8 Risk Identification Methods to Discover Your Business Risks
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Risk in business helps detail any financial, practical or social challenges a business may face. Risk identification can help businesses build better products and processes and improve their profit margins by identifying and reducing the potential impact of risks. Learning to identify risks can be a critical skill for managers and business owners. In this article, we discuss what risk identification is, how to identify risk, why identifying risk is important and provide eight tips on identifying risks.
What is risk identification?
Risk identification is identifying potential business risks and analyzing them to learn about their effects on the business. Risks come in many forms for businesses and different industries may have different risks. For example, a software development company and a construction company may share the risk of losing revenue if they don't upgrade their tools for modern processes. However, they can carry their own industry-specific risks like the potential for injury on the job or intellectual property risks.
Risk identification allows a business's leadership team to learn more about the risks the company may face and create solutions to the challenges behind the risk. It also can help provide a clear picture of a business's risk factors for bank loans or investor funds.
Read more: What Is Risk Analysis in Business?
Why is risk identification important?
Risk identification is important at all stages of your business's lifespan because it helps identify your biggest challenges and helps create a clearer picture of the business's overall health. Here are a few reasons businesses focus on risk identification:
Identifying industry challenges: Sometimes, risks are industry-related and can be safety risks or volatility because of the industry itself. Identifying industry challenges or specialized risks helps a business plan for future costs or obstacles and helps leadership know if they're allocating resources to the right places.
Meeting legal standards: Risk identification helps a business understand if it needs to meet certain legal requirements. For example, a business that serves food may have different legal risks than a company that makes shoes. Food must adhere to certain sanitation practices and food production requires certain state and local licenses.
Appealing to investors: Investors typically look for low-risk, high-yield investments. These investments produce the greatest reward for the smallest risk and risk identification helps them understand the full potential of a business's risks. Knowing the risks they face, investors can make a more informed choice on the businesses they want to support.
Making projects more efficient: Businesses also use risk identification on a smaller scale for individual projects or practices. Identifying risks early during the project planning phase can help the team navigate the challenges more effectively by planning.
Related: Risk Management: A Definitive Guide
8 ways to identify risk
Here are eight ways to identify risk in business:
Brainstorming is the act of gathering team members to think about and discuss a subject and to form solutions to any identified problems. This kind of meeting allows a team to speculate on ideas, discuss facts and look at a project's future. You can use brainstorming to identify, analyze and address potential risks by hearing from people who work at the front end of the business. Team members may have a better understanding of how the business operates from the ground level and can share their own perspectives of the company's risks.
Brainstorming is an effective method because it allows everyone to speak and practice their critical thinking skills. You can host a brainstorming session each month to determine what your team thinks are the project's biggest risks, allowing everyone to communicate and helping to bridge the gap between leadership and staff.
Related: What Is Enterprise Risk Management?
2. Stakeholder interviews
Stakeholders are the people who have an interest in your project or business, and interviewing them may help you better understand what they believe are the biggest risks. Stakeholders often have invested significant resources, whether it be time, money, labor or all three, into your business. They understand risk from an outsider's perspective as an investor, not a laborer or leader. This viewpoint can help you learn what concerns your investors and how to address it.
3. NGT technique
The NGT, or nominal group technique, is another method of brainstorming that offers a more in-depth approach to the subject. Participants write their own ideas about the challenge without discussing it directly with other group members. Then, a senior member of the team asks each participant for their thoughts, which are written on a chart or whiteboard with overlapping items removed.
The team discusses each item to ensure everyone understands them, and then you can work to prioritize each one. The team can explore the top three items further, analyzing them and creating solutions. The NGT technique depends on honesty and teamwork and provides a more comprehensive approach than brainstorming.
4. Affinity diagram
An affinity diagram is a diagram that organizes data into categories based on their similarities. Ask each team member to write what they believe are potential project or company risks and file each response under a few categories. For example, you can have financial, practical or safety risks as categories. This helps separate the risks into categories for individual review and helps organize the feedback you receive. From there, the team can prioritize each risk and address it.
5. Requirements review
A requirements review is a review of a project's labor, material or financial requirements, and allows the team to analyze requirements often and identify potential risks quickly. The team can complete a requirements review throughout the project timeline to understand risks and requirements at each stage of production. During production, requirements can change, which also may change the risk involved. For example, if a process requires twice as much material as originally speculated, the financial risk of the project rises because of additional costs.
6. Project plans
A project plan is a basic outline of the project and its needs. This includes things like material and labor needs, the timeline for the project and any risks that come with it. A detailed project plan may help the team understand the nature of the project and what it takes to reach the project's goal. It also allows investors and stakeholders to understand what they're investing in and how the team progresses and offers a return on the initial investment.
7. Root cause analysis
A root cause analysis is an investigation of previous project risks and how they relate to one another and the current project. The root cause can be anything from financial challenges to outdated equipment or poor-quality materials. Finding the root cause can allow the team to identify common challenges in the project or business and minimize them for greater project efficiency.
8. SWOT analysis
A SWOT, or strengths, weaknesses, opportunities and threats analysis, is a great way to understand a project's or business's risks alongside other important factors. A thorough SWOT analysis can show investors why a business or project is worthy of investment and helps the team better understand their efficacy in reaching goals. A SWOT analysis examines four factors:
Strengths: Areas where the team excels and how they relate to projects.
Weaknesses: Areas where the team can improve to increase productivity and efficiency.
Opportunities: Areas where the team or business can improve or expand.
Threats: Areas of risk for the project or business and how the team can minimize those risks.
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