk and implement it. This may mean continuing with the project constrained by certain conditions or refusing to start the project because the risks outweigh the benefits.
You should also be prepared for other challenges that arise during the process that you cannot account for in your analysis.
You should review your progress regularly to ensure you are following the proposed solution and evaluate any changes in the project to make any necessary adjustments.
“Plan-Do-Check-Act ” is another method that helps in implementing the solution. The four phases in this cycle are:
- Plan: Create a solution for a risk.
- Do: Implement solutions on a small scale.
- Check: Review the results of the solution on a small scale to ensure its success.
- Act: Implement solutions at scale. Monitor progress and make changes as part of the cycle.