What is Risk Management?

July 25, 2020
Fahad Usmani
Risk Management

We all manage risks every day.

For example, let’s say you are going to catch a train. Even though it is a ten-minute walk from your home to the station, you leave 20 minutes before the arrival time. You give yourself an extra margin of ten minutes. 

You do this to avoid any unforeseen delays in your travel, such as traffic.

What you have done is an example of risk management.

What is Risk Management?

Risks always happen in projects, regardless of how well you may have planned. Every project is unique and requires a unique approach.

A risk is an unplanned event that, if it occurs, can affect your project: e.g., weather emergencies, theft, changes in political conditions, shortage of materials, etc. The effect of risk can be negative or positive.

If negative, you should make an effort to reduce the impact or probability of the risk happening. If it is a positive risk, you should try to increase the impact or the chance of occurrence. 

For example, you may get a discount for buying materials in bulk, or completing the project early may get you another project.

How do you achieve these objectives? 

You do so through risk management.

Risk management is a systematic, and proactive approach to manage risks. It is a process where you identify the risks and develop a strategy to manage them.

However, management ignores risk management most of the time.

Why Risk Management is Often Ignored? 

Risk management is a crucial part of project management but is often ignored by management. This can be because:

  1. Management considers it to be an added cost
  2. Project managers find it to be a time-consuming task

Both assumptions are wrong. Risk management helps reduce the cost of the project, and this outweighs the cost of not managing them.

The typical attitude of upper management shows lack of knowledge and prejudice. If you don’t apply risk management to your project, you may not get the desired results.

For example, assume there is a risk that one of your pieces of equipment may break during the project’s execution. Although you know this may happen, you do not have a backup plan.

Now, suppose during the project’s execution, the equipment breaks down. You have to repair it or rent new equipment. Repairing or renting it last minute will cost you a lot, so your project’s budget may increase, or the schedule may be delayed.

By not following risk management, you lose money and increase the chance of project delays.

Let’s look at another example.

You know that one of your important team members may go on emergency leave and you do not make a plan to handle this situation. During the peak of the project, your team member takes that leave. You panic and start searching for a replacement.

This may delay your project.

Risk management is not a time-consuming task; it actually helps you to complete your project on time and on budget.

The objectives of risk management are to decrease the possibility of negative risks and increase that of positive risks. 

You can manage risks as an aggregate for the large population of events (macro) or on an event-by-event (micro) basis.

Keep the following points in mind while applying risk management principles: 

  • The cost of managing risk should not outweigh the cost of the risk itself. For example, suppose a risk may cost you 100 USD if it occurs. In this case, the cost of the risk response should not be more than 100 USD.
  • Risk management is a people-oriented process and expert judgment is a key tool.
  • Risk management should be fluid and iterative.

Benefits of Risk Management

Risk management is a proactive process. You find the risks before they happen and take measures to prevent or contain them. Managing a risk before it happens is less costly than what you will spend after.

Let’s see it with the help of an example.

Suppose you’re a project manager of a construction project. You identify a risk that it might rain, which may damage the construction materials lying on the open ground.

You make a plan to mitigate this risk and assign it to a risk owner. This is a person who makes sure that if the identified risk occurs, the mitigation plan is carried out. 

Your plan says that if storm cloud movement is observed and rain is imminent, the risk owner will put a water-resistant cover over the materials lying on the ground.

Now, guess what will happen if rain falls?

The risk owner will know to act. He will not call the project manager; he will implement the risk mitigation plan.

You can relax because you know that someone is there to take care of it.

How would you have managed the situation in the absence of this plan, and what would have happened? There would be chaos, and team members would call you. You would have rushed to the location to try and keep the materials from being damaged, but they would have already gotten wet.

Hence, you can see that if you don’t have a plan to manage risks, recovering once a risk has occurred is far more expensive and time-consuming.

Risk management helps you complete your project with minimal hassle.

It brings many benefits to organizations. Some of them are as follows:

  • It helps achieve your project’s success with fewer obstacles.
  • Saves you resources, money, and time.
  • Improves your organization’s reputation.

A risk management system ensures that the organization is prepared to deal with any problems, which increases its trustworthiness.

Problems with Risk Management

If your organization does not follow risk management, it could be challenging for you to convince them. Management will see it as an additional financial burden with no monetary benefit.

Explain the benefits of risk management. Show them the project’s cost with and without the risk management.

Project failure, cost overruns, and schedule delays are a few examples of the drawbacks.

Show them the probability of completing the project with and without risk management. You can use a Monte Carlo analysis for this purpose.

It is difficult to contradict valid arguments that are supported by data analysis.

Summary

Every business faces risk. Successful businesses manage them and unsuccessful businesses ignore them. Risk management prepares organizations for the unplanned and saves them from unwanted incidents, sparing costs and delays. Therefore, it is necessary for organizations to use risk management to complete projects with fewer headaches and grow their business.

Does your organization use risk management? Please share the reasons in the comments section.

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Speak Your Mind

  • I am working with an MNC currently and would like to obtain Risk Management Certification. I have not done PMP, which I think is a requirement. So, can you please help me how to go about it.

    • Both certification are different and independent. You can apply for the PMI-RMP exam without holding PMP certification.

      Hope it helps.

  • Dear Fahad,

    I find your blogs very concise and informative. I’m planning to take PMP exam sometime soon. Will keep visiting your blogs for knowledge refresh. Nice effort. Keep it up..

  • Like the layout of your home page. Articles to the left, right, and center has main text. Good format. Easy to understand the site, What is Risk Management? is well written and makes sense. “If you were wanting to take the PM EXAM would you use the site for resources?” The site looks like a great place for resource information. Don’t mean to rah-rah everything, but I DO thing it’s all good.

  • mr fahad osmani

    like your other artickles, i enjoied reading it.
    i have just became a PMP and should admit reading your summeries in net was a success factor for me.

    thanks and regards
    m.najmi
    25 may,2013

  • {"email":"Email address invalid","url":"Website address invalid","required":"Required field missing"}

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