Learn how to do risk analysis with the William T. Fine Method

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In this article we will talk about:

Types of Risks

When we are talking about risk analysis, our first challenge is to understand what are the main problems that can occur in our work environment and for that it is worth to see what are the main types of risks that exist:

  • Management Risks - problems stemming from poor decision-making, either due to lack of knowledge base, little managerial experience or error of judgment
  • Risks of accident - normally related to safety of the work environment or operation of machines and equipment. They can range from severe accidents to more serious accidents with physical consequences for the professional in question
  • Chemical / biological hazards - problems with particulates, aerosols, gases, vapors, dust, fumes, etc. that can cause health damage
  • Ergonomic hazards - usually related to the execution of labor activities and ranging from repetitive movements and manual transport of heavy loads to improper posture and imposing excessive rhythms
  • Physical risks - are connected to the work environment itself and include noise, poor lighting, excessive vibration and uncomfortable thermal environment.

Depending on the business environment of your company, one type of risk may be more relevant, but what matters in practice is that you can measure the most important risks, and from that measurement, you can decide where invest in risk prevention, be it a financial investment or a preventive effort.

How to do risk analysis

In general, risk analysis is done taking into account two main factors

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  • Probability
  • Impact

Basically you should analyze the chance of a risk happening (probability) and how much this risk will influence your company if it actually happens (impact). This concept is easier to visualize in a matrix of risks:

Risk management with risk matrix - risk matrix

See that for each risk you should say whether the probability is rare, low, medium, high, or practically certain to happen, and in the case of impact, it will have no impact, whether it is mild, medium, severe or very serious. Depending on the weights used for each response you will have a final note for your risk.

Assuming I have different 3 risks and use weights from 1 to 5 for each of these responses, I would have the following scenario:

  • 1 Risk - High Probability (4) x Light Impact (2) = 8 - High Risk
  • 2 Risk - Rare Probability (1) x Light Impact (2) = 2 - Low Risk
  • 3 Risk - Average Probability (3) x Severe Impact (4) = 12 - Extreme Risk

That way, instead of subjectively assessing which risk to deal with first, you have a clear measurement of which risk to act first in a very simple and objective way. I talked a little more about the risk matrix in an article on how to do project risk management. Now, this method, interesting as it is, forgets a primary factor.

How the William T. Fine Method can help further

If we only take into account the variables of probability and impact would be forgetting one of the most important factors for any business, which is money and how much it costs to solve each of these risks. It is precisely by taking into account this extra variable that the William T. Fine method enters.

In this methodology there are two primordial variables:

  • Degree of Criticity - which is a kind of risk matrix that takes into consideration 3 variables: consequence (similar to impact), exposure to risk (that is the frequency that the risk usually manifests) and probability.
  • Investment justification - takes into account the degree of criticality compared to the cost factor (which analyzes the amount to be invested) and the degree of correction (which shows how much of the risk will actually be corrected)

Not to be too general let's see exactly how this methodology works.

Risk Analysis by the William T. Fine Method

As I said, the William T. Fine method has two main variables that need to be calculated. Let's see exactly how to do this:

1. Degree of Criticity

Factor Consequence - Determine the level of consequence if the risk / problem occurs:

  • Catastrophic breakdown of end-of-business activity - 100
  • Severe - Damages - 50
  • Grave - 25
  • Moderate - 15
  • Lightweight - 5
  • None - Small impact - 1

Exposure to Risk Factor - Determine how often this risk / problem occurs or can occur:

  • Several times a day - 10
  • Once a day, often. - 5
  • Once a week or a month, occasionally. - 3
  • Once a year or a month, irregularly. - 2
  • Rarely possible, but not infrequently known - 1
  • Remotely possible, do not know if it has already occurred - 0,5

Probability Factor - Determine the chance of the risk / problem occurring

  • Expected to happen - 10
  • Completely possible - 50% chance - 6
  • Coincidence if it happens - 3
  • Remote Coincident - 1
  • Extremely remote but possible - 0,5
  • Practically impossible, a chance in a million - 0,1

Now just multiply the values ​​of the chosen variables that you will have your GC - Degree of Criticality. According to the GC response, you will have a risk treatment indicator, which works like this:

  • GC greater than and equal to 200 - Immediate correction - risk has to be reduced
  • GC smaller than 200 and larger than 85 - Urgent correction - requires attention
  • GC less than 85 - Risk must be monitored

In a simple example, if we have:

  • Factor Consequence - Severe - Damage (50)
  • Exposure to Risk Factor - Once a week or a month, occasionally (3)
  • Probability Factor - Remote Matching (1)

The degree of criticality would be 50 x 3 x 1 = 150, which would indicate an urgent risk treatment requiring attention.

2. Investment justification

So far, we have had a scenario similar to that of the risk matrix, but it is precisely at this point that the William T. Fine method helps with the financial issue. The Investment Justification is calculated by the formula:

  • JI = GC / (Cost Factor x Degree of Correction)

Again, let's enter the calculation of these variables:

Cost Factor - is a valuation of how much it would cost to prevent the risk of happening. (note that the gradation is made in dollars, so if your solution is in reais, adapt with the exchange rate of the time)

  • Greater than $ 50.000 - 10
  • Between $ 25.000 and $ 50.000 - 6
  • Between $ 10.000 and $ 25.000 - 4
  • Between $ 1.000 and $ 10.000 - 3
  • Between $ 100 and $ 1.000 - 2
  • Between $ 25 and $ 100 - 1
  • Less than $ 25 - 0,5

Degree of Correction - Indicates how much of the risk will be eliminated

  • Risk deleted - 100% - 6
  • Reduced Risk - 75% - 4
  • Reduced risk between 50% and 75% - 3
  • Reduced risk between 25% and 50% - 2
  • Reduced Risk Less Than 25% - 1

Still in our example that had GC = 150, if we had to make an investment of R $ 30.000 that would cause our risk to be considerably reduced (up to 75%), we would have the following justification for investment:

  • JI = 150 / (3 x 4) = 150 / 12 = 12,5

Now comes one of the most interesting parts, your investment justification needs to be plotted on a valuation scale that has 3 possible answers:

  • IJ lower than 10 - doubtful investment
  • IJ between 10 and 20 - normally justified investment
  • IJ greater than 20 - fully justified investment

In our case we are in the middle, with an investment that is justified. Now, you can not rely solely and exclusively on a risk, you need to analyze all the risks of your company. In the example below, we have a list of several risks, already with the GC and IJ valuation done automatically in our risk analysis worksheet:

risk analysis method william t fine

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  1. Good morning,

    Very interesting about the article about the Fine methodology. A question in Riesgos's Analysis Sheet would be to download the file? Seems like a link but there is nothing.



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