How to Identify Risks

A risk is an uncertain event – something that could happen, not something that has happened. Risks can be positive (opportunities) or negative (threats) although most organisations think primarily about risks as threats.

There are three elements to defining risks:

  • What could go wrong?
  • What is the change of it going wrong, and if it does what is the effect?
  • What, if anything can we do about it?

It is useful to think about risks that could occur in the following areas:

  • Financial (risk of losing money)
  • Operational (risk of things not happening the way you want)
  • Reputational (risk to how people see you or your organisation)

Because risks can arise from a range of sources you should take into account elements such as:

  • the needs and expectations of interested parties like customers and suppliers;
  • the importance of individual products and services to the organisation;
  • the effectiveness and efficiency of processes and use of resources;
  • financial performance;
  • compliance with external requirements such as regulatory regimes.

Tools like a SWOT or a PESTLE analysis can help you identify risks as well. We like a SWOT analysis because it helps you consider opportunities and well as threats. A PESTLE analysis will help you identify risks in particular areas such as environmental or legal so it can be more focussed.

Once you have your risks you should score them by the chance of the risk occurring and the impact if it did. Those with the highest chance of occurring and the biggest impacts are your most important risks.

Then you need to decide what to do. You generally have four options:

  • avoiding the risk, by no longer doing the thing that poses the risk;
  • mitigating the risk by reducing the likelihood of the risk occurring or the impact if it does;
  • sharing the risk by, for example, working with customers to facilitate effective delivery or products and services;
  • accept the risk, which means taking no action – perhaps because it is a very low risk.

Which option you choose will depend on your tolerance of a risk. For example, you will probably want to avoid a risk that has a high chance of causing a greater financial loss than you can afford. However simply going through this exercise will be hugely helpful in looking to the future and deciding what actions you will take and how you will allocate resources.