Risk management is a proactive and realistic alternative the "all will go well" attitude that is portrayed by many project stakeholders.
Project managers should worry about risk because it is inherent in any project. Project managers must, therefore:
- avoid being blindsided;
- manage the project outcome; and
- avoid the crisis management of "firefighting mode" syndrome.
"Risk Management includes the processes concerned with ... identification, analysis, responses and monitoring and control on a project. The objectives ... are to increase the probability and impact of positive events and decrease the probability and impact of events adverse to a project." (PMBOK, 237)
From the above definition, it must be noted that project managers should manage not only the negative issues, but the positive ones as well: threat versus opportunity.
Difference between Risk and Opportunity
Risk and opportunity are related. An opportunity cannot be realized without taking risks. Risk is essential to making the project progress. Balance is the key.
Opportunity and risk are at their highest levels at the start of the project while they are at their lowest at the end of the project. This is so because there are many unknown factors and uncertainties in the beginning. However, as the project progresses, these unknown factors become known, therefore risk and opportunity continuously decrease until there is none left at the end of the project.
Effective Risk Identification on a Project
There are essentially three components of risk. Risk is the probability of an event occurring and the significance of the consequences. It is characterized by the risk event, the risk probability and the impact of the event. It is not only the possibility of suffering harm or loss (negative consequences) but also the possibility of benefiting from an opportunity (positive). In other words, it is measure of the inability to achieve the project's objectives within the allotted budget and time.
Additionally, there are two types of overall risks. These are:
- Organizational risk - this type is specifically related to the operation of a business enterprise, whether it is public or private. The project manager has no control over this type of risk.
- Project risks - this type is directly linked to the planning and delivery of a product to a customer. The project manager has some control over this type of risk.
Factors that Affect Individual and Organizational Perceptions of Risk
There is a trade-off between control that is achieved on the project and the project risk. The more control the project manager has over the project, the lesser the project risk. Therefore, the project manager would be more willing to accept the project risk. The reverse is also true. The less control the project manager has over the project, the greater the risk. The project manager becomes less willing to accept the risk.
The factors affecting risk perception are:
- organizational environment;
- personal risk preference;
- time to event;
- previous successes and failures; and
- information availability in terms of amount, quality and accuracy.
Inexperienced people may not know what to look for and, thus, may not see all the risks.
The Risk Management Process
Risk management is a dynamic process with the following steps:
- Risk identification - this determines the risks and document the characteristics;
- Risk quantification and qualification risk analysis - this evaluates and analyses the risks and assess the outcome;
- Risk response (mitigation) planning - this defines the response steps;
- Risk monitoring and control - this executes the risk management plan; and
- Risk documentation - this establishes the project database and as documents procedures and identifies responsibilities, as well as conduct post-project reviews.
Benefits of Risk Management
- It provides more control or project outcomes;
- It helps avoid or mitigate the consequences;
- It provides support for smarter decisions;
- It provides an assessment of what is ahead;
- It helps establish priorities;
- It reduces the probability and impact of undesirable events; and
- It encourages the management of positive events.
Risks should be managed throughout the life of the project. The risk management process provides stability and direction during the life of the project. Project managers should make risk a key component on the project plan. They should facilitate the identification of the risk, encourage awareness of risks, delegate responsibility to the appropriate team members and review risks as a normal part of team meetings.
Sources
Wysocki, Robert K, Beck, Robert (Jr.) and Crane, David B. "Effective Project Management". John Wiley & Sons, Inc., 2000
Lewis, James P. "Project Planning, Scheduling and Control". The McGraw Hill Companies, Inc., 2001
Project Management Institute. "A Guide to the Project Management Body of Knowledge (PMBOK Guide) - Third Edition" Project Management Institute, 2004
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