Commencing from initiation to post completion of the project, the degree of risk grows within, as does the haze of uncertainty, thus proper project risk management can make a difference.
Risk inevitably comes with any project. It resides in the project as a contrary and hinders as an adversary. Enclosed within, the compound constraint of time, budget, workforce and multiple quantifiable and non-quantifiable determinants; a project marches towards its success and the risk factors follow until project execution.
To be precise, "risk" in a project management is the threat or possibility that an action or occurrence will unfavorably affect a project's potentiality to achieve its objectives. Any counter event and adverse causes that can become an obstacle are risk factors.
However, inside the project management line of attack is the term "risk" this term is considered as a negative component resembling an occurrence that will adversely affect the goal of the project. Nevertheless, in the optimistic and neo project management approach, "risk" can be considered as a prospective occurrence or a productive event; if handled and executed properly it may lead to achieve enhanced objectives, improved and advanced.
Project risk management is the procedure of determining or evaluating risk and developing strategies to manage it, and is concerned with identifying risk and putting in place policies to eliminate or reduce these perils.
Project risk analysis is the detection and quantification of these probabilities and collisions of events that may harm the project. The risk analysis process identifies risk in advance, and the risk management process established methods of avoiding these risks thus reducing the impacts that may occur.
Risk Detection Risk detection is an initial step in the risk management course. As these potential hazards occur causing problems in its kinetics there needs to be a plan for identification. To identify these concealed threats at their origin before their occurrences whether they are quantifiable or non-quantifiable is the foremost groundwork; this groundwork is the risk identification course of action. Risk detection starts with tracing risk sources as a root cause, and its source branches including internal to external and primary to secondary.
Some of the most common risk detection methods in project risk management are as follows; 1.Objective Oriented Risk Detection 2.Scenario Oriented Risk Detection 3.Taxonomy Oriented Risk Detection 4.Regular Risk Inspection
Risk Evaluation in Project Risk Management
Once the risk detection process is concluded, then they must be evaluated for their latent severity for loss, and its likelihood for hazards. In project risk management, each risk should be exploited independently as they vary from simple to complex results.
Generally, plain risk can easily be quantified, while those risks of probabilities are unfeasible to enumerate; thus in the evaluation process it is significant to take a finer presumption to accurately accentuate the implementation of the risk management remedy. Moreover, the primary problem in risk evaluation is lack of statistical information and scientific evidences for determining the pace of risk events that may occur. Conversely, gauging risk is often quite a complicated process, although numerous formulae are being followed; a popular yet simple formula is;
Project Risk = Accident X (Probability X Impact) Or Project Risk = Accident Probability X Accident Impact
Here, risk is directly equivalent to "probability of accident" multiplied by the "impact of accident". In opposition, project risk management is less reliant only on the type of formula pursued, but more reliant on the risk occurrence and on how risk management is employed. However, in general a systematic tactical plan that should be prearranged for risk management is as follows: 1. Risk: Description of the Actual Risk 2. Impact: Impact on the Project if the Risk Occurs 3. Possibility: Possibility of Loss if Risk Occurs 4. Action: Action Remedy to Reduce the Impact 5. Cost: Cost if the Risk Occurs
Once risk is identified and evaluated, there are four major practices that need to be followed to prevent a failed remedy, they are: 1. Risk Evasion: Avoidance of the Risk Altogether 2. Risk Diminution: Reducing the Degree of Risk through Precaution Measures 3. Risk Retention: Accepting the Degree of Risk with Loss 4. Risk Relocating: Transferring the Risk to Another Party
Hence, in the combat of project risk management etiquette, a precedence procedure should be tracked, whereby risks with the maximum loss and the maximum probability of evils should be handled first; vice versa to those with minimum risk.
Project risk management is the tactic of methodically applying lucrative action for diminishing the effect of hazard to the project. Risks are never fully avoidable due to exterior elements and limitation of financial and practical margins. However, with the acceptance of a certain degree of risk and the arrangements of its counter to tackle it, the risk at hand can be recompensed.
All risks can never be fully avoided or mitigated, therefore all projects have to accept some level of residual risks, but if the risk is handled with mythological and proficient approach referring to statistically and scientific information then risk rewards.
Project risk management is one single process to manipulate, exploit, and extinct risk.
