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Ranveer Singh is one of the most successful actors in the Indian film industry today. Known for his infectious energy, he can slip into almost any character from a slum-dwelling rap artist to a cruel foreign invader.
Did you know that before Singh got his big break on the silver screen, he worked a full-time job at a marketing agency? But his passion for acting pushed him to take one of the biggest risks of his life.
And it paid off.
Just like Singh, businesses and individuals take major and minor risks every day; it’s the only way to create new opportunities. Businesses have to take certain risks to grow and improve. However, taking risks isn’t enough—you need to know how to assess, analyze and control them. Let’s explore the risk assessment process in detail.
What Is Risk Assessment?
Risk assessment is the process of identifying the hazards or risk factors that could negatively affect an organization’s ability to conduct business. It’s a systematic examination where businesses:
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Identify risks or hazards that have the potential to cause damage (risk identification)
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Analyze and evaluate the associated risks through the processes of ‘risk analysis’ and ‘risk evaluation’
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Determine appropriate strategies to eliminate or manage the risks (risk control)
For implementing a successful risk assessment plan, it’s crucial to distinguish between a ‘hazard’ and a ‘risk’.
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Hazard:
Anything that can cause harm—accidents, conflicts, emergencies
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Risk:
Likelihood and severity of a negative occurrence resulting from a hazard
Purpose Of Risk Assessment
Employers are responsible for the safety and security of their stakeholders—both internal and external. Risk assessments provide a system to maintain checks and balances. Let’s look at the purpose of an effective risk assessment process:
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It highlights risk factors and informs employees, work associates and customers of how these risks have been effectively managed—to ensure individuals that they’re safe at the workplace
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Risk assessment training helps employers educate and train individuals about the necessary workplace safety procedures. For instance, organizations conduct fire drills to prepare an employee for emergency fire hazards
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It creates a risk culture, i.e., prepares everybody for potential threats and unforeseen circumstances. Everyone is encouraged to follow certain protocols and make the workplace a risk-averse environment
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It facilitates the creation of an accurate inventory of available assets or resources and justifies the costs of managing risks. Decisions are made keeping legal requirements in mind
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In addition to analyzing possible threats, it prevents injuries and creates awareness of risk factors and hazards
Types Of Risk Assessment
There are five types of risk assessment processes commonly used by organizations.
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Qualitative Assessment
One of the most common forms of risk assessments, it’s based on personal judgment and experience of those assessing the risk factors. However, others are consulted when additional guidance is required to make the most beneficial decision. Risks are categorized under ‘high’, ‘medium’ and ‘low’. High risks will be prioritized while low risks can be managed later, depending on the resources available. This method looks at risk in terms of the severity of its impact and the likelihood of its occurrence.
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Quantitative Assessment
It’s used to measure risks by assigning a numerical value—different types of risks are assigned different numbers. This method is commonly used to analyze major hazards often associated with chemical plants or aircraft designs. Special quantitative tools and methods are implemented to identify risks, estimate their severity and the likelihood of their recurrence.
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Generic Assessment
This type of risk assessment covers common risk factors or hazards of any task or activity. Its purpose is to cut down on the duplication of costs, effort and paperwork. It considers all risk factors in a single assessment—where the activity may be carried out across various operational areas or departments of the organization. In other words, it acts as a risk assessment template that can be used in similar situations and environments.
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Specific Assessment
This type of risk assessment takes into account the specific environment, associated stakeholders and particular items of work to assess the risk. It can be either qualitative or quantitative, depending on the need and context of the assessment. You may start with a generic risk assessment template but you should finish with a procedure that takes specific risk factors into account. It helps in addressing unusual and context-specific threats.
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Dynamic Assessment
It refers to the process of assessing risks on the spot. It’s often used to deal with unknown risks and uncertainties. Certain situations need you to be constantly prepared, prompting continual assessment. This type of assessment is commonly used in emergencies. For example, the COVID-19 pandemic forced several businesses to restrategize and counter risk factors. However, it’s not possible to stay prepared for every hazard or risk—businesses need to arm themselves with the necessary skills and awareness.
Procedure Of Risk Assessment
A risk assessment framework helps determine the actions to be taken to identify and manage risk factors. It enables the entire organization to run its projects efficiently. Let’s look at the five essential steps of a powerful risk assessment process.
