Understanding Risk
Risk is the potential positive or negative outcome of an event. Risk is calculated from the probability of an event occurring and the volume of impact that the event would have.
RISK = (Probability) X (Impact)
There are multiple elements that should be identified to analyze risk including:
1. Event - What could happen?
2. Probability - How likely is the event to happen?
3. Impact - What will happen if the event occurs? How bad will it be?
4. Mitigation - How can you reduce the Probability of the Event occuring? How much can you reduce the Probability of the Event happening?
5. Contingency - How can you reduce the Impact? How much can you reduce the Impact?
6. Reduction = (Mitigation) X (Contingency)
7. Exposure = (Risk) - (Reduction)
Once you have identified the Exposure you will have identified the amount of risk that cannot be avoided by choosing to support the event or activity. An Exposure may also be referred to as a Liability, Threat, or Severity. The calculated Exposure is used to help determine if the planned activity should take place.
Identifying activities that have an acceptable level of risk can be done through many evaluations including a simple cost vs. benefits formula. These elements may be used to determine if the risk of implementing a change is higher, or lower, than the risk of not implementing the change.
Once you have chosen to proceed with an activity then the identified Exposure becomes the Assumed Risk of the activity.
This evaluation process is one of the many tools that AMG brings to every Risk Management project in which we are involved.
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