Risk is an uncertain event which could possibly on its occurrence, affect the ongoing project life-cycle/ phase and in turn the project’s outcome. A risk may be a potential hazard to the planned outcome of the project in terms of Cost, Time and Quality. However, in a few cases, the risk may turn out to be a positive catalyst to the project.
Uncertainties in a project may be anticipated mostly based on experience and historical data which can be mitigated or avoided while few cannot be anticipated turning out to be absolute disasters ruining the project outcome out-and-out.
One can compare the risks/ uncertainties with occurrence in every individual’s life shackling its progress. Attending untimely or de-efforts to mitigate it may lead to tragedy. Hence, managing such risks is of utmost importance to safeguard the interests of the project or life. Nevertheless, life is also a project with many phases in it.
The objectives of the risk management initiative are to
thus assisting in enhancing
For a successful risk management, there are five (5) steps to be executed in a proper manner.
The four (4) process steps involved in risk management are:
Methods of risk management include:
Evaluation of control environment
Activities of an internal audit function
Risk assurance techniques - audit committees
Reporting on risk management - risk documentation
Importance of corporate reputation
Risk Management in project has become of utmost priority because of experiencing global financial crisis and increase in a number of corporate failures, also, increasing stakeholder expectations.
Whichever the field the project is, there is always a possibility of encountering risks which may or may not be averted depending on its nature. However, risk management is everyone’s responsibility.
Here, I would like to mention the 10 myths of risk management by Dr. David Wilson which clearly states what risk management is all about and its role among the project teams.
Risks can be divided into three (3) categories:
Note: * not to be confused with Control Risk - one of the five steps of the risk management process.
There are certain events that can only result in negative outcomes. These risks are hazard risks or pure risks. In general, organizations will have a tolerance of hazard risks, and these to be managed within the levels of that tolerance. A common area where these kinds of risks are observed is Occupational health and safety.
There are certain risks that give rise to uncertainty about the outcome of a situation. These can be described as control risks. Often these risks generate uncertainties on the project budget, time and quality which are to be taken care of or managed to be in the desired range. The main purpose of managing such risks is to reduce the variance between anticipated outcomes and actual results.
At times, organizations consciously take risks in order to achieve a positive return, though not guaranteed. These can be described as opportunity risks. These relate to the relationship between risk and return.
However, apart from the above, a project may face risks from four (4) different ways which can be broken down as below. These, again, maybe of hazard, control and opportunity kind of risks.
The main principle of risk management is that it reduces the volatility or uncertainty of outcomes thus achieving the best possible result/ product.
A successful approach to risk management initiative and framework within an organization is known as PACED.
However, the key goal of risk management is to enhance the efficiency of operations, the effectiveness of processes and efficaciousness of strategies.
As the result of a risk may have on the project, a negative impact (due to hazard or pure risk) or a positive impact (due to opportunity or business risk) so the strategies to deal with the risks.
b. Opportunity or business risk:
In whichever the given situation, both the risks must be assessed and managed.
Priority significant risks facing by an organization are those that have:
To handle such risks, Paul Hopkin - Author of Fundamentals of Risk Management, stated in his book, four (4) ways called 4Ts.
Drawing a distinction between project risk management and the reason why the project was undertaken is of utmost importance because project risk management is concerned about the risks embedded within the delivery of the project. Project risk management should be an extension of project planning. The main requirements of any project are that it is delivered on time, within the budget (cost) and to specification or performance (quality).
A risk is often defined in terms of uncertainty or deviation from required outcomes. Therefore, the focus of risk management is often on the reduction in the variability of outcomes and the management of control risks. Project risk management is a type of control management. Project risk management is one of the successful areas for the application of risk management tools and techniques.
As per the Project Risk Analysis and Management (PRAM) Guide developed by The Association for Project Management (APM), there are five (5) points in a project where an accurate prediction of the impact of risk-based events can be done:
Risk management should be embedded in project management so as to consider that it is just another project management technique. It must not be seen as an optional. It must be built-in into project management and not seen as a bolt-on. Built-in risk management has two (2) key characteristics:
Importance of Risk Management in an Organization can be understood by analyzing a series of steps:
The explicit management of risks brings benefits. By taking a proactive approach to risk and its management, organizations will be able to achieve improvement in:
Stakeholders should expect that organizations will take full account of risks that may cause disruption within operations, late delivery of projects or failure to deliver the strategy.
The exposure presented by an individual risk can be identified in terms of likelihood of the risk materializing and the impact of the risk when it does materialize. As risk exposure increases, then likely impact will also increase. The level of risk should be compared with the risk appetite (set of risk criteria) of the organization for risks of that type.
Hazard risks undermine the objectives, and the level of impact of such risks is a measure of their significance. Hazard risk management is closely related to the management of insurable risks. Hazard (or pure) risk can only have a negative outcome.
Hazard risk management is concerned with:
Hazard risks can cause disruption to normal operations resulting in increased costs. Theft and fraud can also be significant hazard risks to an organization. Techniques to avoid such risks include adequate security procedures, segregation of financial duties, and authorization and delegation procedures, etc.
Another feature of risk and risk management is that many risks are taken by organizations in order to achieve a reward. When an organization puts the value at risk, it should do so with the full knowledge of the risk exposure and it should be satisfied that the risk exposure is within the appetite of the organization. Even more important, it should ensure that it has sufficient resources to cover the risk exposure.
Risk is sometimes defined as uncertainty of outcomes. It is particularly applicable to the management of control risks. Control risks are most difficult to identify and define but are often associated with projects. The overall intention of a project is to deliver the desired outcomes on time, within budget (cost) and to specification (quality).
A certain level of deviation from the project plan can be tolerated, but it must not be too great.
Different organizations will have different attitudes to risk. Some organizations may be considered to be risk-averse while some others risk aggressive. To some extent, it depends on the nature and maturity of the marketplace within which it operates, as well as the attitude of the individual board members
Risks cannot be considered outside the context that gave rise to them. Improvement in the decision-making process is one of the key benefits of risk management.
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