Risk Management is the process of identifying, analyzing and responding to risk factors throughout the life of a project in order to provide a rational basis for decision making in regards to all risks. Proper risk management implies the control of possible future events, and is proactive rather than reactive; so it is embedded in to the project planning process. It will reduce not only the likelihood of an event occurring, but also the magnitude of its impact.
Importance of Project Risk Management
Projects often get started in the right direction but then get off track. For example, project managers will spend time with their teams to develop a clear scope and detailed plan. Then something happens; something unexpected—a major disaster strikes. The project manager and team move quickly into their reactive mode – they manage this risk based on their experiences and best judgment but they have no opportunity to test it out and they hope that it’ll be okay, but they do not know for sure. This is not risk management – it is management by crisis. Here are some rules to help you manage project risk effectively:
10 Rules for Managing Project Risk
The Risk Management Process is intended to reduce management by crisis. While there may always be some things that will occur that are unanticipated, most of these, through sound risk management, can be managed, rather than reacted to. Essentially, the Risk Management Process is a quality problem- solving process. Quality and assessment tools are used to determine and prioritize risks for assessment.
1. Identify the risks early on in your project
- Review the lists of possible risk sources as well as the project team’s experiences and knowledge.
- Brainstorm all potential risks.
- Brainstorm all missed opportunities if project is not completed.
- Make clear who is responsible for what risk.
2. Communicate about risks
- Pay attention to risk communication and solicit input at team meetings to ensure that risk management is perceived as important for the project.
- Focus your communication efforts with the project sponsor or principal on the big risks and make sure you don’t surprise the boss or the customer.
- Also, make sure that the sponsor makes decisions on the top risks, because some of them usually exceed the mandate of the project manager.
3. Consider opportunities as well as threats
- While risks often have a negative connotation of being harmful to projects, there are also “opportunities” or positive risks that may be highly beneficial to your project and organization. Make sure you create time to deal with the opportunities in your project. Chances are your team will identify a couple of opportunities with a high pay-off that may not require a big investment in time or resources. These will make your project faster, better and more profitable.
4. Prioritize the risks
- Some risks have a higher impact and probability than others. Therefore, spend time on the risks that cause the biggest losses and gains. To do so, create or use an evaluation instrument to categorize and prioritize risks.
- The number of risks identified usually exceeds the time capacity of the project team to analyze and develop contingencies. The process of prioritization helps the project team to manage those risks that have both a high impact and a high probability of occurrence.
5. Assess the risks
- Traditional problem solving often moves from problem identification to problem solution. However, before trying to determine how best to manage risks, the project team must identify the root causes of the identified risks.
- Risk occurs at different levels. If you want to understand a risk at an individual level, think about the effect that it has and the causes that can make it happen. The project team will want to ask questions including:
- What would cause each risk?
- How will each risk impact the project? (i.e., costs? lead time? product quality? total project?)
- The information you gather in a risk analysis will provide valuable insights in your project and the necessary input to find effective responses to optimize the risks.
6. Develop responses to the risks
Completing a risk response plan adds value to your project because you prevent a threat occurring or minimize the negative effects. To complete an assessment of each risk you will need to identify:
- What can be done to reduce the likelihood of each risk?
- What can be done to manage each risk, should it occur?
- What can be done to ensure opportunities are not missed?
7. Develop the preventative measure tasks for each risk
- It’s time to think about how to prevent a risk from occurring or reducing the likelihood for it to occur. To do this, convert into tasks, those ideas that were identified to reduce or eliminate risk likelihood.
8. Develop the contingency plan for each risk
- Should a risk occur, it’s important to have a contingency plan ready. Therefore, should the risk occur, these plans can be quickly put into action, thereby reducing the need to manage the risk by crisis.
9. Register project risks
- Maintaining a risk log enables you to view progress and make sure that you won’t forget a risk or two. It’s also a communication tool to inform both your team members, as well as stakeholders, what is going on.
- If you record project risks and the effective responses you have implemented, you create a track record that no one can deny, even if a risk happens that derails the project.
10. Track risks and associated tasks
- Tracking tasks is a day-to-day job for each project manager. Integrating risk tasks into that daily routine is the easiest solution. Risk tasks may be carried out to identify or analyze risks or to generate, select and implement responses. The daily effort of integrating risk tasks keeps your project focused on the current situation of risks and helps you stay on top of their relative importance.
The benefit of risk management in projects is huge because the outcome of project failure is wasted dollars that steal investor profits and have a negative impact on the organization’s bottom-line. Risk assessments allow you to deal with uncertain project events in a proactive manner. This allows you to deliver your project on time, on budget and with quality results.
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. And, whenever possible, measure the effects of your risk management efforts and continuously implement improvements to make it even better.