Every project manager is aware that risks exist in all projects; for example, deliveries may be delayed, accidents may occur, people may become ill, etc. Planning cannot eliminate risk or one’s inability to influence unforeseen events. Risk in the frame of reference of projects refers to an unanticipated occurrence or circumstance that, if it materialises, has an impact on the goals of the project, either favourably or unfavourably. A risk has an aetiology and, if it materialises, a result. A flu virus or a change in the project's scope are two examples of potential causes. The occurrence is when one or more team members contract the flu, or the product needs to be remade. The cost, schedule, and the project's overall performance will all be impacted if either of these unlikely occurrences takes place. Before the project begins, some possible risk events can be identified, such as equipment failure or a change in technical requirements as apart of risk management strategies . Risks can be anticipated outcomes like cost or schedule overruns.
What are Risk Management Strategies?
The goal of risk management strategies is to identify and control potential and unforeseen problems that might arise during project implementation. As many risk events as possible are identified (what could go wrong), their impact is reduced (what can be done to prevent the event before the project starts), responses to the events that do materialize are managed (contingency plans are created), and contingency funds are provided to cover risk events that do materialize. Let us dive deep into the risk management strategies in project management in this article.
A graphic representation of the risk management challenge is shown in Figure 1 below. The likelihood of a risk event (such as an error in timing, cost, or design technology) occurring is highest in the early stages of a project. At this time, there is the most uncertainty and unanswered questions. The risk decreases as the project moves closer to completion, and critical questions (Will the technology work? Are the deadlines realistic?) are answered. But as the project progresses, the cost impact of a risk event grows. For instance, a design flaw that is discovered after a prototype has been made has a greater cost or time impact than if it were found during the project's planning stage.
Why is Having a Risk Management Strategy Important?
Instead of being reactive, risk management strategies are proactive. It is a proactive process intended to ensure that unpleasant surprises are avoided and that the negative effects of unfavorable events are kept to a minimum. Additionally, it gets the project manager ready to act when a potential time, money, or technical advantage arises. The ability to successfully manage project risk increases the project manager's control over the future and increases the likelihood that the project will be completed on schedule, on budget, and with the necessary technical (functional) performance So, risk strategies in project management are very important.
Project and operational risks are common in most businesses, but developing risk management strategies in project management and its processes is crucial to determining your company's SWOT analysis, or strengths, weaknesses, opportunities, and threats. The project risk management strategies for agile projects and project management has several advantages of effectively managing risks. Learn more about Project Management training program here.
- Operational Effectiveness and Business Continuity
- Protection of Your Company’s Assets
- Customer Satisfaction and Loyalty
- Realizing Benefits and Achieving Goals
- Increased Profitability
Positive Risk Management Strategies
This is a brief section focused on negative risks — things that could go bad on a project. On the other hand, what could go well with a project? This is what's known as a good risk or opportunity. An opportunity is a circumstance that could benefit project goals. For instance, unusually good weather can speed up construction work, and a decrease in fuel prices may result in savings that can be put towards improving a project. Positive risks are managed essentially using the same procedure as negative risks. Opportunities are identified and evaluated for likelihood and impact, responses are chosen, and even backup plans and funds can be set up to seize the chance should it arise. The biggest distinction between managing risk and opportunity is in the way we respond. 4 distinct ways to respond to an opportunity have been identified by the project management industry:
This strategy aims to remove any doubt surrounding an opportunity so that it will undoubtedly materialize. Examples include putting your best workers on a time-sensitive task to speed up completion or altering a design to allow for the purchase of a component rather than its internal development.
This tactic entails transferring some or all possession of a chance to a different party who is best equipped to capitalize on the chance for the project's benefit. Examples include creating joint ventures or external contractors with incentives for continuous improvement.
Improvement is the opposite of remediation in that activity is taken to boost an opportunity's likelihood and/or favorable effects. Examples include picking a site's location based on a region's favourable weather patterns or selecting raw materials that are likely to see their cost decrease.
Accepting an opportunity means being ready to seize it should it arise but not taking any steps to pursue it. While it is only natural to concentrate on bad risks, it is also wise to actively manage your opportunities.
10 Types of Risk Management Strategies to Follow in 2023
It's critical to understand that there are numerous risk management techniques, each with unique advantages and applications. Become a certified PMP trainer to learn more about risk management strategies.
The following are ten different types of Risk Management Strategies:
Type 1: Business Experiments
Run "what-if" scenarios using this risk management strategy to evaluate various outcomes for potential threats. Many functional groups, from IT to marketing teams, are experienced in running business experiments. Experiments are also conducted by financial teams to evaluate other financial metrics or return on investments.
