When planning a project, “what could go wrong” is usually one of the first things that spring to mind. This may sound negative, but practical project managers know this thinking is only preventative. Issues are bound to arise, and you need a mitigation strategy to understand how and when to manage risks when planning a project.
Inherently, managing risk is a skill that employers typically look for; therefore, you must understand what risk is and how to manage it. That said, how do you even resolve the unknown? It may seem like a hypothetical paradox, but you can take several practical steps.
As business projects grow more dynamic with time, organizations need to be able to manage the risk and uncertainty that comes with those changes. The ever-growing demand for skilled project management experts reflects this growing trend. Approximately 22 million jobs will be added to the industry by 2027.
Those looking to advance in a project management role can consider an online engineering management master’s degree from the University of Ottawa. The degree program offers engineering and STEM professionals a leadership-fortifying, industry-centric educational experience.
This article discusses the risk management process, its benefits, and much more as you take steps toward managing and reducing risk for your organization.
What is a risk management process? Why is it necessary?
Risk suggests any uncertainty that can reduce or improve the ability to obtain your objectives. It can come in many forms, including risks affecting privacy, security, finances, projects, and the environment.
For negative and positive risks (opportunities), you need a deliberate approach to comprehend the balance between risk and reward. This article centers on managing risks that could negatively impact your organization. Similar procedures apply to deciding how to use beneficial uncertainty (or positive risk).
Recent developments have highlighted the possible impact that risk factors can have on the operations of individuals and companies and whether they continue to do so. Understanding risk will undoubtedly help contribute to the organization’s success. The inability to do so could bring about disaster, even beyond the point of recovery.
Consequently, applying a consistent and thoroughly proven risk management process is crucial. When built on a strong foundation of understanding the company’s objectives, goals, and external/internal context, adopting a risk management process can help ensure your organization’s success.
Risk management is identifying, analyzing, categorizing, prioritizing, and then planning for risks before they evolve into issues.
Risk management can allude to different things on different kinds of projects. On larger-scale projects, risk management procedures may include detailed planning for each imminent risk to guarantee mitigation strategies are established should issues arise. On the other hand, risk management may be a simple, ordered list of high, medium, and low-priority risks for small-scale projects.
Once again, no project is without its risks. Therefore, the ability to guide a project through trouble is one of the most invaluable skills project managers are expected to have.
Steps you should take during the risk management process
Below are the five essential steps involved in this particular process:
Identifying risks may seem daunting initially, but that should not be the case. This step should instead be seen as a positive experience. Encourage your team to participate, as it provides plenty of learning opportunities.
This first step involves identifying the risks a business may be vulnerable to. The types of bets include:
- Environmental risks
- Legal risks
- Regulatory risks
- Market risks
A business must be able to identify as many risks as possible. The most high-ranking or concerning bets are placed at the top, while the more negligible chances are at the bottom. These risks are usually noted down manually. This helps you and your team predict when and where threats may emerge while establishing tasks for a project.
Using data productively, your team can accurately identify and access threats to a project. Using information productively, your team can accurately identify and access threats to a project. Once the likely issues have been compiled, a project list is created for precise risk tracking and monitoring. This log also referred to as a project risk register, is a crucial part of an effective risk management process. It works as an ongoing database for each project’s risks, helps manage current threats, and serves as a reference for past projects.
All this information is fed into the system if the organization owns a risk management solution. The upside to this approach is that every organizational stakeholder can view these risks.
Analyze the risk
After identifying the likely issues, it is time to focus on the next step. This involves addressing some more questions. What are the possibilities of these risks occurring? When they do occur, what are the possible consequences?
This part of the process requires you and your team to evaluate the probability and possibility of each risk you have identified in the previous step. This will help you decide where your focus needs to go first. Major factors to consider include loss of time, potential monetary loss to your organization and severity of the impact, which all play a significant role in analyzing each risk accurately.
When you analyze each risk profoundly and carefully, you may find new risks and issues that you may not have noticed beforehand. This will allow you to refine the process further for all your projects in the future.
Assess the risk
Risks must be prioritized and ranked. Most solutions have varying risk categories based on the risk’s severity. Low-convenience risks are rated lowly, and threats that may result in significant damage are rated much higher.
Ranking risks is crucial as it lets the organization obtain a holistic viewpoint of its possible risks. The organization might be susceptible to various low-level risks, but it might not need senior management intervention. On the other hand, a high-ranking risk is enough to call for prompt intervention.
You will come across two types of risk assessments, i.e., quantitative and qualitative risk assessment.
