Everything you need to know about risk analysis: its components, types, and methods, as well as examples and steps on how to perform risk analysis
Published April 23rd, 2021
Risk analysis is a multi-step process aimed at mitigating the impact of risks on business operations. Leaders from different industries use risk analysis to ensure that all aspects of the business are protected from potential threats. Performing regular risk analysis also minimizes the vulnerability of the business to unexpected events.
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 Components
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:
A risk benefit analysis involves weighing the pros and cons (benefits and risks) of an action. It helps leaders decide on whether or not they should pursue that action. Choosing to pursue a risk-heavy action can result in having to pay more for insurance or a greater insurance premium.
A needs assessment is a systematic process of identifying and evaluating organizational needs and gaps. It gives leaders an idea of where the business may be lacking and helps them refocus resources towards achieving goals more efficiently.
A business impact analysis entails planning for operational disruptions caused by natural disasters and other external factors. It is the basis for investment in recovery, prevention, and mitigation strategies.
A failure mode and effects analysis is a systematic method of anticipating potential failures in business processes and mitigating their impact on customers. It improves product and service reliability and reduces the cost of failures.
A root cause analysis focuses on identifying and eliminating root causes to solve problems. It helps in the prevention of recurring problems by targeting the ineffective systems behind them. Aside from failure mode and effects analysis, other root cause analysis tools are 5 Whys, 8D, and DMAIC (part of Six Sigma).
There are two main risk analysis methods. The easier and more convenient method is qualitative risk analysis. Qualitative risk analysis rates or scores risk based on perception of the severity and likelihood of its consequences. Quantitative risk analysis, on the other hand, calculates risk based on available data.
Types of risk analysis associated with qualitative risk analysis are all root cause analysis (RCA) tools except for failure mode and effects analysis, needs assessment, and risk matrix.
Types of risk analysis included in quantitative risk analysis are business impact analysis (BIA), failure mode and effects analysis (FMEA), and risk benefit analysis.
A key difference between qualitative and quantitative risk analysis is the type of risk each method results in. For qualitative risk analysis, this is projected risk, which is an estimation or guess of how the risk will manifest. Meanwhile, quantitative risk analysis deals with statistical risk. Unlike projected risk, statistical risk is specific and verified. For this reason, it’s often used in the calculation of insurance premiums.
Though risk analysis is used across industries by businesses of all sizes and types, some leaders may find a risk analysis example that’s specific to their industry more helpful than a generic one. Here are risk analysis examples for three major industries: construction, transport & logistics, and manufacturing.
Construction Risk Analysis Example: The owner of a construction company was presented with a project proposal to build a luxury resort. While pursuing this project may lead to good press for the company, the owner is hesitant to accept the project because her company specializes in mid-range residential buildings. Taking on this project would be both a leap and a challenge. Before making a final decision, she performs a risk benefit analysis together with her team to see if the benefits of pursuing this project outweigh the risks.
Transport & Logistics Risk Analysis Example: The director of a multinational shipping company is anxious about the impact an upcoming storm will have on business operations. She believes the company should set aside some money for recovery after the storm hits. Her colleague, however, thinks differently. He argues that the storm won’t affect them that much. To convince her colleague and fellow directors, she performs a business impact analysis and presents its results in the next board meeting.
Manufacturing Risk Analysis Example: A newly hired manager is in charge of preparing a factory and its workers for a large influx of customer orders due to the summer season. To get an understanding of what he needs to do for this factory to succeed in producing enough units, he performs a quick needs assessment by asking the workers to fill out a survey on the factory’s processes.
For leaders who have already decided on the type of risk analysis to perform, here are steps and instructions on how to perform risk analysis for each type:
Use this digital template to identify business/department, performance, and learning needs. It has all the tools leaders need to improve the management of their businesses.
Use this digital template to assess the impact of possible disruptive events across key business functions. This template includes an assessment of losses in terms of operational activities and revenue. Leaders can use it to prioritize functions for recovery during crises.
The mechanism of failure (potential failure modes, effects, and causes) can be identified properly when leaders in charge of FMEAs account for past failures, agree upon certain assumptions, and establish ground rules.
The risk priority number is used to prioritize the potential failures that require additional planning. It’s a product of three factors: severity, occurrence, and detection.
How to Determine RPN
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.
After establishing and executing effective action plans, leaders should remember to continuously review these plans and the high-risk failure modes they address.
Use this digital template to identify problems in processes or products. Describe the potential failure effect, the potential cause, and current controls. Add the severity, occurrence, and detection ratings. Finally, record the RPN and sign-off.
5 Whys involves asking the question “why” five times. Though 5 Whys is the easiest to use, it can also oversimplify problems. 8D stands for the eight disciplines of problem-solving. While 8D provides long-term solutions, performing it correctly requires extensive training.
DMAIC, on the other hand, is more comprehensive than 5 Whys, but also relatively easier to perform than 8D, especially if the third step (Analyze) is simplified.
Use this digital template to analyze a recurring problem and its effect on productivity. List reasons why the problem occurs and rate how likely they are to be root causes. Once a root cause has been identified, choose its category and provide a prevention strategy.
For leaders who haven’t decided on a specific type or want a general outline of how to perform risk analysis, refer to the steps below:
One way to manage risks effectively is to use the ISO 31000 standard. ISO 31000 is an internationally recognized benchmark for risk management. It can be summarized into three guiding rules for leaders to follow:
Another key aspect of using ISO 31000 is to ensure that all employees are familiar with the standard and/or have received training on how to apply the standard in their work. While leaders should take responsibility for the overall risk management, they should be careful to not alienate employees from this process. Without the support and input of employees, implementing ISO 31000 will be much harder than it needs to be.
Use this digital template to establish a solid risk management framework based on ISO 31000. Show leadership by making a commitment to risk management. Share the responsibility of managing risks with other stakeholders in the business, including employees.
Though adhering to the ISO 31000 standard is recommended, this can seem intimidating or overly complicated for smaller businesses or those with less resources to spend on risk management. A temporary alternative is to use a risk management plan, which should have the following parts:
When using a risk management plan, it can be helpful to have a risk management plan template that’s easy to distribute to employees and update when needed. Without a template, it can be difficult to use or create a risk management plan for the entire business.
Use this digital template to assess the likelihood and severity of consequences. Specify planned mitigation strategies and the employee/s responsible for executing them. Give the estimated cost and timeline of mitigation actions.
iAuditor by SafetyCulture is a digital inspection platform businesses can use to identify, analyze, communicate, and manage risks effectively. Together with Mitti, a technology-first insurance company, iAuditor rewards businesses who are proactive in managing their risks.
Use this digital template to perform qualitative risk analysis in 4 steps:
This digital template can be used as guide in performing quantitative risk analysis. It has the following steps:
SafetyCulture staff writer
Zarina is a Content Specialist for SafetyCulture. She is a Creative Writing graduate who enjoys discovering new ways for businesses to improve their safety, quality, and operations. She is working towards helping companies become more efficient and better equipped to thrive through change.
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