Projects are becoming more dynamic. Therefore organizations need the ability to manage the risk, or uncertainty that comes along with those changes. If a potential risk of the project is not identified early, then the project will be at a high risk to complete as per schedule, within budget, and meeting the expected quality. Thus in this blog, we are going to discuss a systematic approach project managers should follow to tackle the risk in their projects using risk management.
Let’s first understand what is risk management.
What is Risk management?
Risk management is the practice of identifying, analyzing, and responding to any risks to a project that has the potential to negatively impact the desired outcomes. Typically, project managers are responsible for overseeing the risk management process throughout the life cycle of the project.
Risk management is the part of the planning process to figure out the risk that might happen in the project and how to control that risk if it occurs.
6 Steps in Risk Management Process
To protect a project from unplanned risk, project managers typically follow the risk management processes. This process involves the following steps.
1. Identify the Risk
The initial step in the risk management process is to list all of the events that could have a negative (risk) or positive (opportunity) impact on the project’s goals. In brief, identifying the risk actually, defines what could go wrong?
There are many different types of risks in project management some of the most common are:
- Cost Risk (Cost risk referred an increase in project expenses. Cost risk refers to the possibility that the project will cost more than the budgeted amount.)
- Schedule Risk (The risk that activities will take longer than expected, and is typically the result of poor planning.)
- Performance Risk (Project fails to achieve the set objectives that are consistent with the project specifications)
- Hazard Risk (Risks associated with external hazards can include risks from storms, floods, and earthquakes.)
- Market Risk (Market risks include commodity markets, competition, and interest rate risk, as well as credit risks, and liquidity)
Risk identification mainly involves brainstorming. Furthermore consulting with industry professionals, using past experience of the team, and external research is also good practice to identify the risk. After identifying the risk it is very important to arrange all the identified risks in order of priority. Because it is not possible to mitigate all the risks at once. Prioritizing the risks helps to understand which risk we have to focus on first that can have a larger impact on the project.
2. Analyze the Risk
To determine the severity and seriousness of the risk, once a risk has been identified it needs to be analyzed. It is important to know how the risk is going to affect the project, and whether the effect is major or minor. Furthermore knowing the frequency and severity of your risks will show you where to spend your time and money, and allow your team to prioritize their resources.
To mitigate the risk we should have a deep understanding of that risk. Analyzing the risk help to dive deeper to know what is the likelihood of a risk occurring? And if they do occur, what will the ramifications be?
3. Risk Assessment
Risks need to be ranked and prioritized on the basis of their likelihood of happening and their potential effect on the project. Ranking risks provides insights to the project’s management on where resources may be needed to mitigate the realization of high probability/high consequence risk events.
There are two types of risk assessments:
- The qualitative assessment examines the criticality of an event based on its likelihood and impact.
For example, The equipment was in fine working order when the project began. At the time, the only risk the project manager could see was a lack of proper training, as most of the workers didn’t know how to use the equipment correctly.
- The quantitative assessment examines the financial impact or benefit of the risk or an event. Quantitative risk analysis examines the consequences of risk on schedule delays, cost overruns, resource consumption, and scope creep using verifiable data.
For example, During qualitative risk analysis. A project manager scored each risk a 10 on a scale of 1-10, with 10 being extremely high risk. But the project manager wants to ensure that each risk has an impact great enough to justify spending time and resources on them.
4. Risk Treatment
Risk treatment is the action to manage the risk. We need to mitigate or minimize every risk to the greatest extent possible. In order to treat risks, an organization must first identify its strategies for doing so by developing a treatment plan. The goal of the risk treatment strategy is to lower the risk’s probability of occurrence and/or mitigate the risk’s impact.
In general, there are four types of risk treatment:
- Avoiding Risk – You can choose not to take on the risk by avoiding the activities that produce the risk. Risk avoidance requires identification of the risks first and foremost.
- Transferring Risk – The project owner shifts the risk to a third party. Risk transfer is one of the most effective ways to reduce the risk’s effects.
- Mitigating Risk – You can mitigate the risk by taking the action in advance before the occurrence of the event.
- Accepting Risk – Finally, there are certain risks that are unavoidable therefore risk acceptance is choosing to face a risk.
5. Monitor the Risk
Risks and opportunities and their treatment plans are needed to be monitored and reported on frequently depending on their criticality. Not all risks can be completely eliminated – some risks always persist. Developing a monitoring and reporting framework will ensure that proper risk responses are implemented and that appropriate forum for escalation are available.
Risk management is essential because it tells businesses about risks in their working environment and enables them to mitigate risks before they occur. Properly identifying risks and analyzing them is an effective way to manage risks. It is crucial to know what the risks are, how likely they are, and what their impact might be.