Project risk management is the process of identifying and planning for potential risks, which are factors with the potential to affect the schedule, budget, or performance of your project. It’s a concept that causes us to have (in addition to Plan A), a Plan B, C, and even D if a project is big or has enough moving parts.
While risk is impossible to eliminate completely, a well-developed project risk management plan will reduce not only the likelihood of an event occurring but also the significance of its impact if Murphy’s Law does take effect. Your plan is like your auto insurance: you hope you never have to use it, but if issues arise, you’re glad it’s in place.
So how can you address your project’s risks? Here are some guidelines that can help busy managers identify, assess, and manage the risks that could arise during the timeline of a project.
1. Identify Risks That Apply
The first step in project risk management is asking yourself, “What can go wrong?” Now is not the time for optimism: when trying to identify risks, you need to be critical. If you have experience in the project type you’re planning for, let it guide you, but don’t rely on it 100%, as no one has seen everything.
Other risk identification techniques include:
- Brainstorming with your team. Ask them what issues they have encountered on past, similar, projects.
- Interviewing subject matter experts. For example, if you’ve been tasked with developing a booking app for a popular travel website, talk to developers who have worked on booking and scheduling software. Get their advice on what risks you should plan for.
- Doing a SWOT Analysis to get a picture of the project strengths, weaknesses, opportunities, and threats. For example:
- A strength is that you are developing a system that people are asking for and that is easy to understand.
- A weakness is that the service is not well known outside of the U.S.
- An opportunity is that the company name is a trusted one
- A threat is that local companies outside of the U.S. may try to develop their own, region-specific systems
A firm understanding of both the good and not-so-good will help you anticipate what problems you are likely to encounter and what resources you have to deal with them.
- Putting together an Assumption Analysis. An assumption is something presumed to be true or certain without valid proof. Ask the client and other stakeholders what assumptions they have about the project outcome and document any risks associated with them.
These are all ways that you can identify risks commonly associated with your project type and create profiles for each of them. Once you’ve compiled a profile for each one, inform stakeholders such as the client and company management and provide them with copies of your documents.
2. Assess the Potential Effects of These Risks
Understanding the potential effects of a risk is a precondition for a sound response. Risk assessment is the process of analyzing each risk for:
- The likelihood that it will occur
- The impact on the project if it does happen
There are two commonly recognized methods:
- Qualitative risk analysis, which prioritizes risks using a rating scale that scores them for the probability of occurrence and severity of impact on project objectives if they happen.
- Quantitative risk analysis assigns a numerical (quantitative) rating to the highest priority risks. It establishes a quantitative basis for decision-making when uncertainty arises.
No matter which method you use, focus more on those risks that are most likely to happen and those with the most detrimental effects if they do occur.
3. Develop Risk Response Strategies
In project risk management, there are four commonly used strategies you can utilize to respond to risk. They are:
- Avoid: It may be possible to avoid an imminent risk by making a change to the project plan. Examples include adjusting the scope, reducing or extending the timeline, or altering the strategy.
- Transfer: Transfer refers to passing the risk to another party. This doesn’t eliminate the risk: it merely assigns the responsibility for managing it to a third party. Common examples of transferring risk include product warranties, performance bonds, and insurance packages.
- Mitigation: When you mitigate risk, you reduce the probability of it happening and/or the consequences if it does occur. Examples that are commonly seen in project risk management include stable supplier relationships, thorough and appropriate team training, and creating a high degree of redundancy in the planning process.
- Acceptance: Acceptance of risk means that you do not try to prevent risk by changing the project management plan. Passive acceptance means that you and your team deal with a risk if it occurs while active acceptance means that you have a contingency plan in place.
4. Monitor Risk Status as Project Unfolds
Take some time each week to monitor the progress of all identified risks and check for sign of any new ones. Unlike some pre-launch tasks, project risk management does not stop after work begins: it is a critical element that must be reviewed at every stage of the project lifecycle. Make sure to create a risk status report and make it available to the client and upper management for their information and input.
Why Project Risk Management is So Important Today
Given the new variables introduced by technology, the importance of risk management in modern projects is more important than ever. If you deal with risks and uncertainties in a proactive manner instead of hoping for the best, benefits include:
- A reduction in threat impact
- Preservation of the original project budget because you avoided expensive mistakes
- A team that can concentrate on its tasks without having to worry about jumping into firefighting mode over problems that could have been prevented with some planning
The overall outcome is a project that is completed on schedule, within the allotted budget, and with the quality results that your client hired you to achieve.