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How do I evaluate a risk?
Home » Human Resources » Risk Management » How do I evaluate a risk?Once you have identified the risks that your company faces, a quality risk management strategy moves forward to evaluate those risks. A basic formula for evaluating specific risks is to multiply (after quantifying the risk in some form) the probability of the risky event by the costs of the event if it does occur. In other words, you are taking into consideration the likelihood and consequences of an event.
Begin by estimating the likelihood of an event. For example, if you cut employee salaries, what is the likelihood that employees will leave the company? If you commit to a new development project, what is the likelihood that it will go over-budget? Do research to determine past occurrences of this event, and then try and quantify the data in some form.
Next, you need to estimate the potential losses if your risk turns out negatively. In regard to the previous examples, estimate how many employees would leave and the costs, in terms of training and reduced production, of hiring new employees. If it is a new development project, estimate how far over budget the project might go. The key word here is data. The best risk management specialists excel at determining predictive data.
After determining the likelihood and potential costs of a risk, move forward to design a risk hierarchy--which risks do you need to act on first? Begin with the risks that have a time deadline and with risks that have both a high likelihood of occurrence and high potential losses. Consider the safety of employees and the necessity to stay in compliance with corporate and federal regulations. Then, once you have organized your risks, you can begin responding to them.
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