Gap analysis identifies the differences between desired performance levels and existing performance levels. An organization develops programs and activities to close these gaps. In the context of gap analysis, risk is the possibility that something will affect the success of programs and activities. Organizations need to identify and assess the impact of these risk factors.
Types of Risk
Risks can be categorized as environmental, financial or operational. Environmental risk includes such things as competition, regulation and ecological elements. Financial risk includes interest rates, exchange rates and credit availability. Operational factors are internal to the organization, such as product line, budget, manufacturing facilities, processes and human resources. A SWOT (strengths, weaknesses, opportunities and threats) analysis helps identify these risks.
Risks are those factors that impact the ability of an organization or project team to achieve desired performance levels. Risk criteria define acceptable levels of risk. For example, environmental risk tolerance may be low, whereas management might tolerate financial risk to maximize return on investment. Each activity or project, designed to close a performance gap, is evaluated based on these risk criteria. Ongoing monitoring is necessary to validate the risk criteria.
Risk management provides a framework for making decisions. It reduces the uncertainty of achieving the strategic objectives, while increasing the probability of success. Management can take steps to eliminate, accept or mitigate the risk. A gap activity might carry a low probability of success due to a lack of skills within an organization. The organization can reduce the risk by developing the skills. Alternatively, the organization can avoid risk by canceling the activity or project. A third option is to accept the risk and proceed with the activity using the existing skills.
Closing the Gaps
Risk management helps an organization develop a comprehensive and manageable action plan for closing performance gaps. Quantifying the risk allows management to direct investments towards resources that are needed to increase the probability of success, thereby closing the gaps in performance levels. At the project level, for instance, the team might identify a shortfall in the budget needed to fulfill the project deliverables. The team can either adjust the deliverables to meet the existing budget or request additional money to fulfill the target deliverables.
Risk is an integral part of any decision making process. Gap analysis is a tool for identifying actions required to achieve desired outcomes. When an organization is faced with multiple action plans and project proposals, management requires a method for evaluating these options. For example, a company may require programs to achieve a certain return on investment or to meet certain ecological standards. A predetermined and consistent set of risk factors is important to ensure that programs are evaluated equitably. These risk factors need to be communicated clearly throughout the organization. Otherwise, employees and project teams may feel they are being treated unfairly.