Type 2: Validation of Theory
Utilizing questionnaires and group surveys, theory validation strategies are carried out to gather feedback based on experience. It makes sense to get direct, timely, and pertinent feedback from end users when a new product or service is developed or improved in order to help manage potential challenges and design flaws and thereby better manage risks.
Type 3: Minimum Viable Product Development
Creating complex systems with luxury features isn't always the best course of action. Building software with essential components and features that will be relevant and helpful to the majority of their customers is referred to as a Minimum Viable Product and is an effective risk management strategy (MVP). The financial burden is reduced, projects stay within budget, and businesses reach the market more quickly.
Type 4: Isolating Identified Risks
Information technology teams are accustomed to enlisting the assistance of internal or external resources to identify security flaws or deficient procedures that could expose vulnerabilities. By doing this, they avoid waiting for a malicious and expensive breach to happen and start proactively identifying security risks before an event.
Type 5: Building in Buffers
Project managers understand the need to include a buffer in any project, whether it involves technology or an audit. By ensuring that initiatives remain within the intended scope, buffers lower risks. Buffers can be financial, resource-based, or time-based depending on the project. Making sure there are no surprises that pose unanticipated risks is the aim here.
Type 6: Analyses of data
Data collection and analysis are crucial steps in identifying and managing different risks. Qualitative risk analysis, for instance, can be used to find potential project risks. Analysis of data helps to identify and rank risks and to create plans for how to handle, keep an eye on, and reassess them.
Type 7: Risk-Reward Analysis
Before allocating resources, time, or money to an initiative, companies and project teams can find out the advantages and disadvantages by conducting an analysis of risks versus rewards. It's not just about the rewards and risks of using money to invest in opportunities; it's also about giving understanding to the price of missed opportunities.
Type 8: Lessons Learned
Lessons can be learned from every initiative or project that your business undertakes or fails to complete. Lessons are only useful if teams take the time to document them, discuss them, and develop an action plan for improvement based on what has been learned. These lessons are a valuable tool that can significantly reduce risks in future projects or undertakings.
Type 9: Disaster Planning
Although having a plan is excellent, it rarely suffices because things rarely go as expected. Businesses must prepare to have a variety of options or plans based on various scenarios. Contingency planning is all about preparing for the possibility that something will go wrong and developing backup plans in case those risks materialize and derail your original strategy.
Type 10: Making use of best practices
Best practices are mentioned under risk management strategies for a reason. Best practices are typically tried-and-true methods of conducting business; while they may vary from industry to industry and project to project, they make sure that businesses don't have to reinvent the wheel. In the end, this lowers risks.
Successful risk management has always been essential for business and industry success, but just never as much as now. Having the ability to recognize and appropriately evaluate risks helps prevent errors and helps save money, time, and precious resources. Additionally, it clarifies judgment and their teams, assisting leaders in identifying opportunities and the necessary course of action. Your company's risks should be managed as a key component of your risk strategy using comprehensive risk management operating systems that promote collaboration and risk visibility to boost the efficiency of your risk mitigation initiatives. Earn a PRINCE2 certificate to become a seasoned Project Management professional.
Negative Risk Management Strategies
Not only for particular project dangers but also to identify overall project risk, risk assessments should be planned and put into action. In order to address the overall project risk, the very same risk response techniques that are used to address each project's hazards can be used:
An avoid strategy may be used when the overall project risk level is strongly negative and outside the project's set risk thresholds. This entails taking targeted action to lessen the impact of ambiguity on the venture as a whole and get it back within the acceptable ranges. Removing high-risk scope elements from the project would be an example of evasion at the overall project level. The project may be canceled if it is impossible to bring it back within limits. This is the maximum level of risk avoidance, and it should only be used if the overall threat level is and will continue to be unacceptable.
Exploit. An exploit strategy may be used when the overall project risk level is significantly higher than the predetermined risk thresholds for the project. To achieve this, deliberate action must be taken in order to maximize the benefits of uncertainty for the project as a whole. Addition of high-benefit scope elements to the project to increase value or benefits for stakeholders would be an example of exploitation at the overall project level. Alternately, with the support of important stakeholders, the project's risk thresholds may be changed in order to take advantage of the opportunity.