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Risk Identification
At any given point, there are several types of risks involved in businesses. Labeling them makes it easier to tackle or avoid them. Risk identification in organizations involves reviewing the various sources of risks and arranging them in order of priority. Start asking questions like, ‘What can possibly go wrong?’ to gauge potential threats. Here are the most common types of risks that’ll help you identify potential threats.
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Business Risks:
Usually taken by business ventures to maximize shareholder value and profits
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Non-Business Risks:
They aren’t under a firm’s control and are influenced by political, social and economic imbalances
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Internal Business Risks:
They arise because of inefficient management in businesses
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External Business Risks:
They arise because of external environments and factors
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Financial Risks:
Risks associated with any kind of financial transactions (company loans)
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Market Risks:
Risks that arise because of instability and losses in the financial markets caused by changes in stock prices, interest rates, currencies and more
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Operational Risks:
They arise because of operational failures including management failure, systems failure and human errors
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Technology Risks:
These risks are related to technical failures that are otherwise critical for the smooth functioning of businesses
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Risk Analysis
Once the risks are identified, they need to be assessed. It’s important to map different risks to their underlying factors. Your risk analysis should answer the following questions:
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What is the likelihood of these risks occurring?
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How will the risks impact the organization?
Risk analysis helps create appropriate risk responses depending on their severity and available resources.
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Risk Evaluation
Many organizations use risk maps or visual representations of risk factors that detail which risks are severe and/or frequent. When you rank risks in order of their severity and urgency, you prioritize and solve the more urgent risks before moving to the others. For example, risks that cause minor inconvenience don’t necessarily need intervention from the upper management. In short, a risk evaluation framework is influenced by two key factors.
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Probability And Impact:
You estimate and identify the probability and impact of each risk factor and rank them according to their urgency and importance. However, most risks don’t have a single cause but a collection of related possibilities.
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Moment Of Risk:
List out the specific instance and conditions that caused a risk or will cause it in the future. For example, injury at a construction site can be associated with a particular stage of construction, which needs to be addressed.
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Treating The Risk
Risks need to be either eliminated or managed. Determine your risk response according to the severity of the risk. Here are a few strategies that’ll help you prepare for different types of potential threats.
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Avoid:
You eliminate a particular risk by getting rid of its source. For example, enforcing anti-discrimination policies that make it mandatory to protect employees and other stakeholders
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Accept:
You decide to take the risk. For example, you decide to invest in a start-up business
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Mitigate:
You take action to reduce the risk. For instance, you purchase superior quality tools to reduce workplace safety risks
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Transfer:
You transfer the risk to a third party. For example, you get car insurance in case of unforeseen accidents or damages
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Share:
You distribute the risks among multiple members, teams or projects. For example, if your star-tup business faces risks, the co-founder and you jointly face the consequences
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Contingency:
You plan ahead to handle anticipated risks. For instance, you come up with back-up plans in case a new strategy doesn’t work out
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Retain:
You decide to retain or keep a risk because you think it’s advantageous to your current situation
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Monitoring & Reviewing The Risk
Risk assessment isn’t an end in itself but a process of continuous improvement. Risks are constantly changing and new ones keep emerging. Therefore, your risk plan is complete when it’s consistent and standardized. By doing this, you develop a risk culture, preparing everyone to become more resilient and adaptable in the face of changes and challenges. It leads to greater clarity on how to operate and prepares everyone for upcoming challenges.
Conclusion
Risk assessment is the first step to successfully managing risk. You need to analyze, respond and monitor those risks to avoid them from recurring. A good risk management process doesn’t have to be resource or cost-intensive. A little structuring and a strong understanding of the risk factors and underlying problems can prepare you better.
Harappa Education’s Structuring Problems course will equip you with powerful frameworks to systematically break down problems into small and manageable tasks. The MECE (Mutually Exclusive and Collectively Exhaustive) Principle will teach you how to classify problems better. The Ease Impact Analysis will teach you how to analyze, identify and prioritize the underlying causes of problems. Get to the root of problems to identify risks with greater efficiency. Don’t just take risks, assess and manage them successfully!
Explore Harappa Diaries to learn more about topics related to the SOLVE Habit such as the Importance of Decision-Making, FMEA, Root Cause Analysis, Problem-Solving and the Fishbone Diagram.
