Risk analysis is an important activity used to identify and analyze potential risks facing an organization. This process helps organizations to manage uncertainty and encourage informed decision-making; it is an integral part of enterprise risk management.
By using risk analysis, organizations can identify potential risks and take action to mitigate potential consequences. These risks can range from new competitors to equipment failure. The essence of risk analysis is identifying and assessing the potential harm of each risk and the likelihood that it will occur.
Some other benefits of risk analysis include:
- Improved security policies/procedures
- Increased communication and employee awareness
- Saved time, money, and reputation
The goal of risk analysis is to improve an organization’s security by being prepared; analyzing risk will help the process of allocating resources to enhance efficiency. So, how does an organization go about risk analysis?
The Process of Risk Analysis
Risk analysis is a complex process; an organization must take into account all internal and external contexts. Internal context might be financial data, and external context might be marketing forecasts. The structure and undertaking of risk analysis are outlined in depth in the risk management standard ISO 31000.
Organizations can break risk analysis down into simple steps:
1. Risk Identification
Establish existing and potential risks facing the company.
These can include:
- Human (injury, death, company culture)
- Reputational (loss of customer satisfaction, damaged market reputation)
- Financial (loss of revenue, loss of funding)
- Operational (distribution failures, failed internal processes)
- Natural (disease, natural disasters)
2. Risk Assessment
Analyze risks to establish possible impact as well as probability. Organizations must also consider potential opportunities and weigh the possible benefits with possible losses.
3. Risk Treatment
Using the knowledge gathered, a plan of action must be made. Treatment of risk will be determined by an organization’s risk appetite. Decisions must be made to take the risk, avoid the risk, or mitigate the risk if needed.
This process of risk analysis will help organizations detect when preventative action must be utilized when an opportunity outweighs a risk, or when a risk threatens its core objectives.
If an organization wants to succeed and continue to do so, risk analysis can never be a one-and-done process. After the long and complex exercise of analyzing risk, this procedure must be integrated into the company as a continual process.
Risk and opportunity are ever-changing, as is the internal and external context of an organization. PDCA (plan, do, check, act) is a method seen in ISO 31000 that acts as a tool to guide organizations in the establishment of continuous improvement. This cycle aims to keep risk management fresh and up-to-date; an organization’s results will be consistent and relevant.
The method is structured in the following way:
- Plan – Once an organization completes a successful risk analysis, resources must be allocated, procedures made, ways to mitigate threats must be fully thought out.
- Do – An organization will then execute the plan.
- Check – After the plan is carried out, results must be continuously checked and recorded.
- Act – Finally, the results should be analyzed and discussed so that improvements can be made, if needed, and the cycle begins again.
PDCA is a great tool for ensuring constant results and improvement. Risk analysis is a significant part of risk management as a whole, and the process must always be embedded into every aspect of an organization. Risk management is making decisions based on the current, most accurate, information. Without analyzing risk and reward, an organization will never stay successful and achieve its objectives.
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