Everything in life comes with some risk. You take a risk every time you walk, drive, get married, stay single, go to college, or go to work. Even doing nothing can’t keep you from taking risks. After all, people who don’t move much can get fat, develop diabetes, and have high blood pressure.
Even doing nothing comes with risks, so how do you decide if a project or change in your business is worth the risk?
To conduct a risk analysis there are several different parts. One is a simple analysis of risks, how likely they are to happen, and what would happen if they did. The second step is making a risk matrix to help your team see how important different risks are. The third is a plan for how to deal with the risks that can’t be avoided and are part of your plan.
A risk analysis can tell you that it might rain…
Team members could decide not to play in the games…
If not managed well, the evening bonfire could turn into a wildfire. This type of risk analysis will also tell you that it is very unlikely to rain since you live in a desert, but that bonfires are very risky when it is very dry.
A risk analysis matrix will help you see how important each risk is, so you can decide which ones are important enough to manage and which ones you can just avoid.
A risk analysis management plan would almost certainly include choosing alternate locations in case it rains, activities to get people excited about the games, and fun evening activities that don’t involve fire.
Here is how to conduct a risk analysis;
Once you know what your project is, what its goals are, and who on your team has the skills to do the work, you can move on to conduct a risk analysis. Having the money and time to hire an outside expert to conduct a risk analysis is great, but if you’re like most of us, you may have to become an expert yourself. If that’s the case, don’t worry; the process isn’t too hard.
Step 1: List the risks
People who live with risk every day are the only ones who truly understand it. Your sales team knows the risks that come with overbidding or underbidding, and your marketing team knows the risks that come with trying out a new and risky way of communicating. So, when you start making a list of risks, you’ll need to talk to your team. To do this, you can talk to each team member individually, hold brainstorming sessions, look at evaluations of similar projects from the past, or (best case scenario) do all three.
Step 2: Think about the risks.
To evaluate risks, you have to score your answers to two related questions:
1.How likely is it that this problem will happen?
2. How bad would this problem be for our project if it happened?
You’ll give each risk a score between 1 and 9, with 1 being the least risky or having the least effect and 9 being the riskiest or having the most effect. So, going back to the company picnic, the chance that Margaret in Marketing will forget to bring the potato salad is pretty high (maybe an 8), but it wouldn’t have much of an effect on the event (perhaps a 2). On the other hand, the chance of a big storm may be low, but it would be very bad if it happened.
Risk evaluation can be a complicated process that often uses mathematical models. It will almost certainly require at least a little bit of research. You might not want to model how likely it is that certain things will happen at your picnic, but you should at least look at weather trends to see how likely it is that it will storm hard in the afternoon.
After your analysis is done, you should have a list of risks with two numbers next to each one. It helps to give each risk a letter so that they can be charted on the risk analysis matrix more easily.
Step 3: Make a Risk Analysis Matrix
A risk analysis matrix is a square chart or graph with four boxes. Each box represents a different level of risk: severe, high, elevated, and guarded. Along one axis of the graph, the numbers 1–9 show how likely something is to happen, and along the other axis, the numbers 1–9 show how bad or important something is. You can color code your chart like this if you want to. When you make a graph of your threats, it will be easy to see which ones are the biggest and most likely (and vice versa)
conduct a risk analysis the same way you would chart any other information by putting the letter that represents the risk where it belongs on the chart. A risk with a likelihood of 8 and a significance of 7 would be plotted in the red zone, meaning it is a major threat. A risk with a likelihood of 4 and a significance of 3 would be plotted in the blue zone, meaning it is a small risk.
Getting ready for a plan to manage risks
Now that you have your matrix, you can easily see and share information about the risks that could affect your planned project. This means you’re ready to think about how to deal with those risks based on how likely they are to happen and how bad they are.
There are only a few basic ways to deal with risk, no matter what business you’re in or what risks you’re thinking about. The style of risk management you choose will depend on the type of risk you’re facing. Here are your options, according to the Association for Project Management:
Any risk that is easy to get rid of from your project should be gotten rid of. For the company picnic, it makes sense to say “no” to a bonfire.
Before getting started, you can reduce many risks by taking simple, low-cost steps. For example, if one of your risks was negative responses from upper management, a simple way to lower that risk might be to include upper management in early brainstorming and decision-making.
What will you do if you run into this problem? What is your backup plan? In the case of the picnic, having an indoor location is a great way to avoid a weather-related risk.
Can someone else take responsibility for your risk? For example, if you hired a company to set up your picnic, you can also ask them to think about what to do if it rains and give you some good options.
You should take some risks. Would you risk being embarrassed if your alma mater asked you to give the graduation speech? Most likely, you’d say “yes” and be okay with the idea that you might blank out at the microphone. On the other hand, some risks are so small that you can easily learn how to deal with them. Having no potato salad is such a risk. Yes, Margaret might forget to bring it, but so what?
Now that you know your options, you can go through your risk matrix and assign the right answers to each item, either with the help of a lawyer or your team members. This things will help you conduct a risk analysis in better way.
Making a plan for dealing with risks
Your risk management plan is a written record of all the work you’ve done so far, including your matrix and the strategies you’ve chosen for each risk. If the strategy involves more than just accepting the risk, you’ll need to work with stakeholders to figure out the best way to deal with it if it comes true.
Your team members and anyone else who has a stake in the matter should read, edit, and sign this document so that you all agree on the best way to handle each situation. Once you conduct a risk analysis and your plan is approved, you’ll be ready to reduce or avoid many risks. Possibly even more important, you’ll have a “Plan B” ready in case big risks turn into real problems.
A plan for conduct a risk analysis is basically insurance against a wide range of possibilities. How good is it? NASA says that a well-thought-out plan for managing risks has been a big part of the success of many high-profile missions, like fixing the Hubble Telescope. A Case Study document about risk management at NASA says that the matrix made for space-related projects was more complicated than most. This is because some projects have budgets in the billions of dollars and are watched by people all over the world, while others are almost unnoticed by the public. But the result was well worth the hard work:
By figuring out the level of risk early on in the program or project, program and project managers can come up with and implement the right mission assurance and conduct a risk analysis, management strategies and requirements, as well as effectively communicate the level of risk that is acceptable.
Unless you work for SpaceX, you probably won’t have to worry about losing a big satellite or failing to save a multi-billion dollar space telescope. But it doesn’t matter what kind of risk you take. For you and your coworkers, your business is as important as a rocket to Mars may be for NASA. Your company could die if you lost a big product, client, or project. Conduct a risk analysis, management and plan can help you make sure you never risk more than you can afford to lose.