‘A risk’ is one pathway by which something unpredictable could cause the year-end reality to match a picture that doesn’t show planned success.
After setting out a range of possible year-end outcomes on each objective, you start identifying specific risks. You have defined ‘a risk’ when it links a source of uncertainty with a consequence representing an outcome for the year. Those outcomes are represented by pictures in your collection. Between the source and the consequence there will be an unpredictable event, or an assumption that may have been wrong.
You need to find those pathways to outcomes other than success. Call these pathways ‘risks’.
The process of finding particular ‘risks’ involves creativity and brainstorming.
You can find risks by looking backward from each unplanned outcome to its sources of uncertainty.
You can also find risks by looking forward from those sources of uncertainty to the effects on outcomes, and by looking both ways from potential events or wrong assumptions. There are other good ways to identify particular risks.
Each pathway (risk) has a likelihood you can estimate.
Events and wrong assumptions have a likelihood that you can estimate, more or less. The important likelihood to estimate is the likelihood that reality will match the pathway as a whole, resulting in its unplanned outcome. That important ‘likelihood’ may be much lower than the likelihood of an event or wrong assumption, because the outcome may not always follow.
You have already assessed the ‘consequence’ or ‘impact’ of the risk, by linking it with an outcome in your picture collection.
When estimating the likelihood of a pathway, you take into account any controls that affect its likelihood, or that mean the outcome is different to what it might have been without the control.
You also estimate the likelihood of year-end reality matching each outcome picture. The likelihood of each outcome reflects the total of the likelihoods for all ‘risks’ (pathways) leading to that outcome.
You can assess the likelihood of each ‘risk’ leading to its outcome. There may be many ‘risks’ that would lead to that same outcome.
You can also assess the likelihood of the common outcome directly. In that assessment, you might come up with a general estimate of the plausibility of the outcome, based on intuition and experience. You don’t go through the list of separate risks resulting in that outcome. You might also estimate directly the likelihood of each planned success outcome.
Ideally, for each unplanned outcome, the total of the likelihoods for each related risk will match the outcome likelihood you assessed directly. But when you try to match those two likelihoods, they will be different. Understanding and working through the differences will be very enlightening, and ultimately, assuring.
The likelihoods of each of the outcomes for an objective must total 100%.
Within an objective, each unplanned outcome now has a likelihood. If you add up those likelihoods and subtract the total from 100%, you have the likelihood of delivering the planned success outcome.
If you try that bit of arithmetic, the likelihood of planned success may itself end up close to 100%. It may also be much less than 50%, which would suggest something has to be done urgently. The total of likelihoods for outcomes representing planned success or better may also vary widely.
You then note the outcomes with acceptable and unacceptable likelihoods.
Positive outcomes, including planned success, have a minimum acceptable likelihood.
Disappointing outcomes have a maximum acceptable likelihood.
You may not be told what those minima and maxima are. There may never be percentages that you can write down as numbers. But you probably have a good idea of the level for each outcome that your organisation would consider acceptable or unacceptable. You probably also have a good feel for the in-between likelihood levels that would warrant a discussion with your boss. The important goal is confidence that the actual likelihood is well within the acceptable likelihood.
If you are unable to discuss the organisation’s expectations with your boss in a productive way, this stage is important for your own protection. You need to understand what it will mean for you if each of the unplanned outcomes are reached. You then decide on the acceptable likelihood of each one, and on the acceptable trade-offs between improving one likelihood at the expense of another.
Where the likelihood of an outcome is not clearly acceptable, you decide what to do about it.
When you first note a likelihood that is unacceptable, you might first look at ways to improve that likelihood. You may find a way to change the likelihood of the risk event occurring, or to change the outcome that would follow if and when the event occurs. Down the second route, you have reduced the likelihood of the original outcome and increased the likelihood of things turning out differently. Whatever you change, that change will probably influence your expectations for other objectives. There are always trade-offs involved. When you have confirmed the changes that you will and won’t make, you re-assess all the affected outcome likelihoods.
If there remain one or more outcomes with likelihoods that are not clearly acceptable, you have something to discuss with the boss. That discussion might touch on the possibility of simply avoiding certain business plan activities altogether. It might also contemplate carrying on regardless, perhaps subject to some monitoring and review of events.
If you are unable to have a sensible discussion with the boss, you are the one left to make hard decisions about the outcome likelihoods that are least unacceptable.
Next article for Managers
Decisive final steps: Taking action To the extent that you are relying on controls, you ensure that those controls really work. Confidence comes from always knowing that those controls are in place. After all of that, you will definitely be ready to look the boss in the eye over the business plan. You can maintain the outcome pictures and their likelihoods as the focus of conversations with the boss through the year. You review can and maintain the risk collection at the same time. |
New to this: This series assumes you have no prior knowledge. It does not use technical terms without explaining them first. |
Drill-down articles
New to this: This series assumes you have no prior knowledge. It does not use technical terms without explaining them first. |
Register the identified risks. Find risks by looking backward from the unplanned outcome, to its sources of uncertainty. Then look forward from those sources of uncertainty, to the effects on outcomes. You can also start from the potential for events, or for wrong assumptions, and look both ways. The final ‘risk’ runs from the source of uncertainty, through the event or assumption, to the unplanned outcome. There are other good places to look for risks. Keep the risk register in good order. |
New to this: This series assumes you have no prior knowledge. It does not use technical terms without explaining them first. |
Previous article for Managers
First steps to confidence: Find the unit outcomes that matter The first step is validating the unit’s objectives. ‘Risk’ is meaningless without the objectives. You understand each objective only when you see how success and failure are different. To see that difference, draw pictures. The outcome pictures must show your real world as it might be at the end of the planning period. You will use the outcome pictures to understand the significance of unplanned developments during the year. |
New to this: This series assumes you have no prior knowledge. It does not use technical terms without explaining them first. |