Understanding ‘risk’ for business planning

The focus of business planning is the end of the planning period. ‘Risk’ in work unit business planning is the uncertainty of the year-end result for the organisation, from all possible causes. ‘A risk’ is one pathway by which the year-end outcome can be different to the success outcome you planned. That limits the range of ‘risk’ you need to think about right now. Risk isn’t bad, or good. Taking more risk can be the way to better performance outcomes.

What to read first: Risk in work unit business planning: What is it?

New to this: This series assumes you have no prior knowledge. It does not use technical terms without explaining them first.

The focus of business planning is the end of the planning period.

You first visualise the close of business on the last day of the planning period. You create a range of different pictures for different outcomes on that day. The outcomes are for the organisation, delivered by your unit.

Some outcome pictures will be dreamily attractive, and others will be nightmares. After finding the picture the organisation will prefer, you think about what will get you there, what will get in the way, and what will bring on a nightmare instead.

In your first steps to confidence (jump ahead to those) you will visualise the alternative outcomes and draw them as pictures.

Your unit’s strategies and efforts will be necessary to reach the preferred outcome. They may not be enough. You may be relying on forces outside your control. Your unit’s carefully planned strategy might come to nothing, but the year-end outcome for the organisation might be pretty good anyway.

‘Risk’ in work unit business planning is the uncertainty of the year-end result for the organisation, from all possible causes.

Risk is the effect of uncertainty on objectives (ISO Guide 73:2009). For unit business plan risk management:

  • The objectives are the outcomes expected of the unit at the end of the planning period.
  • The uncertainty arises from
    • unit decisions and implementations that may not succeed;
    • unpredictable events, inside and outside the unit; and
    • planning assumptions that may not be correct.
  • The effect on objectives is the nature and size of the difference between the actual and planned outcome, resulting from uncertainty.

‘Risk’ is the total effect of the uncertainties on the outcomes.

‘A risk’ is one pathway by which the year-end outcome can be different to the success outcome you planned.

We can talk about a separate ‘risk’ as the particular causal route by which one outcome is possible, within a range of potential outcomes. ‘A risk’ is a specific path, from an event or wrong assumption, to an unplanned outcome of the year’s activity. This point is explored further in the next steps to confidence (jump ahead to those).

That limits the range of ‘risk’ you need to think about right now.

That may seem like quite a range of ‘risks’ to consider, and so it is. But it also leaves out many types of ‘risk’ that might be buzzing around in your mind, or in the minds of your employers. Leaving out large categories of irrelevant risk will greatly simplify risk within business planning.

It is a common mistake to think of business plan risk first in terms of how much your plans for the year might be messed up – that is, risk to the work unit. You will need to think about that. You might even want to start listing any alarming thoughts – and keep that list to one side for now. The first and more important way to understand risk is how much your unit can mess up the organisation and its stakeholders – that is, risk from the work unit. You begin by understanding why your unit exists and why its outcomes matter. In other words, you first define the unit’s objectives. Doing that is the first step to confidence (step forward to that).

Now that you’ve started ‘risk management’ on your business plan, you might be anxious. In particular, you might be anxious to start listing the ways in which your business plan’s wishes might not come true. Those pathways represent risk to your work unit.

You can and should start listing those threats to your work unit. You should keep that list as an informal collection of thoughts, until you have been through the process of understanding unit objectives and outcomes.

The thoughts in your informal list might be alarming, but they do not become formal ‘risks’ until you link them with unit objectives, properly validated and understood. A potential event becomes ‘a risk’ when its effect on objectives is understood. Once you can make that connection, each informally listed scenario can become a formally registered risk.

That idea might make your head hurt for now. There’s no need. This how-to guide will take you through these stages in short, easy steps.

Risk isn’t bad, or good. Taking more risk can be the way to better performance outcomes.

A predictable result is rarely the best possible result. Your boss may want you to be more adventurous to get a better result from the year, even if you cannot guarantee an improvement, and even if you might both reach a disappointment instead. Your boss will be thinking of a big improvement, to justify being ‘adventurous’. If the boss reveals that thought, it could be a sign that there is plenty of room for your unit’s performance to improve.

Taking more risk is not a matter of turning an imaginary dial. It’s a matter of trying something different that might produce a better result, and accepting less predictability. You choose which of your unit’s outcomes might have better results, and you choose which of your outcomes become less predictable.

The ‘something different’ you might try will probably be one of your ‘strategies’, in the framework of your business plan. The change to ‘something different’ must be big enough to make a difference. That change will be uncomfortable at first.

Your boss and the organisation might welcome some types of unpredictability, especially if the unpredictability includes the potential for big improvements. They might see other kinds of unpredictability as unwise or unacceptable, for good reasons.

The how-to steps in this guide take you through risk that is both good and bad, and through risk that is both encouraged and unacceptable.


Drill-down articles

What can be left out of business plan risk

These categories of ‘risk’ can be left out: Routine and low-level events from which you can recover. Most disruptive events, even those experienced as ‘crises’. Potential events that are clearly harmful, though to someone else’s outcomes rather than those of your unit. Risks subject to separate management. Existential risk – the possibility of being abolished. But first be sure of the objectives for the unit.

New to this: This series assumes you have no prior knowledge. It does not use technical terms without explaining them first.

Parent articles

Risk in work unit business planning: What is it?

In business planning, ‘risk’ is just the possibility that your unit’s outcomes for the year will be different from those promised in the business plan.

New to this: This series assumes you have no prior knowledge. It does not use technical terms without explaining them first.

Index to the topic Risk in work unit business planning

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