In our daily life, we all know what a risk is, and we are managing it on daily basis, knowingly or unknowingly. We take a risk, analyze it, and take measures to stop or mitigate its effects.
For example, let’s say that you are going to the station to catch the train. Even though you know it is a 10 minute walk from your home to the station, you leave your home 15 minutes early. You give yourself an extra margin of 5 minutes. You do this to avoid any unforeseen condition which may cause a delay in your travel, such as traffic.
Risk management is nothing but a systematic proactive approach towards all possible risks, and taking measures to manage them. Risk management is a process where you identify the risks, and develop a strategy to manage them.
In risk management, you ask two questions of yourself:
- What may go wrong? And
- If something wrong happens, how to prevent it?
Risks are inherent in all kind of projects regardless of how well you planned it, or how much experience you have in dealing with such kinds of projects. Every project is unique and requires a unique approach.
A risk can be anything unexpected and unpredictable; e.g. tsunami, theft, changes in political condition, shortage of any materials, etc. These kinds of risks may damage or affect your project or its outcome.
Risks are not necessarily negative; sometimes they can bring an opportunity as well. For example, buying material in bulk may give you a discount, or completing your project early may award you a new project.
Risk management is a very important and unfortunately most ignored part of the project management plan.
Risk Management is ignored because of two primary reasons:
- Organizations consider it as an additional cost to them, and
- The Project Manager and his team find it a time-consuming task.
However, both assumptions are wrong. Risk management helps the project to achieve its objective, and the cost of managing the risks outweighs the cost of not managing them.
For example, let’s say that there is a risk that one of your pieces of equipment may break down during the project execution which may affect your project. Although you know the risk, you did not make a plan to deal with this risk.
Now, suppose during the project execution, the equipment breaks down. In this case, either you have to repair it, or you will rent a new piece of equipment. This will cost you a lot, your project’s budget may increase, and/or the schedule may be delayed.
You can clearly see that by not following the risk management, you lose a lot of money and chance of a delay in the project schedule.
Let’s see another example.
Although you know that one of your important team members may go for an emergency leave, you did not make a contingency plan to handle this situation. Now, during your project execution this member takes emergency leave. You become panicked and start searching for his replacement.
It may cost you a lot of time which may delay your project’s schedule.
Risk management is not a time-consuming task; on the contrary, it saves the time, and helps you to complete your project on time.
Before we move any further, let’s see the definition of Risk and Risk Management.
As per the PMBOK Guide 5th edition, project risk is an uncertain event or condition that, if it occurs, has a positive or negative effect on one or more project objectives.
And risk management is the process of conducting risk management planning, identification analysis, response planning, and controlling risk on a project.
The sole objective of risk management is to decrease the possibilities of negative risks, and increase the possibilities of positive risks.
Risk can be managed as an aggregate for the large population of events (macro), or it can be managed on an event-by-event (micro) basis.
In project management, risk management is managed by considering a large population of events.
You should note the following points while applying the principles of risk management to your project.
- Cost of risk management should not outweigh the cost of risk itself. For example, suppose some risks may cost you $100 USD, if they occur. In this case, the cost of Risk Management should not be more than $100 USD.
- Risk management is a people oriented process. Expert Judgment is a key tool & technique for this process. You must consider the human factor in your Risk Management.
- It should be fluid and iterative.
Benefits of Risk Management
Risk management is a proactive process. In risk management you identify the risks before they happen and take measures to contain them.
Managing the risk before it happens is less costly than the cost you will spend once it occurs.
Let’s see it with the help of an example.
Suppose you’re a project manager of a construction project. During the Risk Identification process, you identify a risk that the rain may fall during your project execution and may damage the construction material lying on open ground.
You make a plan to mitigate this risk and assign it to a risk owner (A risk owner is a person who makes sure that if the identified risk occurs, the risk mitigation plan should implement properly). Your plan says that, if the cloud movement is observed and the rain is imminent, the risk owner will bring the water-resistant cover and put it on the construction material lying on the ground.
Now, guess what will happen if the rain starts falling?
The risk owner will bring the waterproof sheet and cover the materials. He even will not bother to call the project manager. He will simply implement the risk mitigation plan.
Moreover, you will also be relaxing because you know that someone is there to take care of it.
Just think for a moment that you did not have this plan, what would have happened. There will be chaos everywhere, team members will be calling you and you will be calling them. You will rush to the spot try to stop wetting the material by any means. However, until you take any action, most of the material will have been washed.
Hence, you can see that if you don’t have a plan to manage the risks, how expensive and time-consuming it could have been for you to recover once the risk has been occurred.
Therefore, if you want to complete your project successfully with minimum hassle, you must follow risk management.
Risk management brings many benefits to organizations. Some of them are as follows:
- The most important benefit of project Risk Management is that it helps you achieve your project’s success will less obstacles.
- It saves you resource, cost and time.
- Improves your organization’s reputation.
Having a solid risk management System ensures that your organization is well prepared to deal with any kind of trouble, and hence increases its trustworthiness.
Problems with Risk Management
If you’re a project manager and your organization does not support risk management, it could be very difficult for you to convince your organization to start using risk management. Risk management involves money, and getting money from the management is not an easy task.
It is very important for you to understand the importance of risk management. Unless you know its importance, you cannot convince top management about it.
You have to show them the benefits of applying Risk Management to the project. Show them that without risk management how much the project may cost to complete, and how much it will cost if you apply the principles of risk management.
Project failure, cost overrun, and schedule delay are a few examples of not following risk management.
Show them the probabilities of completing the project with risk management and without risk management.
Show them your analysis. No one can contradict to data derived from some logical calculation. Surely they will listen to you.
(Tip: you can use Monte Carlo analysis for this purpose.)
Risk management is a very important aspect of project management, and most often is ignored by management. The reason behind this is the ignorance of knowledge and false prejudice that risk management adds cost to the project. However, this is not true. If you don’t apply risk management to your project, it is more likely that you may not get the desired result from your project. Therefore, it is necessary for you to convince your management to apply risk management to your project. It will help you complete your project successfully with fewer headaches.
This was a short introduction of Risk Management, in next blog post I’ll discuss about the risk management plan.