Risk Analysis: A Comprehensive Guide

Difference Between Risk Assessment and Risk Analysis

Risk assessment is just one component of risk analysis. The other components of risk analysis are risk management and risk communication. Risk management is the proactive control and evaluation of risks while risk communication is the exchange of information involving risks. Unlike risk analysis, risk assessment is primarily focused on safety and hazard identification.

Risk Analysis Framework

Risk Analysis Methods

There are two primary risk analysis methods: qualitative and quantitative.

• Qualitative risk analysis:
  • Easier and more convenient.
  • Rates risks based on perceived severity and likelihood.
• Quantitative risk analysis:
  • Calculates risk using available data.

Qualitative analysis tools include all root cause analysis (RCA) tools except failure mode and effects analysis, needs assessment, and risk matrix. Common quantitative types include the 3×3, 4×4, and 5×5 risk matrix.

Risk Assessment Matrix | SafetyCulture

Quantitative risk analysis includes types such as business impact analysis (BIA), failure mode and effects analysis (FMEA), and risk benefit analysis. The main distinction between qualitative and quantitative risk analysis lies in the type of risk assessed: qualitative analysis yields projected risk (estimates of how risks may manifest), while quantitative analysis focuses on statistical risk (specific and verified data), often used for calculating insurance premiums.

Types of Risk Analysis

As risk analysis covers a wide range of topics, there are many approaches to analyzing risks or types of risk analysis. These include, but are not limited to, the following:

• Risk Benefit & Cost Benefit Analysis
  A risk-benefit analysis looks at the advantages and disadvantages of an action, helping to determine how likely it is to succeed or fail. On the other hand, a cost-benefit analysis adds up the expected costs and compares them to the expected benefits. Both methods help leaders make smart choices, as taking on risky or expensive actions can result in losses.
• Needs Assessment
  A needs assessment is a structured process that helps organizations find out what they are lacking. It identifies gaps in the business and allows leaders to understand what needs improvement. This way, they can better use their resources to reach their goals more effectively.
• Business Impact Analysis
  A business impact analysis helps companies prepare for disruptions caused by natural disasters and other external factors. It lays the groundwork for recovery plans and guides investments in prevention and mitigation strategies.
• Failure Mode and Effect Analysis (FMEA)
  A failure mode and effects analysis is a method used to find possible problems in business processes and reduce their impact on customers. By identifying these issues, FMEA helps improve the reliability of products and services while also lowering costs associated with failures.
• Root Cause Analysis
  A root cause analysis aims to find and remove the main reasons behind problems. This approach helps prevent the same issues from happening again by addressing the weak systems that lead to them. Besides failure mode and effects analysis, other tools used for root cause analysis include:
  • 5 Whys
  • 8D
  • DMAIC (which is part of Six Sigma)

Risk Analysis Example

Here are risk analysis examples for three major industries: construction, transport & logistics, and manufacturing.

Construction Risk Analysis Example: The owner of a construction company considers a luxury resort project proposal that could boost her company’s reputation, but hesitates due to her focus on mid-range residential buildings. She conducts a risk-benefit analysis with her team to evaluate the potential risks and benefits before making a decision.

Transport & Logistics Risk Analysis Example: The director of a multinational shipping company worries about an upcoming storm’s impact on operations and proposes setting aside recovery funds. A colleague disagrees, believing the storm will have minimal effects. To convince him and other directors, she conducts a business impact analysis and presents the results at the next board meeting.

Manufacturing Risk Analysis Example: A new manager conducts a needs assessment by surveying workers to prepare the factory for increased summer orders, ensuring successful production of sufficient units.

How to Perform Risk Analysis

For leaders who have already decided on the type of risk analysis to perform, here are steps and instructions for each type:

How to Perform Needs Assessment

• Step 1: Identify requirements – What must the business deliver to succeed?
• Step 2: Assess existing resources – What can be used to achieve success?
• Step 3: Identify needs – What does the business lack that is critical to success?
• Step 4: Develop a plan of action – What must be done to fill the gaps and succeed?

Needs Assessment Template

Use this digital template to assess your business or department’s performance and identify learning needs, providing leaders with essential tools for effective management.

How to Perform Business Impact Analysis

• Step 1: Gather information on business processes, finances, and management.
• Step 2: Identify Recovery Time Objective (RTO) or how long it takes to restore business processes after disruption. RTO helps determine how long the business can function without normal business processes.
• Step 3: Identify Recovery Point Objective (RPO) or the acceptable loss to customers when a disruption occurs. RPO helps determine the estimated financial impact on the business.
• Step 4: Develop workaround procedures of the business in the event of disruption.
• Step 5: Decide business needs based on the information gathered in previous steps.

Business Impact Analysis Template

Use this digital template to evaluate the impact of potential disruptive events on key business functions. It assesses operational losses and revenue, helping leaders prioritize recovery efforts during crises.

How to Perform Failure Mode and Effects Analysis

• Step 1: Identify mechanism of failure

Identify potential failure modes and causes by reviewing past failures and establishing ground rules.

• Step 2: Determine RPN
  • Calculate the risk priority number (RPN) based on severity, occurrence, and detection to prioritize failures. Focus on the top 20% of high RPNs for improvement efforts.

FMEA: RPN Risk Analysis | SafetyCulture

Leaders should focus their improvement efforts on potential failures at the top 20% of the highest RPNs. These high-risk failure modes must be addressed through effective action plans.

• Step 3: Follow-up on actions
  • Continuously review and update action plans addressing high-risk failure modes after implementation.

Failure Mode and Effects Analysis Template

Use this digital template to pinpoint issues in processes or products by detailing the potential failure effect, cause, and current controls. Include severity, occurrence, and detection ratings, then record the RPN and sign off.

How to Perform Root Cause Analysis

• Step 1: Define the problem
  • Identify observable consequences of an unidentified risk or root cause.
• Step 2: Select a tool
  • Use methods like:
    • 5 Whys: Ask “why” five times; simple but may oversimplify issues.
    • 8D: Eight disciplines for long-term solutions; requires extensive training.
    • DMAIC: Comprehensive yet easier than 8D, especially if the analysis is simplified.
• Step 3: Implement actions
  • Develop and execute specific actions addressing the root causes identified.

Root Cause Analysis Template

Use this digital template to examine a recurring problem’s impact on productivity. Identify reasons for the issue, rate their likelihood as root causes, select a root cause category, and propose a prevention strategy.