A Step-by-step Guide to Risk Assessment

Introduction

Organizations are complex systems that evolve from the interaction of their various components. Risk assessment is a process for identifying vulnerabilities and evaluating risks to organizational objectives. ISO 31000:2018 defines risk assessment as “Risk assessment is the overall process of risk identification, risk analysis, and risk assessment. Need to be carried out in a systematic, iterative, and collaborative manner, drawing on the knowledge and views of interested parties https://www.iso.org/standard/65694.html

A risk assessment will help organizations make better decisions when managing risks, such as developing mitigation strategies or deciding whether to accept certain levels of risk. As with any system, understanding how all the parts work together can be daunting. However, this step-by-step guide will provide an overview of the key concepts in risk management and offer practical guidance on conducting your own organization’s risk assessment.

Organizations need to understand their risk and take action against it to ensure a successful business. One of the steps to success in this process is through performing an adequate risk assessment. It is a procedure that enables companies to evaluate possible risks and determine how they can reduce the effects of those risks. It is important to note that risk assessment cannot eliminate risks, but it can help minimize those risks’ likelihood.

Risk assessment helps organizations come up with a plan for managing their risks so they will be able to identify and assess possible threats, evaluate how severe the impact would be if any of these threats will happen, and decide on possible mitigations.

In this article, we will explore the steps that are necessary for performing a risk assessment. We will teach readers how to identify risks, assess potential and evaluate the risks.

Risk identification

The process of identifying risks is called risk identification. Involves classifying risks that are relevant to an organization or a specific project. It also recognizes the sources of risk (such as external, operational, and internal risks) to a business or project. It is usually accomplished by evaluating each exposure, understanding its potential impact and likelihood on the organization’s objectives.

The responsibility of risk identification may reside with a single individual, but it can also be part of the responsibilities handled by various members within an organization. Risks can come from many different sources, such as accidents, natural disasters, or internal weaknesses in the company’s design or processes – and often, multiple sources.

During risk assessment or management, different people are involved in fulfilling specific tasks. For instance, people assessing the consequences of risks identified by examining worst-case scenario possibilities for what might happen if we ignore them (the downside), estimating how probable adverse occurrences are (the upside), and considering what defenses/mitigations to address the risks.

Many businesses face the challenge of measuring the risk of unknown exposures or cannot be quantified because they can only occur in scarce circumstances. The stakes might include new chemical exposures due to improvements in technology. It also Includes contamination resulting from a disaster such as an earthquake affecting a nuclear power plant 100 miles away or low probability but high consequence/impact events where asset values reach their maximum point at one time during the investment term.

Risk identification includes identifying which sources of risk are acceptable/The first step in risk assessment is identifying the different types of hazards. It is achieved through brainstorming sessions with representatives from all levels in the organization or interviews with stakeholders.

How to identify risks

To carry out a risk identification exercise, identify the types of risks the organization is exposed to. They can be classified as external, operational, or internal. External threats are those related to natural disasters and accidents which occur outside the boundaries of the company. Operational risks are those within the control of the company’s management and include product quality, production costs, distribution methods, customer service levels, technical innovations, market conditions, and human resource policies. Internal risks are those mistakes made by employees (e.g., data entry errors) or faulty systems (e.g., lack of backup for databases).

Risks identification approaches include:

• Brainstorming sessions with employees and managers.
• Workshop with process owners to identify their specific risks on their processes.
• Analyzing historical data related to events that have previously occurred in the business.
• Talking to representatives from any external organizations which may affect or influence the organization’s objectives (e.g., suppliers).

Another way to identify risks is to map out the steps that make up a process and assign a person specific to each step. You can also use simulated work processes to explore the different scenarios when implementing your plan.

For instance, if you are coordinating an event, you may ask questions like:

1) What will happen during set-up? Who will perform this task? Who checks and approves the stage before being used for other jobs? Are any checks done on safety after setting up so as not to harm or inconvenience visitors in case of events occur later on in the day?

2) How does someone know if something terrible has happened or not happened at the event location.

Risk Analysis

Risk analysis is a process that uses many tools and techniques to identify the threats, vulnerabilities, and possible resultant consequences of one’s organization’s risks. It is essential for companies to carefully weigh all possibilities before any action is taken, such as when considering whether or not that new software needs to be installed on your computer. The software might open up holes in your firewall, may come with an undetected malware pre-installed, or even log more keystrokes than would meet HIPPA standards– so it’s worth taking some time for careful risk analysis.

Risk analysis looks at the risks identified and determines how likely they are to occur (i.e., likelihood), their impact if they do happen, and whether you already have a plan in place to eliminate them or protect yourself from that risk. It can involve quantifying the expected value of each design option and calculating the associated statistical distributions (e.g., Monte Carlo simulations) to calculate the probability of each outcome.

