Evaluating business risk, or risk assessment, is the process of identifying every risk of loss associated with a new project or business venture, then comparing each potential loss against the potential benefit/profit of the whole project. Determining whether a project is worth the risks and should be undertaken in spite of them is the traditional purpose of business risk evaluation. But according to Carnegie Mellon Software Engineering Institute, another goal is to shift thinking from &ldquo;crisis management&rdquo; to &ldquo;crisis prevention.&rdquo; Reducing or eliminating each identified risk to prevent the associated loss in the first place is the essential final component of the risk assessment exercise.
Step 1Identify all–or as many as possible–potential risks of loss to the business presented by the project. For example, phase one of the project could take a month longer than scheduled to complete, resulting in financial penalties and additional labor costs to the business.
Step 2Estimate the likelihood of the loss occurring. Label on a sheet of paper or spread sheet three columns with percentages of probability. Label them (low), (medium), and (high), then place each potential risk in one of the three categories according to its estimated probability of occurrence. For example, if the chance of phase one of the project running over deadline by a month is low, place it in the column.
Step 3Assign a dollar loss amount to the potential risk and calculate total loss to the business at fiscal year end. In the example, it is 25 percent likely phase one of the project runs over deadline by a month costing the company R1,000 per month in penalties and R5,000 in additional labor costs, totaling a R6,000 loss in cash to the business at fiscal year end.
Step 4Decide if the business can withstand the loss and if the risk is worth taking. Subtract the potential loss from the revenue generated by the project as a whole. For example, the project benefits the business by a gain of R50,000 at fiscal year end, minus a loss to the business of R6,000 at fiscal year end if phase one is not completed on time. The result is a R44,000 gain at fiscal year end. Comparing a R50,000 gain against the low probability of a R6,000 loss results in the logical decision that the business can withstand the loss and the risk is financially worth taking.
Step 5Devise a way to minimize or eliminate the risk. In the example, minimize or eliminate the risk of the R6,000 loss in penalties and increased labor costs from a missed deadline by adding more labor from the beginning to ensure the deadline is met, or by negotiating to move the deadline and give phase one an addition month for completion.