- Quantitative risk assessment
Finance-focused risks are better evaluated via quantitative assessments. Such assessments are found frequently in the financial sector since the sector mainly involves numbers, such as any other data point vital for evaluations in finance.
These are more straightforward to automate than qualitative assessments and are typically viewed as more objective.
Qualitative risk assessment
Such processes are qualitative in that although we can deduce metrics from the risks, most are not quantifiable. For example, the possible risk of climate change that numerous businesses are looking at cannot be quantified overall; only different aspects of the factor can be quantified.
There must be a way to conduct qualitative risk assessments while ensuring standardization and objectivity throughout the organization.
Address the risk
Once the risk has been evaluated and prioritized, it must be contained or limited. You can do this by contacting the experts in the field related to the chance being dealt with.
In a manual setting, this involves contacting every stakeholder and setting up conferences so everyone involved can address the issues. Begin with your highest-priority risk, delegate tasks to your team and have them either solve the trouble or mitigate it until it is no longer a significant threat to your organization.
With time, you gain more insight and experience, and your completed projects’ database grows, leading to more risk logs. With all these resources, you will be better equipped and more proactive, ensuring more effective treatment and handling of problems.
This discussion is often broken into numerous emails throughout additional spreadsheets, documents, and phone calls. If you have a risk management program, you may send the stakeholders involved the necessary notifications via the system. Senior management may also get involved and monitor the proposed solutions and the progress made via the program.
Monitor the risk
Numerous organizations make the error of believing the risk management process ends once the risk is treated. However, you cannot eliminate all risks; some will remain. Environmental and market risks are a few risks that always need constant monitoring.
In a manual setting, the monitoring is carried out by diligent team members. These individuals must keep track of all the possible risk factors. It is also essential to have clear communication among your stakeholders and team members while monitoring potential risks.
Monitoring risks allows your company to move on from its problems. In a digital setting, on the other hand, the risk management program traces the complete risk framework of the company. If any risks or factors were to change, everyone with access to the program could view them.
The advantages of risk management
Risk management is a necessary process that lets you recognize potholes along your organization’s path toward growth. It helps you determine their depth and work on how to avoid irreversible damage. It also allows your organization to mitigate disaster and safeguard vulnerabilities before substantial damage happens. Below are a few benefits of adopting risk management procedures in a business.
It helps avoid major disasters.
Risk management procedures prepare companies for all kinds of unwelcome surprises. Risk managers try to predict the small-scale shocks affecting the daily business of any company. That said, they also try to keep a close eye on catastrophic events that may show a low probability of occurring.
However, organizations must be well-prepared to handle them without going bankrupt if they do occur. Such occurrences, known as “black swan” events, have become prominent in recent years.
Forecasts likely issues
One of the most noticeable benefits of risk management is that it transforms a company’s culture. Companies that usually focus more on risk management procedures are more proactive than others rather than reactive. Risk management prompts organizations to look closely at their operations and determine what could go wrong. This in-depth analysis lets companies become more proactive at looking out for potential issues.
Organizations that exhaustively use risk management suffer fewer business disruptions since such issues are identified and handled early. This approach is constructive since it allows companies to recognize unsuccessful projects early on. Constant feedback allows organizations to determine whether investing more money in an unsuccessful project will help it improve or whether it is just throwing money down the drain.
While prima facie risk management sounds like a defensive organizational activity with a negative implication, this assumes that the action is performed to escape losses. Studying processes and risk factors in-depth during risk management can foster growth.
When a company is preparing to launch new products or enter new markets, it has a preset framework it can deploy to avoid these risks. Therefore, in a way, risk management enables organizations to take calculated risks and facilitate their growth. Carrying out continuous risk management processes means the organization has amassed plenty of data, which can be mined to gain invaluable insights, ultimately leading to better decisions.
Allows for better budgeting
Companies that adopt risk management processes have better control over their finances than those that do not. That is because they often look closely at financial numbers and trim any waste they see. The result is that these organizations have a better understanding of their budgets.
This leads to the creation of efficient budgets wherein companies can allocate funds to achieve their goals in the best way possible. Budgets do not have to depend on guesswork in such corporations.
Allows to stay competitive
Risk management allows corporations to minimize losses during critical times when inadequately managed businesses fight to stay afloat. Companies with risk management processes do not struggle as much when minimizing their losses. As a result, such companies tend to remain constantly competitive and improve.
When adverse circumstances such as recessions hit companies, the ones with better risk management procedures stay afloat while having an abundance of cash. This is why some organizations have the extra money needed to make acquisitions even during times of crisis. Such processes also prompt different departments and stakeholders to communicate actively, increasing the company’s competitiveness.