How to analyze risks

Risk analysis seeks out all possibilities for decision-makers by carefully considering alternatives before proceeding along any one course of action. Contingencies are to be made ahead of time to prevent adverse impacts by using what could go wrong. Allowing every possibility related to the chosen plan to be evaluated beforehand helps when it comes time for implementation as there are no surprises.

Risk analysis needs to include two components: 1) Probability estimation–quantifying how likely the risk is to occur; 2) Impact evaluation-determining how harmful an event will be when it occurs (also known as consequence analysis).

The first step is to define the likelihood that a particular risk will occur depending on the organizational risk management policy and procedures. The organization can use a simple numeric scale of 1-5 or 1-3. 1-3 scale (high, medium, and low), and 1-5 scale (rare, unlikely, possible, likely, and almost certain). There can also be options for likelihood, either as an indicative frequency or indicative probability.

The next step is to assess the dire consequences of such an event and assign it a numeric value on a scale from 1-5(Insignificant, minor, moderate, significant, and catastrophic). The resulting rating is derived from an inherent risk rating (before controls) or Residual risk rating( after applying controls).

There are two ways of doing risk analysis qualitative and quantitative. Quantitation risk analysis takes various techniques, i.e., Montecarlo, value at risk. Qualitative risk analysis methods are practical where you have to include more than two risks together. It is called multivariate risk analysis. The risk analysis is done using decision trees to get an idea about the consequences of your actions on each possible outcome. What your risk analysis covers will depend on your particular situation, environment, infrastructure, and budget. Numerous software applications are available to assist you with the process.

Risk Evaluation

Risk evaluation is a process for assessing the severity of the risk to an organization and ranking it relative to other threats.

The specific risks that need evaluation can vary depending on the industry, company position or size, profitability level, geographical location, and regulatory environment. For example, one may regard property theft as having a lower risk than fire; in another enterprise, robbery might be compared with the costs associated with downtime due to sewage failure. A risk evaluation will show you your level of risk within your life and your ability to cope with your risk. The risk evaluation identifies your risks and what protective strategies are in place to handle your risks. Your risk evaluation should also document your past, present, and future threats.

In most cases, risk evaluations focus on assessing hazards (like how likely something will happen) and not on ranking the severity of impacts. Qualitative techniques may be utilized in some instances to classify different risks relative to one another; for example, a fuzzy logic method ranks risks based on combinations of probability and impact. In such comparisons, it becomes clear which risk merits less attention since the lesser-ranked remedy has a lower cost-benefit ratio than the higher-ranked.

How to evaluate risks

Analyzed risks are categorized using the appropriate risk ranking of the organization. Ranking example for 1-5 scale can be either low, medium, and high risks. Risks ranked low have existing controls that majorly reduced likelihood or impact to multiple low levels—no need for improvement actions to mitigate against the risk’s probability or impact. Subsequent follow-up and monitoring are needed for the common threats. Ensures that your results are still valid.

Monitor and classify your risks, then mitigate high risks if there are any. For medium threats, monitor the risk and add controls to your operations to observe data on how well they work. Keep adding new controls as needed until you can reduce the risk to low risk or eliminate it.

Medium-risk areas in software development may include bugs, lack end-to-end test coverage, involve hardware dependencies with a slow signal response time, must meet strict deadlines while maintaining the existing backlog of work, or might unintentionally make an ad hoc modification too dangerous. Successful mitigation strategies usually start by assembling a cross-functional team responsible for managing the medium-risk area of concern.

This team should consist of process owners/risk owners. There is a provision of timelines to mitigate the risk improvement strategy. Other team members should include your testers, your developers, and your product owners. Change risk management is considered a significant way to ensure the success of your activities, especially for your medium-risk areas. As you reduce your risks, you may notice that your products are becoming overly complex. This complexity often occurs in more mature software development organizations as your processes overreach your capabilities.

Medium risks need controls that are still in place and not effective for the risk. Addressing medium risks could be by defining or redefining a control, replacing old controls with new ones that are more effective, or adding new controls to mitigate against risk.

Risks ranked high need your immediate attention as your organization may be vulnerable to threats, and your losses could be catastrophic. Do not forget that risk ranking is a continuous process where your risk assessment should undergo continual improvement. Prioritization of your risks changes from time to time to ensure that you address your high risks first. Budget planning and remedial actions are needed to actualize your risk management program.

High risks in your software development environment include your organization’s high-risk areas where your chances of encountering a significant problem are very likely to happen soon. It may also happen that you have introduced an entirely new way of doing things, causing your applications or systems to undergo a significant change.

Conclusion

The key to managing risk is understanding how all the parts work together. This step-by-step guide provides an overview of some of the most important aspects of a successful, comprehensive risk assessment. If you found this post beneficial and wish more resources on risk assessment or business continuity planning – including tips for developing your risk assessment strategy document – send us a message at the chat! We offer consulting services that can help you develop risk assessment strategies with organizational risks and exposures identified through our discovery process to discuss what steps taken going forward.