Like in life, business projects consist of risk. Some risks are known from the start, whereas other risks appear along the way. As a project manager or key decision-maker, you play a major role in interpreting risk and deciding the best approach. Project risk management helps to ensure risk is dealt with optimally.
Let’s take a look at what project management and risk management involve.
What is Project Risk Management?
Project risk management is a process that identifies and evaluates risks to any type of business endeavor or project. Based on the steps taken, those with power to make decisions can choose whether to avoid, mitigate, transfer, or accept said risks. The knowledge to decide what action to take is dependent on the risk’s implications, impact, and likelihood of occurring.
What is Risk?
There are a few different types (and thus definitions) of risk. But, to put it simply, risk is the chance or probability that an event with an unfavorable outcome will take place. At its core, risk is uncertain, so there’s unknowns involved in the entire project risk management process.
Businesses face risks every day. These risks can be market risk, liquidity risk, investment risk, inflation risk, and more. While some risks are easier to plan and deal with, others, like environmental risks, may be entirely unforeseen. This is why businesses utilize analytics and plans to be prepared for whatever may take shape.
Risk Management vs. Project Management
Risk management and project management go hand-in-hand. Project managers are in charge of ensuring a project gets carried out to completion. They are responsible for managing budgets, scope of work, schedule, communication between parties, and the quality of the deliverables, to name a few.
As such, since risk is involved in any type of project, risk management falls under the umbrella of project management and should be considered seriously by any project manager. The good news is that risks don’t always have to be negative. Positive risks are known as opportunities.
Strong project managers will practice risk management from the onset of a project to help keep everyone informed, have a plan of action, and agree with stakeholders on strategies to employ.
A 5-Step Risk Management Process
You may be wondering how something that is unknown can be planned for in advance. That’s the beauty of risk management. As part of the process, people can begin to brainstorm and use their experience and knowledge of any given situation to consider what may be expected.
Here are the basic steps of the risk management process that most project managers become keenly aware of in their work:
1. Risk identification
Risk identification is best performed as a group. Project managers can involve anyone and everyone on their team to be a part of the brainstorming. Risk identification basically answers the question of what may go wrong and outlines potential scenarios. It’s helpful to look back at past projects or business plans to learn from history, as it often repeats itself.
Additionally, by researching the market and competition, project managers can learn from past mistakes. There are different methods to conduct risk identification, but one of the most widely used one is called SWOT analysis.
SWOT stands for strengths, weaknesses, opportunities, and threats. Businesses as a whole can perform SWOT analysis to plan their strategies moving forward. But it’s also possible to use SWOT analysis for specific projects as part of risk identification.
Once all potential risks are listed out, it’s time to move into risk measurement. Risk measurement is often a very challenging step in the risk management process, but it does get easier with experience and over time. Measurement involves weighing both the probability that each risk will occur along with the impact or consequences.
There are software tools that can help teams create a risk matrix for this step. When risks have a low probability of happening with a low impact, then it’s very possible to simply accept the risk since the outcome won’t be so bad.
However, if a risk has both a high probability of occurring and a strong impact, it’s generally dealt with through contingency plans, transference (reallocating risk to a third party like an insurance company), or avoided entirely (in which case, a new plan of action must be designed).
3. Decision stage
The aforementioned paragraph lists what happens during the decision stage. At this point, stakeholders and managers can review the risk matrix or measurements to decide how to approach each risk. The main ways to deal with risk include: accept, avoid, transfer, and mitigate.
4. Brainstorm solutions
For any risk that is accepted or mitigated, a plan must be made for how it will be accomplished.
For example, if you run the risk of a client changing course midway through a project, then you may create a strategy in advance to lessen the likelihood that this could occur. You may either add a clause in the contract that the client will have to pay for change orders (thereby reducing their motivation to want to take that route) or you could devise a strategy from the start that allows clients to see multiple options so that they are satisfied with the path they choose.
Regardless of the solutions that you and your team may come up with, this should be a collaborative exercise with a lot of open communication.
5. Execute and monitor
The risk management process isn’t over once you decide how to deal with risk. In fact, the real work has just begun. While having decisions made is a major piece of the puzzle, execution and constant monitoring is just as important.
It’s also always a good idea to document the course of action and results. This way, for any project in the future, there’s a historical record with data and analytics to back up decisions that will be made.
Learning More: A Degree in Business Administration
Risk management is a challenging but rewarding exercise for those in business. It’s inevitable and always changing based on the context of a project. This is one reason why people with problem-solving minds look to become project managers.
For anyone interested in learning more about the ins-and-outs of business, a degree in business administration could be the perfect first (or next) step. At the University of the People (UoPeople), our associate’s, bachelor’s, and master’s degree in the subject are all tuition-free and online. So, students from around the world benefit from an affordable quality education that they can complete at their own pace.
Project risk management is an essential aspect of any business. While some risks are obvious, others may be entirely hard to grasp. So, the best project risk management process involves a collaborative and creative team that is aligned to accomplish business goals.