What Is Risk Management?
Risk Management is the process of identifying, analyzing and responding to risk factors throughout the life of a project and in the best interests of its objectives. Proper risk management implies control of possible future events and is proactive rather than reactive. For example:
An activity in a network requires that a new technology be developed. The schedule indicates six months for this activity, but the technical employees think that nine months is closer to the truth. If the project manager is proactive, the project team will develop a contingency plan right now. They will develop solutions to the problem of time before the project due date. However, if the project manager is reactive, then the team will do nothing until the problem actually occurs. The project will approach its six month deadline, many tasks will still be uncompleted and the project manager will react rapidly to the crisis, causing the team to lose valuable time.
Proper risk management will reduce not only the likelihood of an event occurring, but also the magnitude of its impact.
Risk Management Systems
Risk Management Systems are designed to do more than just identify the risk. The system must also quantify the risk and predict the impact on the project. The outcome is therefore a risk that is either acceptable or unacceptable. The acceptance or non-acceptance of a risk is usually dependent on the project manager’s tolerance level for risk.
If risk management is set up as a continuous, disciplined process of problem identification and resolution, then the system will easily supplement other systems. This includes; organization, planning and budgeting, and cost control. Surprises will be diminished because emphasis will now be on proactive rather than reactive management.
Risk Management… A Continuous Process
Project Teams identify all of the possible risks that might jeopardize the success of their project. Then they identify the risks which are the most likely to occur. They make these decisions based on past experiences, lessons learned and research. This helps quantify the likelihood of occurrence and the impact on the project.
Early in the project there is more at risk then as the project moves towards its close. Risk management should therefore be done early on in the life cycle of the project as well as on an on-going basis.
The significance is that opportunity and risk generally remain relatively high during project planning (beginning of the project life cycle) but because of the relatively low level of investment to this point, the amount at stake remains low. In contrast, during project execution, risk progressively falls to lower levels as remaining unknowns are translated into knowns. At the same time, the amount at stake steadily rises as the necessary resources are progressively invested to complete the project.
The critical point is that Risk Management is a continuous process and as such must not only be done at the very beginning of the project, but continuously throughout the life of the project. For example, if a project’s total duration was estimated at 3 months, a risk assessment should be done at least at the end of month 1 and month 2. At each stage of the project’s life, new risks will be identified, quantified and managed.
What a Project Team will want to achieve is an ability to deal with blockages and barriers to their successful completion of the project on time and/or on budget. Mitigation plans help ensure risk likelihood is reduced and contingency plans help ensure most risks can be managed as they arise.
Why Do Risk Management?
Assessing and managing risks is the best weapon you have against project catastrophes. By evaluating your plan for potential problems and developing strategies to address them, you’ll improve your chances of a successful, if not perfect, project.
Additionally, continuous risk management will:
- Ensure that high priority risks are aggressively managed and that all risks are cost-effectively managed throughout the project.
- Provide management at all levels with the information required to make informed decisions on issues critical to project success.
If you don’t actively attack risks, they will actively attack you!!
How to Do Risk Management
Start by looking at various sources of risks. There are many sources as you’ll see from this brief list. The project team should reference this list and other sources of risks to help brainstorm and identify all possible sources of risk.
Various sources of risk can include:
- Project Management
- External Unpredictable
- External Predictable
- Top management not recognizing this activity as a project
- Too many projects going on at one time
- Impossible schedule commitments
- No functional input into the planning phase
- No one person responsible for the total project
- Poor control of design changes
- Problems with team members.
- Poor control of customer changes
- Poor understanding of the project manager’s job
- Wrong person assigned as project manager
- No integrated planning and control
- Organization’s resources are overcommitted
- Unrealistic planning and scheduling
- No project cost accounting ability
- Conflicting project priorities
- Poorly organized project office
- Unforeseen regulatory requirements
- Natural disasters
- Vandalism, sabotage or unpredicted side effects
- Market or operational risk
- Currency rate fluctuations
- Technology changes
- Risks stemming from design process
- Violating trademarks and licenses
- Sued for breach of contract
- Labour or workplace problem
- Litigation due to tort law
Follow a Risk Analysis Process
The Risk Analysis Process is essentially a quality problem solving process. Quality and assessment tools are used to determine, prioritize risks, assess and manage risks. A good risk analysis process will include these elements:
Identify the Risk
The project team will brainstorm all of the possible risks, events, occurrences, etc., that might occur which might prevent either all, or a part of the project, from being completed on schedule, budget, and so on. It is important to note that the project going over schedule and/or budget are not risks. They are the result of a risk.
Assess the Risk
The project team will group similar related risks into categories. For example, all risks associated with product innovation will be grouped together, all risks associate with team resources will be group together and so on. Then they will prioritize these risk groups by identifying the likelihood of each group of risks and their impact on the project, should they occur.
Develop Responses to the Risk
The project team will conduct a cause and effect analysis of the high ranked risk groups and their related risks. They’ll ask what will cause each risk to occur and how will each risk, in the group, impact the project, team, stakeholders, customers, leadership and so on. Then the team will assess these risks to determine what can be done to reduce the likelihood of the risks and what can be done to manage the risks, should they occur?
Develop Mitigation and Contingency Plans
The project team will create mitigation plans to reduce risk likelihood and contingency plans to manage risks, should they occur.
Your Call to Action
The outcome of project failure is wasted dollars that steal investor profits and have a negative impact on the organization’s bottom-line. Undertaking a Risk Assessment on your project is critical for project success and proper return on investment. Complete your risk assessment early on in the project’s execution and continuously (i.e.; every 2 to 3 months), throughout the project’s lifecycle. This will increase your project’s success likelihood.