How do you evaluate risk when making a decision?

risk assessment discussion in office
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Decision making is an integral part of our daily routine. At work as well as with our families and friends. Some are easy, non-critical and we do not have to worry about consequences. Then there are critical decisions that may have far reaching consequences. At times we plan and discuss what needs to be done and how. There are times when we follow our instincts. Planning is important though. I believe planning makes our instincts better over time. I recommend following a risk evaluation process when making key business decisions. Understanding of what could go wrong and the potential impact will facilitate informed decision making. I will share an easy to use template to evaluate risk when making a decision.

Example: Risk Analysis

Acme Designs is a mid-sized home décor manufacturing firm. They have a large retailer and wholesaler network across the country. The retailers stock Acme Designs products and sell to consumers. Acme Designs does not sell directly to consumers.

Considering the e-retail boom and the growth forecast, the management decided to test a direct-to-consumer sales channel. They added an ecommerce store to their company website as well as hired an agency to list products on 3rd party e-retail platforms.

What is the risk involved in the decision taken by Acme Designs? How could the success or failure of the direct-to-consumer sales channel impact their existing sales channels? Is there a risk of losing top wholesalers and retailers? Would it be better to enter the e-retail segment with a new brand name and range of home décor products?

These and many other such questions need to be evaluated. The management needs to identify risk mitigation actions to minimize the impact.

A structured approach to evaluate risks and impact is the best approach.

The process to evaluate risk when making a decision

The following need to be discussed as part of the risk analysis:

  • What could go wrong? As a result of the decision or action, what may change? Lets consider the example of an ecommerce company selling t-shirts for kids. The company decided to start charging an additional fee for all cash-on-delivery orders. The decision was taken to motivate online shoppers to opt for online payment using debit or credit cards. However this may lead to reduction in online orders as 60% of all online orders in the last 6 months were cash on delivery (COD).
  • What is the probability? Once we establish what could go wrong, we should evaluate the probability of occurrence.  The probability is rated on a scale of 0 to 9, 0 least likely and 9 most likely to occur. In the example above, we could rate the probability as 7 since 60% of all orders are COD and more than 3/4th of all customers who opt for COD have never paid online.
  • What could be the impact? Describe the potential impact on the business. To evaluate risk, it is best to link to a financial impact such as reduction in sales or increase in cost. The ecommerce company may end up losing 30 to 40 percent of all COD orders if they add an additional fee for cash on delivery.
  • How severe will be the impact? This too is rated on a scale of 0 to 9. 0 is least severe and 9 most severe. The severity in the example could be 8 as the company may end up losing 30 to 40 percent of all orders.
  • Risk Score. This is obtained as a product of probability and impact (Risk score = (Probability X Impact)/100). The score is 56% for the example above.
  • The decision to implement or not (Go / No-Go): If the risk is high, decide if it is worth implementing the decision.
  • Action plan to mitigate the risk. If you decide to go ahead with the decision, what steps are to be taken to negate and minimize the impact.
    • What needs to be done to reduce the probability of occurrence and/or severity of impact to mitigate the risk. The ecommerce company may want to promote and incentivize pre-paid online orders
    • When will the action plan be implemented – timeline and frequency. The company may give incentives for online pre-paid orders starting next week for another 6 months
    • Who would be responsible for the execution and monitoring. The Chief Marketing Office (CMO) of the ecommerce company will be take charge of the implementation and incentive roll out.
    • How will you achieve the desired outcome? The company will offer 10% instant discount via promo code for converting COD orders into pre-paid orders

Download the Risk Probability and Impact template.

The process to evaluate risk and preempt potential failure modes helps in improving the decision accuracy over time.

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By Nitesh Verma

Founder - Business Management Blog. I am an independent business strategy consultant, helping companies take data driven business decisions. My mission is to find and implement simple solutions for complex business problems.


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