Magazine article Risk Management

Assessing and Analyzing Risk in R&D Projects

Magazine article Risk Management

Assessing and Analyzing Risk in R&D Projects

Article excerpt

You and your colleagues arc discussing a potential research and development project when someone finally asks, "So, what risks are we really taking with this project?" To assess and analyze the risk involved in an R&D project, you first need to answer two key questions: Which risks should be included in an analysis of the R&D project, and how do you quantify them?

To understand which risks should be included in an analysis of an R&D project, companies must think like investors and employ portfolio theory. Portfolio theory states that each company's stock has two inherent types of risk: unique risk and macro-economic risk. Unique risk is particular to the stock itself. Macro-economic risk results from variations in the market and economy. If an investor has a sufficiently diversified portfolio, all unique risks are eliminated. Investors must only focus on macro-economic risk.

This same theory applies to the analysis of R&D projects. Investors are primarily concerned with what drives the value of a company. Unique risks such as the potential success or failure of one R&D project do not factor into their assessment. They know that some projects will succeed while others will fail. At the end of the day, a company wants to attract and retain investors by providing a return on investment.

Therefore it is essential to understand how the R&D project fits into the company's overall strategy. What value will the project bring to the overall company and, most importantly, its investors? For example, if the potential earnings of the project will vary substantially based on economic conditions, then the risk for that R&D project would be high. If the expected potential earnings will not fluctuate as widely given changing market conditions, then the risk can be thought of as low. Risks unique to the project should not be included in the assessment since they are not relevant.

Now that you have identified which risk should be included in an analysis, how do you quantify it? A common approach is to develop a business case that includes a forecast of future revenue and expenses. If the final product will be introduced to a nascent but potentially lucrative market, then the revenue forecast will most likely grow at a high annual rate. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.