RISK MANAGEMENT

DEFINITION OF RISK
Project risk is defined as any possible event that can negatively affect the viability of a project.
Project risk is frequently expressed in equation as:
Risk = (probability of event) (consequences of event).

Effective risk management goes a long way toward influencing project development. To be effective, however, project risk management needs to be done early in the projects life.

DEFINITION OF RISK
Risk management is an important element in overall project planning. It identifies specific risks that can have a detrimental effect on project performance and quantifies the impact each risk may have. The impact of any risk factor is defined as the product of the likelihood of the vents occurrence and the adverse consequences that would result.

DEFINITION OF RISK
The tremendous number of unknowns in the early phases of a project makes risk highest at this level. As the project moves forward, the team continues to address risk with technical, administrative and budgetary strategies.

THE FOUR KEY STAGES IN PROJECT RISK MANAGEMENT

There are four (4) distinct phases of project risk management. These are:
1. 2. 3. 4. Risk Identification. Analysis of probability and consequences. Risk mitigation strategies. Control and Documentation.

THE FOUR KEY STAGES IN PROJECT RISK MANAGEMENT

1. Risk Identification: This phase focuses on determining a realistic set of risk factors that a project faces. 2. Analysis of probability and consequences: In this phase, the project team prioritizes its responses to these various risk factors by assessing the impact factor of each one. The impact factors are determined either in a quantitative manner, by using a matrix approach and consensus decision making, or in more quantitative ways, in which all relevant probability and consequence parameters are laid out and used to assess overall project risk.

THE FOUR KEY STAGES IN PROJECT RISK MANAGEMENT

3. Risk Mitigation Strategies. The project team begins the process of developing risk mitigation strategies once a clear vision of risk factors is determined. 4. Control and Documentation. The last step in the risk management process, is based on the knowledge that risk management strategies are most effective when they have been codified and introduced as part of standard operating procedures. The goal is to create systematic and repeatable strategies for project risk management.

THE PRIMARY CAUSES OF PROJECT RISK

The five primary causes of project risk are:
Financial Risk. Technical Risk. Commercial Risk. Execution Risk. Contractual or Legal Risk.

THE PRIMARY CAUSES OF PROJECT RISK

Financial Risk: This refers to the financial exposure a firm opens itself to when developing a project. If there is a large up-front capital investment required, as in the case of Aircraft industry or a new venture, the company is voluntarily assuming a serious financial risk in the project. Without a contractual buyer prior to the construction, those companies agree to accept significant financial risk in the hope of selling the product after it is completed.

THE PRIMARY CAUSES OF PROJECT RISK

Technical Risk: When new projects contain unique technical elements or unproven technology, they are being developed under significant technical risk. The technical risk may be minimal or substantial depending on whether the project is a modification to an already developed product or an entirely new product. The greater the level of technical risk, the greater the possibility of project underperformance in meeting specification requirements.

THE PRIMARY CAUSES OF PROJECT RISK

Commercial Risk: Projects are usually developed for a definite commercial intent (profitability). The degree of unknown commercial success once the product or service is introduced into the marketplace is the commercial risk. Commercial risk is an uncertainty that companies may willingly accept, given that it is virtually impossible to accurately predict customer acceptance of a new product or service venture.

THE PRIMARY CAUSES OF PROJECT RISK

Execution Risk: These are the specific unknowns related to the execution of the project plan. Execution risk is a broad category of efforts that seek to assess any unique circumstances or uncertainties that could have a negative impact on execution of the project plan. Elements in the environmental scan (SPELT) for instance.

THE PRIMARY CAUSES OF PROJECT RISK

Contractual or Legal Risk: This form of risk is usually consistent with projects in which strict terms and conditions are drawn up in advance. Companies naturally seek to limit their legal exposure through legal protection, but it is sometimes impossible to pass along contractual risk to other parties. Eg. In a monopolistic market, lost of items in cars at car parks, delays in delivery, damages in transit have to be factored as part of the legal or contractual risks.

THE PRIMARY CAUSES OF PROJECT RISK

After understanding the broad categories of risk, one may want to anticipate some of the more common forms of risk in projects. These are:
Absenteeism. Resignation. Staff pulled away by management. Additional staff or skills not available. Training not as effective as desired. Initial specifications poorly or incompletely specified. Work or change orders multiply due to various problems. Enhancements take longer than expected.

THE FOUR MAJOR APPROACHES TO RISK IDENTIFICATION

Among the most common methods for risk identification are:
Brainstorming Meetings. Expert Opinion. Past History. Multiple or Team-based Assessments.

THE FOUR MAJOR APPROACHES TO RISK IDENTIFICATION

Brainstorming Meetings: This is the act of bringing project stakeholders (Project team, Top Management, Clients est.) together to generate a good list of potential risk factors. Brainstorming is a qualitative idea-creation technique, not focused on decision-making. In order to be effective, brainstorming meetings must be free of judgments, criticism of others viewpoint or pressure to conform.

THE FOUR MAJOR APPROACHES TO RISK IDENTIFICATION

Expert Opinion: There are two alternative ways used in assessing project risks. These are:
1. Delphi Approach: Collects and consolidates the judgments of isolated anonymous respondents. 2. Consulting Experienced people: Identifying and consulting people within the organization with similar experiences in running projects in the past or have sufficient in the organization.

THE FOUR MAJOR APPROACHES TO RISK IDENTIFICATION

Past History: In major cases, one of the best source of information on future risks is the historical records. The history of similar projects in the organization or in other related organizations in the past gives an indication of project risk.

THE FOUR MAJOR APPROACHES TO RISK IDENTIFICATION

Multiple or Team-based Assessments: Using single case sources to identify project risk can be a risky proposition by itself in view of potential bias that may be experienced. A team-based approach to risk factor identification encourages identification of a more comprehensive set of potential project risks.

THE FOUR PRIMARY RISK MITIGATION STRATEGIES

Risks can be mitigated through four primary approaches. These are as follows: 1. We can simply accept the risk:
We may choose to do this in a situation in which we either have no alternative or we consider that the risk is small enough to be accepted or accommodated.

THE FOUR PRIMARY RISK MITIGATION STRATEGIES

2. We can seek to minimize risk:
Perhaps, through entering into partnership or joint ventures in order to lower our companys exposure to risk.

3. We can share risk.

This can be done when we are able to share risk with other organizations or project stakeholders.

4. Transferring Risk:
Finally, when appropriate, we may seek to transfer risk to other project stakeholders.

THE PROJECT RISK ANALYSIS AND MANAGEMENT (PRAM) PROCESS

The PRAM is a generic project risk management approach that offers a model for the life-cycle steps a project team might adopt in developing a risk management methodology. Nine distinct steps in the PRAM model present each phase of the process and its associated deliverables.

PROJECT RISK MANAGEMENT: AN INTEGRATED APPROACH

The nine phase of a comprehensive project risk assessment include the following: 1. Define 2. Focus 3. Identify 4. Structure 5. Clarify ownership of risks 6. Estimate 7. Evaluate 8. Plan 9. Manage