Risk assessment

Importance of Risk Assessment & Tools

Risk-assessment in business, government, healthcare

Risk assessment is a critical component of decision-making processes, even when the decision appears to be right. I am always surprised when I witness leaders or managers making broad level high consequence decisions without having done a risk-assessment of all options. The risk-assessment also serves as scenarios for your negotiation including where you will put your walk-away point.

Here are several reasons why risk assessment remains important:

• Identification of Unforeseen Risks: Even with a seemingly correct decision, unforeseen risks may arise that could impact outcomes. Risk assessment helps identify these potential pitfalls.

  
  

• Validation of Assumptions: Decision-makers often operate under certain assumptions. Risk assessment allows for the validation of these assumptions, ensuring they are grounded in reality.

  
  

• Enhancing Preparedness: Understanding the risks associated with a decision enables organizations to develop contingency plans, enhancing their preparedness for adverse outcomes.

  
  

• Resource Allocation: Assessing risks helps in prioritizing resources effectively, ensuring that the most critical areas are addressed first.

  
  

• Stakeholder Confidence: A thorough risk assessment process can build confidence among stakeholders, demonstrating that decisions are made with due diligence.

  
  

Evaluating Cost-Benefit and Cost-Consequence

In management and leadership, evaluating the cost-benefit and cost-consequence of a decision involves the following steps:

Cost-Benefit Analysis (CBA)

• Identify Costs: Determine all costs associated with the decision, including direct, indirect, and opportunity costs.

• Identify Benefits: Quantify the benefits expected from the decision, such as revenue increases, cost savings, and intangible benefits.

• Compare Costs and Benefits: Analyze the relationship between costs and benefits to assess whether the benefits outweigh the costs.

• Calculate Net Present Value (NPV): If applicable, calculate the NPV to account for the time value of money.

  
  

Cost-Consequence Analysis (CCA)

• Identify Consequences: List all potential consequences of the decision, both positive and negative.

• Quantify Consequences: Assign a monetary value to each consequence where possible, or qualitatively assess the impact.

• Evaluate Trade-offs: Consider trade-offs between different consequences to understand the overall impact of the decision.

  Best Tool for Group Decision Making

I have used variations of this tool throughout my career to get groups to share accountability and make a decision together on a high risk decision. This is a mathematical, logical approach devoid of emotions. The entire team of decision-makers usually feels confident and certain after doing such an assessment as a group.

Decision Matrix Analysis

One of the best tools for group decision-making that evaluates various aspects of a scenario is the **Decision Matrix Analysis (DMA)**. This tool allows groups to systematically evaluate multiple scenarios based on:

• Scenario Evaluation: Each scenario is assessed based on predetermined criteria.

• Probability of Occurrence: The likelihood of each scenario occurring is estimated.

• Impact Intensity: The potential impact of each scenario is rated, often on a scale.

• Timing: The timing of potential impacts is considered to understand urgency.

• Confidence Level: The group's confidence in their assessments is recorded.

• Financial Gain and Losses: Each scenario is analyzed for potential financial outcomes, including gains and losses.

  
  

This structured approach facilitates comprehensive discussions among group members, leading to more informed and balanced decisions.

Decision Matrix Analysis

Decision Matrix Analysis is a systematic approach used to evaluate and prioritize different options based on specific criteria. This method allows decision-makers to assess the potential outcomes of various scenarios, taking into account factors such as probability of occurrence, impact intensity, timing, confidence level, financial gains, and financial losses.

Components of Decision Matrix Analysis

• Scenarios: Different possible situations or options to evaluate.

• Probability of Occurrence: Likelihood that a particular scenario will happen, usually expressed as a percentage.

• Impact Intensity: The degree of effect a scenario would have if it occurred, often rated on a scale (e.g., 1-5).

• Timing: The timeframe in which the scenario may occur.

• Confidence Level: The certainty of the probability estimate, often expressed as a percentage.

• Financial Gain: The potential positive monetary outcome associated with a scenario.

• Financial Losses: The potential negative monetary outcome associated with a scenario.

