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How to Manage Risks
We don't live in a conventional world where our daily lives carry out orchestrated events according to plan with a minimal to zero probability of slip-ups or surprises. There is always a 'risk' in chance that something could occur that could effect the planned outcome. This can come from either an activity, event or even a lack of action.
Risk management comes from the idea of taking a proactive approach in identifying, analyzing, and preparing appropriate course of action to decrease the probability of negative impact events instead of reacting which could potentially be costly. This helps you, and your organization, to take a systematic approach in preventing financial losses and credibility impact if a loss was to occur. It is important to note that risk management also covers identifying and managing positive impacts (opportunities) to the project and to take advantage of them.
Risk Management is a simple process that can be easily integrated in your every day life. In management, it is a great component to improve the efficiency and effectiveness in decision making and project planning while minimizing loss. It involves commitment and diligence in your part, and your organization, to plan carefully and does not require complex models to foresee and avoid risks.
The Approach
Risk management starts by asking yourself four simple questions on the product, service, or activity you want to execute:
- What could go wrong?
- How can you prevent negative impacts (threats and losses) from occurring?
- What is your plan of attack if the above occurs?
- Are there any positive impacts (opportunities) in the horizon to improve
the performance?
The Process
Risk management is a simple process that can be broken down into three major components:
Assess the Risk - Identify, Analyze and Evaluate Risk
Identify - draft a list of potential events that might degrade, delay, or prevent the execution of your product, service, or activity
Analyze - understand the risk (and its impact) and decide on the course of treatment (should you to address it or not, if so - how and will you introduce new risk to the system)
Evaluate - assess the various levels of risk, evaluate the potential losses/gain and prioritize them accordingly
Treatment - generate a list of options treating the risk, evaluate these options, appoint and implement the treatment plan
Review - audit and monitor your overall plan to ensure the treatment plan is applicable
Potential Benefits
Some of the benefits of risk management include:
- Avoiding the risk
- Enable the organization's ability to prepare and address threats and opportunities
- Protecting the organization from economic loss and/or legal liability
- Protecting the organization's reputation and image
- Conserve resources (FTEs, time, cost, income, property, etc)
Comment
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Comment by Beresford Coker on June 20, 2010 at 9:26pm -
Tony you brought up an interesting point about the cost of risk management. Some risk managers will stretch their team to try an identify as many risks but the truth is not all risks can be identify and those are uncertainties. Risk management looks at three things: the event itself, the likelihood and the impact.
The work breakdown structure is a good tool to help identify risks. Risks should be categorize and ranked in terms of likelihood and impact(i.e. high high, high low, medium medium, low low, etc)
This can help you create a better risk response grid i.e accept risk, transfer risk, mitigate risk or avoid risk.
If there is a risk that cannot be avoided but the mangement of that risk constitute more than 50% of the cost of the project you should be talking with the stakeholders .
Another thing to note is that certain risk with a low low might change to a low high or high high due to several reasons. This is why it is crucial for project risk to be monitored through out the project.
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Comment by Moorthy GS on June 1, 2010 at 8:42am -
Hi, Such a interesting points of Managing Risk.
Thanks & Cheers,
Moorthy.GS
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Comment by Safinaaz Rawji on May 31, 2010 at 2:03am -
Glad I could help Tom!
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Comment by Tom Dickie on May 31, 2010 at 1:22am -
Thanks. I currently have a situation where a Client PM and a Cost Advisor seem to want to fly in the face of your very sound approach and when you see your comment in black and white it of course makes perfect sense. I'm going back to have a chat !
Thanks again.
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Comment by Safinaaz Rawji on May 30, 2010 at 9:51pm
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Introducing financial measures against risks should be done as early as possible, I would target as soon as you identify them. The worst thing you can do is identify the risks involved but not be aware of the cost (resource, timing, income, etc) associated with it. This will help you in establishing the budget required to work on a project.
If your project needs to be performed and delivered under certain constraints (say the budget proposed is lower than you estimated from above), then you will need to juggle your project management triangle and see what can you change...
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Comment by Tom Dickie on May 29, 2010 at 2:47am
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Safinaaz/Tony,
Can we focus on the process component of Safinaaz's review and particularly the financial numeration / evaluation of the various levels of risk ?
Do you have a view on the timing of the introduction of the process of placing a financial measure against each risk identified within the Risk Register ? I am thinking of this point in the context of the level of development of the project scope as the project definition develops and in relation to establishing that the project is deliverable and affordable.
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Comment by Safinaaz Rawji on May 27, 2010 at 3:54pm
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I agree, you cannot foresee all risks - there are limitations to our fortune telling. Take for example the Iceland volcano event and stock market's response to the debt crisis in Europe. Response recovery cost companies/industries billions of dollars.
In the area of Information Technology/Software Projects, if your project is dependent OR leveraging other project(s) - project managers need to take a good look at what could go wrong and be aware that the properties of risk are changing rapidly as the project progresses.
If risks are discovered late in the game - organization or management needs to come up with a strong recovery program. A good start would be to identify the value and risk on each node of the project.
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Comment by Tony Askew on May 27, 2010 at 11:07am -
You make some solid and interesting points, and for fields that are not technology driven many of those would apply. However information technology has time and again shown how in effective risk management can be
While I think it is important to manage risk, I see disconnect in the attempt to identify risk, especially with information technology. Some PM's use a phenomenal amount of time, (i mean pages of useless algorithms studies and quantum analysis) research and metric application to identify what they perceive as risk. Yet what cannot be indentified is the unknown. The failure comes because some cannot seem to embrace the idea that there are just some risks that cannot be accounted for. This cycle of risk identification failure repeats itself because people will not embrace two irrefutable facts....
1. With technology, there is ALWAYS an unknown.
a) It doesn't matter if it is with software development, application development or infrastructure moves, consolidations or upgrades, something new will always present itself. Some are good, most are not.
2. The only predictable event is that fact that there WILL BE an event.
I am a proponent of proactive mitigation, however you cannot mitigate what you do not know exist. There must be an allowance for the unknown.
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