What Is Risk Analysis? 6 Steps To Determine a Project's Risk

By Indeed Editorial Team

Updated July 20, 2022 | Published October 7, 2019

Updated July 20, 2022

Published October 7, 2019

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.

Knowing how to perform a risk analysis is useful for almost any kind of decision-making process—no matter your professional role or sector. When you analyze risk, you can develop soft skills such as critical thinking and problem-solving.

In this article, we explore what it means to analyze risk and discuss how to perform a risk analysis.

Related: 5 Risk Analysis Methods and How To Use Them

What is risk analysis?

Risk analysis helps identify potential problems that could arise during a project or process. You can analyze risk to:

  • Reduce the impact of a negative event.

  • Evaluate whether there are more benefits to a project than risks before initiation.

  • Plan the company’s response to emergencies or other adverse events.

  • Eliminate risks during a process.

Risk analysis is a useful tool to use in the decision-making process. It allows you to identify the potential benefits and detriments of each option, evaluate the likelihood of problems occurring and decide whether to move forward considering such risks. Once you have identified potential risks, you can determine how to manage them and even develop a comprehensive preventative plan.

Related: 10 Common Project Risks (Plus How To Analyze and Solve Them)

How to perform a risk analysis

You can follow these six steps to analyze risk for most situations:

1. Identify the risks

Make a list of potential risks that you could encounter as a result of the course of action you are considering. There are a wide variety of sources for potential problems, so make sure to be as thorough as possible when you analyze these risks. To consider all threats, brainstorm potential risks with team members who may have different perspectives. Ask for input from other teams who have attempted to analyze risks for similar projects.

You can also use tools like a SWOT analysis, which stands for strengths, weaknesses, opportunities and threats. This analysis allows you to compile a list of internal and external factors that could affect a project. The factors could be both positive and negative, meaning you could effectively analyze risk and evaluate the positive influences that could help you reduce those risks.

2. Define levels of uncertainty

Once you have identified the potential sources of risk, the next step is to understand how much uncertainty surrounds each one. The level of variation with each potential risk makes it difficult to quantify uncertainty. However, it’s important for the uncertainty of each potential risk to have an estimated impact, and to determine how significant the effect of each might be.

For example, you may not know the precise price that a new competitor will set for their product, but you can estimate it by calculating the costs of production, marketing, distribution and other factors.

3. Estimate the impact of uncertainty

Once you have identified the sources of risk and the levels of uncertainty associated with them, you can estimate their effects. To estimate risk value, the most straightforward method is to calculate the probability of the event occurring and multiply it by the cost of the event.

Risk value = Probability of event x Cost of event

Example: Let’s say you want to assess the risk that the cost of a component of your product will increase substantially. You estimate that there is a 75% chance of the event happening based on market conditions. The cost to your business will be approximately $100,000 if the price of the component increases. You would calculate the risk value as follows:

Risk value = 0.75 x $100,000
Risk value = $75,000

It is important to be thorough to analyze risk. Gather as much information as possible about the potential costs and the probabilities of different events occurring so you can make an accurate estimate of possible losses.

Other risk management tools, such as a risk assessment matrix, can help you identify the risks associated with a project and chart how to address them. Historical data may be a useful guide if you do not have access to current information or forecasting.

Related: A Guide to Project Scope Management

4. Complete the risk analysis model

With risks identified and levels of uncertainty estimated, you now should have the basic model for how to perform a risk analysis. You can build a complete model by compiling all of your inputs, which are your uncertainties. Then, evaluate outputs, which are the outcomes of the different uncertainties and the likelihood of one or more happening during a project. Since your inputs are estimated values, the outputs will be ranges instead of exact outcomes.

You can explore the outputs further with model simulation using a computer program. Such a program can identify each risk and its probability, then calculate the probability of different outcomes. Each program uses a possible value for the uncertain inputs, then calculates the model’s output for that value. Simulations can produce an average outcome value, but they are also useful for reviewing the potential range of outcomes, especially when there are multiple sources of uncertainty in the model that could interact in unexpected ways.

5. Analyze the results

Once you have results, you can figure out the best way to interpret your findings, which may depend on the types of risk you are assessing. Summarize the potential outcomes by using a chart or graph. Visuals help convey potentially complex statistical information quickly and efficiently.

Sensitivity analysis, which uses mathematical software to designate uncertainty in the output to different assumptions in the model’s input, is another useful tool for analyzing the results of a risk analysis model.

Related: Types of Graphs and Charts

6. Implement the solution

Find the solution with the least amount of risk and implement it. This might mean proceeding with a project limited by certain conditions or declining to initiate a project because the risks outweigh the gains. You should also be prepared for other various challenges to arise during the process that you were unable to account for in your analysis. You should review your progress regularly to make sure you’re following the proposed solution and evaluate any changes in the project to make necessary adjustments.

“Plan-Do-Check-Act” is another helpful method in implementing a solution. The four phases in this cycle are:

  • Plan: Create a solution for a risk.

  • Do: Implement the solution on a small scale.

  • Check: Review the results of the solution on a small scale to ensure its success.

  • Act: Apply the solution on a large scale. Monitor the progress and make changes as part of the cycle.

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