Most organizations have more project proposals and ideas than they can realistically fund. This means project teams are competing for project approval and funding. Consequently, project champions often conceal or exaggerate the true value of their projects. Teams and organizations typically focus on the up-front costs of a project and the expected return. Other costs are glossed over or ignored entirely, and risk assessment is treated as a perfunctory afterthought. This focus on the up-front costs and the net return is only half of the story, however.
It may be time to stop thinking of risk assessment as the killjoy exercise which drains the enthusiasm from your project and to start thinking of it as a tool for enhancing your project's value.
Understanding the Fundamentals:
A project risk is any problem that could cause some loss or threaten the success of the project1. Risks differ from issues because they refer to the future or to the potential for adverse outcome.
“A risk consists of a condition which is not currently true, the likelihood that the condition will materialize, and a consequence or impact on the project if the condition does materialize."
Risk management is the process of identifying, analyzing, and addressing project risks proactively to maximize positive consequences (opportunities) and minimize negative consequences (losses). Risks are addressed by formulating mitigation plans, which are aimed at reducing the likelihood that the condition will materialize, and contingency plans, which are aimed at addressing the condition when it does materialize.
As mentioned above, the value of a project is determined by its net return and its risks. The net return on the project is equal to the present value of the project minus the costs (return = present value - costs). This return assumes that the project will proceed as planned and budgeted - that is, it assumes a risk-free project. But projects are rarely risk-free. To get a true assessment of the project, the return must be evaluated against the risks.
Applying Risk Management:
Suppose I have a project proposal to unify two corporate databases. I estimate that this will save the organization $100,000 over five years and that it will cost $80,000 to implement. The return is $20,000 without factoring in any risks, but there are risks.
1. Due to some uncertainty in the requirements, there is a 50% likelihood that the development effort will cost an additional $10,000. This comes to a reduction of the return by $5,000 ($10,000 x .50).
2. Although the project team has assurance from sales that the impact upon the sales force will not be substantial, the team believes that there is still a 25% likelihood that upon seeing the changes, sales will require additional training, costing $8,000, thereby reducing the return by $2,000 ($8,000 x 25).
3. Due to some inherent uncertainties regarding the technologies, as well as the direction of the organization and some anticipated acquisitions, there is a 10% likelihood that the entire project will fail or be superseded by other efforts. This means a reduction of the return by $8,000 ($80,000 in overall project costs x .10).
When all risks are factored, the reduction on the return is $5,000 + $2,000 + $8,000 or $15,000. The return is now $20,000 - $15,000 or $5,000, making the project substantially less attractive than it originally appeared. But by managing the risks, the value of this project can be increased to a level that again makes it attractive.
1. First, the requirements could be tightened by first developing a proof-of-concept or simply by delaying the project until the uncertainties can be eliminated. By taking this approach, the value of the project can be increased by eliminating the $5,000 reduction for the risk of uncertainty.
2. A proof-of-concept could also be evaluated by the sales force to ensure that they will not need training, as feared, thereby eliminating the second risk and increasing the project's value by an additional $2,000.
3. Finally, although external uncertainties cannot be eliminated, mitigation and contingency plans can be put in place to reduce the overall impact on the project's value. For example, instead of structuring the project as an all-or-nothing proposition, perhaps it can be implemented so that parts or stages of it can be adapted to many different environments. Perhaps the data structures and encoding can be separated from the database implementation so that if organizational changes arise that undermine the implementation, the data structures can still be used in the implementation ultimately adopted by the organization. If a third of the work can be salvaged, the value of the project is increased by $2,640 ($8,000 x .33).
This brings the total increase in return as a result of risk management to $9,640.
After risk management, the value of the project is $14,640 ($5,000 return after risk assessment + total increase in return after risk management).
Conclusion:
The true value of a project cannot be evaluated without being realistic about the costs of the undertaking, including the risks. Risks that are simply acknowledged and built into the costs will always lessen the value of a project, motivating project managers to report overly optimistic outlooks, which undermines the very reason for considering risks. But if risks are actively managed by meeting them head-on, formulating mitigation and contingency plans and treating risk management as an ongoing process, risks can be minimized. As a result, project values can be increased, and organizations will get a more accurate and consistent understanding of project values.
About Ralph Dandrea:
Ralph Dandrea is the President of ITX Corp., and leads its Business Performance practice. He is experienced in business and information technology management and holds graduate degrees in business and law.
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