Risk Analysis Definition
Risk analysis is the procedure of analyzing and recognition of any kind of risk that could affect adversely in the primary business objective or any critical projects that are about to take place in an organization in regards to avoid or to take necessary initiatives to reduce such risks in the organization.
Risk analysis is about recognizing the negative or adverse effects that might happen in an organization before taking up any new important project or at the time of changing any essential objective in an organization that can impact the entity in any adverse way. The main objective is to estimate the extent of risk that may occur in the organization, the methods that can help to manage or reduce the risk, and the approaches that can help in managing such risks. There are certain methods that can help in analyzing the risk in the Projects that are about to take place in the organization like the Delphi technique, Swift analysis, Decision tree analysis Bowtie analysis, etc are some of them which will be explained in the later stage.
Process of Risk Analysis
Analyzing risk in a project can have both a positive and negative effect. Such effects can be in both materialistic and non-materialistic impacts on the organization. A risk is an uncertain event that can have both positive and negative impacts.
Any organization shall follow the process which is discussed as below –
Step #1 – Identification of Risk
The First step comes as identifying the risk. Team members shall gather all the inputs that shall be used in the projects and recognize the outcome of the projects and number of ways such is risk involved in the process, etc.
Step #2 – Analysing the Risk
After identification of risk, it’s likely to understand and assess the extent of risk and nature of risk that most likely to happen and to what extent it may occur to the organization shall be analyzed.
Step #3 – Evaluating the Risk
Analyzing of risk helps you to estimate the capacity of risk that may happen. Hence in evaluating the risk, the team shall rank the estimated risk in order to decide whether to accept such risk or not.
Step #4 – Treat the Risk
In this step, the team shall decide whether to continue the project or not, if so the project is accepted then they shall try to treat or resolve the issue by modifying any changes required in the project.
Step #5 – Review the Risk
As the risk is uncertain at any point in time, hence reviewing risk is important to evaluate risk in the project from time to time so as to avoid any future disturbance in the project.
Methods of Risk Analysis
Methods of Risk analysis include both Qualitative and Quantitative application techniques. Most projects shall apply Quantitative analysis in measuring risk, which overlooked in terms of formal qualitative risks. Here is some of the useful qualitative risk analysis considered to be applied in project management.
- Delphi Technique – Delphi Technique uses expert opinion to identify, analyze, and evaluate risks on an individual and anonymous basis.
- SWIFT Analysis – In SWIFT analysis, the team investigates how changes are approved designed or planned that may affect the project in any way. It is a systematic team-based approach.
- Decision Tree Analysis – This analysis is done by proposed decisions and finding different pathways and results that may occur due to proposed decisions. After all the probabilities are analyzed, the course of action of modifying and verifying further may take place.
Risk analysis is one of the essential procedures which is not done in a diligent way or not given enough significance will lead to many problems which may, in turn, could cause the failure of the project. The well-analyzed project will have chances of going more smoothly and have a higher chance of success and will do more to reduce risk than any risk plan, no matter how good it may be.
- Risk analysis helps you to take very calculated and accurate decisions while performing a project as without proper analysis management of the project would not be considered to give positive results.
- It helps in avoiding the potential losses that could occur in the future.
- It is measured on the basis of the probability so it cannot give the exact measurement of the risk exposure.
- Risk analysis is based on certain data and if there is any manipulation in the data or the data is wrong then it will not give the correct results
- It requires the time and expertise of the person conducting the analysis. In case the person is not aware of all required techniques and methods then the desired purpose cannot be solved. Also, there is no standard method for its calculation, so it depends on the personal approach.
Quantitative vs Qualitative Risk Analysis
Quantitative and qualitative analysis are the two approaches to risk analysis. In the case of the Quantitative, the effect of the potential project risk that can be there on the target of the project is evaluated numerically. So the main purpose of the Quantitative analysis is to quantify the risk exposure along with determining the size of the cost and the schedule contingencies.
Whereas, in the case of the qualitative risk analysis, the probability and impact of the potential project risk that can be there on the target of the project is evaluated against a scale that is pre-defined. It is a subjective approach and the main purpose of qualitative risk analysis is increasing the awareness of the severe risk and creating risk responses to deal and reduce the effect of these risks on the overall project.
Risk Analysis vs Risk Management
Risk Analysis can be referred to as the process of the identification of the different possible threats that can occur in the business or the project and then estimating the likelihood of materializing these threats. On the other hand, risk management is a broader concept that includes risk analysis and it can be referred as the process of continuous identification, analysis, evaluation, and monitoring of the risk and then systematically applying the policies, practice, and resources of management to control and mitigate adverse effects of those potential losses.
The risk analysis process helps in assisting the efficient operations of the entity by identifying and evaluating the risk in projects conducted in the organization and helps in resolving and decisions making whether as to accept the project. It is also considered that conducting risk analysis would be beneficial to the organization to make effective decisions.
This has been a guide to Risk Analysis and its definition. Here we discuss methods, the process of risk analysis along with benefits, importance, limitations, and its differences from risk management. You can learn more about financing from the following articles –