  
  

Example Decision Matrix

Scenario	Probability of Occurrence (%)	Impact Intensity (1-5)	Timing (Years)	Confidence Level (%)	Financial Gain ($)	Financial Loss ($)
Scenario A	70	4	2	80	100,000	30,000
Scenario B	50	3	1	70	50,000	10,000
Scenario C	30	5	5	60	200,000	50,000

Importance of Risk Assessment in Decision-Making

Risk assessment is a critical component of decision-making, especially in government-related decisions that affect civilians. Here are several reasons why:

• Informed Decision-Making: Risk assessments provide data-driven insights, allowing decision-makers to understand potential risks and benefits associated with various options.

• Resource Allocation: By identifying high-risk scenarios, governments can allocate resources more effectively to mitigate risks and enhance public safety.

• Public Trust: Transparent risk assessments can build trust between government entities and the public, as citizens see that their safety and well-being are prioritized.

• Regulatory Compliance: Many regulations require risk assessments to ensure that decisions comply with safety standards and legal obligations.

• Long-Term Planning: Understanding risks helps in creating sustainable policies that consider future implications and avoid short-term solutions that may lead to long-term issues.

  
  

Government

• National Institute of Standards and Technology (NIST) - Provides guidelines on risk management frameworks for government agencies. [NIST Risk Management Framework](https://csrc.nist.gov/publications/detail/sp/800-37/rev-2/final)

• Peter W. Murphy - A scholar in public administration who has written extensively on risk management in government.

• Thomas J. Cummings - Focuses on organizational behavior and risk assessment in public sectors.

  
  

Politics

• Graham T. Allison - Known for his work on decision-making in political contexts, particularly in crisis situations.

• Robert Jervis - His theories on perception and misperception in international politics relate to risk assessment.

• James D. Fearon - Focuses on the political implications of risk and uncertainty in conflict situations.

  
  

Healthcare

• Michael J. McGinnis - Author of "The Future of Public Health," focusing on risk management in public health.

• Peter M. Ginter - Co-author of "The Strategic Management of Health Care Organizations," addressing risk in healthcare management.

• David Blumenthal - His work on health policy includes discussions of risk assessment in healthcare systems.

  
  

Large Scale Group Decision-Making

Options for Group Decision-Making

• Delphi Technique - A method that utilizes rounds of anonymous surveys to gather expert opinions. [Delphi Method Overview](https://www.rand.org/pubs/monograph_reports/MR1629.html)

  
  

• Nominal Group Technique - A structured method for group brainstorming that encourages contributions from all members. [Nominal Group Technique](https://www.ncbi.nlm.nih.gov/pmc/articles/PMC1993930/)

  
  

• Consensus Decision-Making - A process that seeks the agreement of most participants while resolving objections. [Consensus Decision-Making](https://www.semanticscholar.org/paper/Consensus-Decision-Making%3A-A-Guide-to-Effective-Group-McCoy/8c2c2c3d8e4c0a7f3c6e4f3d5b2c0b7b7f1e0b5e)

  
  

References

• Boylan, R.M. (2006-2009). Conflicts and considerations comparing Abraham Maslow's hierarchy of needs to Jane Loevinger's model of ego development for assessing the level of development of a leader. M.A. Leadership Studies.

• Cooper, D. F., & Chapman, C. B. (2005). Risk Management: A Project Management Approach. Taylor & Francis.

• Hillson, D. (2002). Effective Opportunity Management for Projects. Project Management Institute.

• ISO 31000:2018 - Risk Management Guidelines. International Organization for Standardization.

  
  

References and Best Scholars for Risk Assessments

Business

• Robert S. Kaplan - Known for his work on the Balanced Scorecard and risk management frameworks.

• James Lam - Author of "Enterprise Risk Management: From Incentives to Controls," focusing on risk management strategies in businesses.

• David Hillson - Renowned for his contributions to project risk management and author of "Practical Project Risk Management."

• Mark S. Dorfman - Author of "Introduction to Risk Management and Insurance," providing insights into risk management in business contexts.

  
  

• Resources and Templates: Categories to look up online for templates

  
  

  • Project Risk Management Plan Template

  • Risk Management Plan Template from Smartsheet

  • Risk Assessment Template from Risk Management Monitor