How to perform a risk analysis (with tips)

By Indeed Editorial Team

Updated 12 December 2022

Published 20 May 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Risk analysis is a highly effective technique for assessing and minimising risks during decision-making and project planning. It allows you to become aware of risks during the decision-making process and make informed decisions that account for that level of risk. It's also a great technique for developing your critical thinking and analytical skills, too. In this article, we discuss what risk analysis is, how to perform a risk analysis, and give you some tips to get the most out of your risk analysis.

What is risk analysis?

Risk analysis is a technique professionals in almost every industry use to assess the risks presented by a particular course of action. Risk analysis can help assess the risks that arise during a particular project or as the result of a major decision. Risk analysis can:

  • Minimise the impact of a negative event

  • Evaluate the benefit-to-risk ratio of a specific project before it begins

  • Prepare for emergencies or other adverse events

  • Eliminate specific risks during a planning process

Risk analysis is a powerful tool for making informed business decisions. It allows you to evaluate the potential benefits and risks of your available options, assess the likelihood of specific risks occurring during a project and decide whether you want to proceed or make adjustments. It can also offer an organisation general risk management by assessing the risks presented during day-to-day operations. Risk analysis is also a useful tool when making decisions about your career. For example, you could make a personal risk analysis for a career change.

Risk management is a major industry and as such, risk analysis is a highly sought-after professional skill because it demonstrates that a person has the ability to perform a critical analysis of a project, assess risks, identify potential problems and overcome them before they occur.

Related: What are the seven different types of business risk?

How to perform a risk analysis

To perform a risk analysis for most situations, you can follow these six steps:

1. Identify risks

The first and most important step in performing a risk analysis is to make a list of the potential risks you could encounter as a result of the decisions you're making. The sources of risk you may encounter are specific to the decision you're making, so it's best to be thorough.

You can identify risks by assessing the potential threats to your decision or project, discussing with your team members who may offer an alternative point of view and analysing available data from previous projects. It may also be useful to contact other teams that have completed similar projects to gain their perspective and input on potential risks.

Related: How to use risk identification within a risk management plan

2. Define the level of uncertainty

For each risk you've identified for your project or decision, the next step is to assess how much uncertainty surrounds each one. Each risk contains a varying degree of uncertainty which makes it hard to quantify. Regardless of whether the degree of uncertainty is high or low, it's important to attempt to calculate your best estimate as it will be used to inform later steps in the risk analysis process.

For example, if the risk you've identified is that your competitor could release a similar product to the one you're planning to release, it's impossible to know how long it will take for them to implement a new product. However, you can get narrow the degree of uncertainty by performing competitor analysis to better understand their capabilities.

Related: How to calculate uncertainty (plus definition and jobs)

3. Estimate the impact of uncertainty

Once you've identified potential risks and their level of uncertainty, the next step is to estimate their impact. There are many different ways to define the impact of risk, and they largely depend on the specifics of the project or decision and the specific risk. One general method for calculating the impact of a risk is to estimate the probability of it occurring and multiply it by the cost of the event. This is called a risk value estimation.

For example, if you estimate the risk of your competitor releasing a similar product to be 75%, and you estimate that it will cost your business £100,000 due to the impact on your sales, you can calculate the risk value as:

0.75 (the probability of the event) x £100,000 (the cost of the event) = £75,000 (the risk value)

To aid in estimating the costs of certain risks, you should gather as much information as possible about probabilities and costs of different events occurring so that you can make the best possible estimate. You may want to use internal data or perform historical research on similar businesses or competitors to inform your estimates.

Related: What is financial risk? (Types and how to mitigate them)

4. Complete the risk analysis model

With the information you've gathered so far, you can now form the basis of your risk analysis model. This uses a compilation of your inputs, which are your risks, uncertainties and their impact. The outputs of a risk analysis model are the outcomes of different uncertainties and the likelihood of one or more occurring. The outputs of a risk analysis model are typically represented as a range based on the accuracy of your uncertainty estimates.

There are numerous risk analysis software packages available that can allow you to simulate risk probabilities and calculate the probability of different results. Risk analysis software is often complicated and requires detailed inputs, but can be highly useful to identify unexpected interactions of different risks that may occur simultaneously.

Related: What is a risk management framework? A comprehensive guide

5. Analyse your results

Now that you have the results of your risk analysis, you can begin the process of analysing and interpreting the results which will depend on the types of risk you're assessing. It may be helpful to summarise the results using visuals such as charts or graphs. They're a great way to convert complex data into readable information quickly and efficiently.

This is also your opportunity to assess whether the outputs of your analysis are realistic and validatable. If the model has designated a certain risk as unrealistically likely or unrealistically expensive if it should occur, you can go back and adjust your model to give you a more realistic estimate.

Related: 9 types of estimating techniques for project management

6. Implement necessary solutions

The final step in risk analysis is to decide which risks are acceptable and which risks are not. For those that aren't acceptable, you should implement the necessary solutions to mitigate that risk. This could mean proceeding with your project under specific conditions to mitigate risks, accepting the costs of a specific risk should it occur or declining to start the project because the risks are too high compared with the gains.

The outcomes of your risk analysis will allow you to make informed decisions during the project planning process and make adjustments that will increase the chances of success for the project within its defined goals.

Tips for performing a risk analysis

Here are some tips to get the best out of the risk analysis process and benefit from minimising risks during your decision-making processes:

Be thorough

To get the best out of a risk analysis process, it's important to be thorough. The more potential risks you can identify, the more detail you can provide about their uncertainty, and the more accurately you can estimate the consequences will allow you to get a comprehensive risk analysis for your decision or project. If you don't provide enough detail, your assessment may be inaccurate or miss a potential risk.

Related: How to perform effective risk analysis in project management

Think creatively

When identifying risks and their impact, it's often necessary to think creatively. Consider your decisions from a variety of perspectives and invite others to comment on your decisions to identify potential risks from their perspective. Similarly, a decision may appear to have beneficial outcomes, but there can also be unintended results that you might miss during your risk analysis process. Because of this, it's best to prepare for unforeseen consequences during the decision-making process.

Related: 10 useful tips to help you with thinking out of the box

Consider hiring a risk management consultant

Risk analysis is a highly effective tool for decision-making, but it can also be a complicated and involved process. In some cases, especially for large organisations, it may be a good idea to hire a risk management consultant who can help provide a more comprehensive and detailed risk analysis that factors in advanced statistical techniques.

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