A third party may be brought in to manage the risk on the organization's behalf if the level of overall project risk is high, but the organisation is unable to address it effectively. When there is a negative overall project risk, a transfer approach is required, which might entail paying a risk premium. Ownership may be shared in situations where there is an elevated overall positive project risk in order to benefit from the associated advantages. Establishing a cooperative business structure where the buyer and seller share the overall project risk, starting a joint venture or special-purpose company, or subcontracting important project components are a few instances of both transfer and share strategies for overall project risk.
To increase the likelihood of achieving the project's goals, these strategies entail modifying the overall project risk level. When the entire project risk is negative, the control measure is used; when it is positive, the enhancement strategy is used. Replanning the project, altering its boundaries and scope, modifying its priority, altering resource allocations, altering delivery schedules, etc., are instances of mitigating the impact or enhancement strategies.
The organisation may decide to move forward with the project as it is currently defined, even if the entire project risk is above the set thresholds in cases where there is no proactive risk manner to address available to address the overall project risk. Whether active or passive acceptance is possible. Establishing an overall contingency reserve for the project, which includes sums of time, money, or resources to be used if the project exceeds its thresholds, is the most typical active acceptance strategy. Apart from a periodic review of the degree of general project risk to ensure that it does not substantially alter, tacit approval includes no proactive action.
What are the Four Common Risk Responses?
Risk responses fall into one of four categories: mitigating, avoiding, transferring, or retaining.
1. Reducing Risk
Typically, lowering risk is the first option thought of. There are essentially two methods for reducing risk: (1) lessen the likelihood that the event will happen, and/or (2) lessen the negative event's effects on the project. Most risk teams prioritize risk event reduction first because, if successful, it may prevent the need to think about the second, potentially expensive strategy. Many times, problems are avoided early on in a project by testing and prototyping.
Finding the underlying reasons for an occurrence is frequently helpful. For instance, poor vendor partnerships, miscommunication about the design, and a lack of motivation may all contribute to the worry that a vendor won't be able to deliver customized components on schedule.
After conducting this analysis, the project manager might decide to reorganize the contract to include rewards for on-time delivery, invite the vendor to design meetings and take his partner to lunch to settle the matter.
2. Keeping Safe
Changing the project plan to address the risk or condition is known as risk avoidance. Even though it is not possible to entirely eradicate all risk factors, you can take steps to minimize some of them before the project is launched. For instance, adopting tried-and-true technology rather than cutting-edge technology can eliminate technical failure. By selecting an Australian supplier instead of an Indonesian one, the possibility that political unrest would disrupt the supply of essential materials would be virtually eliminated.
3. Risk Transferring
It is common to transfer risk to a different party; however, the risk remains unchanged. Paying a premium for this exemption almost always results from transferring risk to a third party. The traditional illustration of risk transfer from an owner to a contractor is fixed price contracts. A financial risk factor is therefore added to the contract bid price because the contractor is aware that his or her company will be responsible for paying for any risk event that transpires. Prior to deciding to transfer risk, the owner should determine which party has the most effective control over the risk-causing activities. Is the contractor also able to bear the risk? It is crucial to clearly define and document who will bear the risk. Insurance is a second, more obvious method of risk transfer.
4. Embrace Risk
In some circumstances, a deliberate choice is made to accept the possibility that an event will occur. Some risks are so significant that shifting or minimizing the event is not an option (e.g., an earthquake or flood). Because there is a remote possibility that such an occurrence will occur, the project owner takes on the risk. In other circumstances, risks noted in the budget reserve can be easily absorbed if they come to pass. By creating a backup plan to implement, if the risk materializes, the risk is retained. A risk event may occasionally be disregarded, and the client may agree to a cost overrun should the risk event materialize.
Stress and uncertainty are significantly reduced when it is known how the response to a risk event will be retained, transferred, or mitigated. Once more, control is attainable with this organized approach.
Who is Responsible for Developing a Risk Management Strategy?
Determining who will be the best person or function to identify, assess, and develop a risk management strategy won’t necessarily be the same each time — it will depend on the scope, nature, company structure, complexity, resource availability, and team capabilities. So, who is responsible for developing a risk management strategy? It might be the responsibility of a risk management committee member, an audit team member, a project manager, a risk specialist, or someone else – like an external consultant. To learn more about the risk management strategies join KnowledgeHut's Project Management classes today!
You’re All Set to Assess Risks Then!
To assess their risk management strategies and better manage the interconnectedness of threats across the enterprise, more organizations implement risk maturity frameworks. More businesses are looking to formalize how to manage good risks in order to increase business value, in addition to using risk mitigation to avoid harmful situations. They are also giving risk appetite statements a fresh look. As the saying goes, it's difficult to make predictions, especially ones about the future, but tools for assessing and reducing risks are improving.