‘A risk’ is one pathway by which something unknowable could cause the year-end reality to match a picture of an outcome other than planned success.
After setting out a range of possible year-end outcomes on each objective, you start identifying specific risks.
Describing risks is both a science and an art, and it is one of the essential steps to assurance.
You have defined ‘a risk’ when it links a reason for your uncertainty with an unplanned outcome for the year. Naming a reason for uncertainty is a way in which you recognise limits on what you know. Each outcome is represented by a picture in your collection. Between your uncertainty and the outcome, there will be an unpredictable event, or an assumption that may have been wrong, and your response to that event or surprising realisation.
You describe risks in a register. The register is a working store of detailed risk pathways. It is not a picture of risk for reports or conversations.
You find those pathways to outcomes other than success.
You find particular ‘risks’ with creativity and brainstorming. Worry and doubt are also productive sources, along with daydreams and aspirations.
These ingredients are all amorphous. Yet a risk must also be precisely defined, to support assurance and decisions. The questions are hard, and answering them is an art. That art relies upon your expertise, your instincts, and your mental discipline, all at once.
You record the risks in the risk register.
You can never be entirely sure that you know about every pathway to a surprise outcome, because you never know everything you don’t know. The Clear Lines lead you through turning even that uncertainty into action, by estimating outcome likelihoods directly.
Very often you will identify something that can happen—an event, or an assumption that turns out to have been wrong—yet have no clear idea about how your year-end outcomes might be affected.
Recognising and responding to those highly uncertain effects is one of the central challenges of risk management. Until you really know what can happen – and you may never really know – you recognise the range of different year-end outcomes that cannot be ruled out.
You estimate the likelihood of each complete risk pathway.
The likelihood of a pathway is a number between 0 and 1 (or between 0% and 100%) that represents your belief that the real world will include the pathway. A likelihood of 1 (100%) represents certainty that the pathway will become reality, and a likelihood of 0 (0%) represents certainty that it will not.
The important likelihood to estimate is the likelihood that reality will match the entire pathway, resulting in the unplanned outcome identified as the end of the pathway. Looking at it another way around, the important likelihood is the likelihood that the designated unplanned outcome will be reached, and that it will have been reached by the pathway described in the risk.
That important ‘likelihood’ may be much lower than the likelihood of the event or wrong assumption within the pathway, because the identified outcome may not always follow.
When estimating the likelihood of a risk pathway, you take into account the effects of any controls or response actions on the pathway to the year-end outcome.
You also estimate directly the likelihood of each outcome picture. The likelihood of an outcome reflects the total of the likelihoods for all ‘risks’ (pathways) leading to that outcome.
You have assessed 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. The likelihoods of each of the outcomes for an objective must total 100%.
Ideally, each outcome likelihood will match the total of the likelihoods of the risk pathways leading to that outcome. You will find them to be different. Exploring the reasons for differences will be a very productive way to understand the confidence and uncertainty in your year-end outcomes.
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.
In the Clear Lines, risks are acceptable or unacceptable at the level of an outcome likelihood. Once you have decided to accept or reject risk at that level, there is little further use in classifying individual risk pathways as acceptable or not.
Your picture collection as a map of confidence: The Risk Based Outcomes Forecast
When you have decided which outcome likelihoods are acceptable and unacceptable, you will know how to feel about the future. You will know where you are confident, where you have doubt, and where you must sound an alarm.
You can share a map of this confidence.
Your map of confidence is your collection of outcome pictures, on one page. It shows the assessed likelihood for each outcome picture. Each picture’s likelihood is tagged as acceptable, unacceptable, or something in between.
You can update this map and share it at multiple times during the year. Updates will come from actions you take to change risk, from actual experience and from new knowledge. If you discuss performance prospects and issues with the boss every month, this map is an excellent focus for that conversation. Even the monthly changes to the map will be excellent conversation starters.
Within the Clear Lines, the picture collection showing likelihood and acceptability for each outcome picture is called the Risk Based Outcomes Forecast.
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