What is Risk Analysis?
Risk analysis is a broad term that is used in a number of different settings. In each instance, the term refers to the evaluation of the potential risk inherent in an upcoming transaction and the identification of several different options in how to proceed. Often, these options are designed to minimize the risk while obtaining the most benefit, or at least finding ways to protect yourself while taking the risk.
In the business world, risk analysis is one of the primary tools used in the process of risk management. Within this setting, the business looks at how various operations, campaigns, and expansions are likely to impact the financial stability of the company. For example, the analysis may take a look at the costs of designing, marketing, and manufacturing a new product or service and weigh those costs against the volume of potential sales, how long it will take to recoup the initial investment in the new product, and what impact the new offering will have on the public image of the business. When the risk analysis indicates that all or most of the factors are favorable, the company moves forward with the product launch. If not, each of the individual risk factors are further assessed, with an eye of determining if there is some way to minimize the risk and ensure the profitability of the project.
When it comes to growing a business, risk analysis is an important part of any constructive business planning. The business assessment often includes understanding both the risks of maintaining the company in its current state as well as determining what could happen if new policies, procedures or product lines were introduced into the corporate culture. Taking the time to engage in this level of assessment helps companies to avoid making hasty decisions that may have long term repercussions that do a great deal of damage to the business.
Risk analysis is not necessarily confined to understanding the degree of financial risk involved. Both businesses and non-profit organizations often engage in risk assessment that focuses primarily on the public’s perception. Because a favorable public perception helps any organization to move closer to success, changes in marketing plans, public relations efforts, and community involvement strategies are often reviewed before their launch. The idea is to determine if there is a risk of negatively impacting the current public image of the entity. If the answer is yes, the proposed project may be retooled or abandoned altogether. If the analysis indicates an extremely low risk of damage to the public image, it is likely to move forward with few or no refinements taking place.
@hamje32 - I agree, but I think you’re describing risk management, not the actual analysis phase. Still, I concur, when the project begins, communication is the most important component in minimizing risks.
In my experience working with organizations who’ve conducted risk assessment analysis, I’ve found that in more than 80% of the cases, the risks that eventually materialized into actual emergencies could have been avoided if there were better communication.
Usually one person in the organization can see the writing on the wall, so to speak, but they don’t talk to the project manager and so he or she gets hit with the problem too late.
Communication, communication, communication—that should be the hallmark of any risk analysis program.
Quantitative risk analysis is all about putting numbers on your risks. In the software world our product is of course new software. We use programmers to develop the new software, but these new programmers are also used in custom software consulting solutions for customers. So, they have a customer billable hourly rate associated them.
When we involve these programmers in developing new product rollouts, we project how many hours it will take for them to complete the product and multiply that by their hourly rate. That’s one way we quantify and analyze risk.
If it takes them longer than their projected hours, then of course we have true cost overruns, because they could have been spending that time on billable work. In the end, of course, the new products tend to generate enough revenue to offset these losses, but that’s one way we quantify and track risk in our company. There’s always a dollar amount no matter what you do.
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