Project Risk Management
Last updated: 2022-03-16
In this sub-section about project risk management, we describe what is a risk and how we prepare a plan or
strategy for managing risks.
The following diagram shows an overview of the process that consists of four generic steps. We go through these four steps in every risk management workshop.
Risk Management Process
Let's start with a definition of terms.
What is a Risk?
Our daily life language usually refers to risks as events that
could have a negative impact. A closer look into the dictionary Longman, 1998, offers us: A risk is the possibility that something harmful
or undesirable may happen. For our purposes, we adopt the definition
also used in the insurance business. A risk is the probability that an event
might occur which could have a negative impact. Such an event we call
Risk = probability (event with negative impact may happen).
(Similarly, we can define the term opportunity as the probability that an event might occur which could have a positive impact.
Entrepreneurs of the gambling industry count on that as well.)
Risk management focuses on the question: What can we do about those events that might impact our project negatively?
Principle of Risk Management
We can prevent some of these events by taking actions which make
the event impossible to happen. For most of them we can take actions
that decrease their probability. Finally, for those we cannot prevent we
can prepare actions that make it easier for us to deal with their
Principle of Risk Management
The following form (there is a template in section Free Downloads) reflects this in a more detailed way.
Risk Assessment Form
Following the process, we start with step 1,
identifying risks, i.e. identifying as many risk events as possible,
usually in a brainstorming session. The result is a list of such events.
In step 2, evaluation of risks or risk analysis,
we estimate probability (in %) and impact (in $) of each event. By
multiplying these figures we obtain the expected value of risk, or just
risk value. Risks with high risk value will be high on our priority
list. Another way of showing the different priorities of risks is by
arranging them in the probability-impact-diagram. Mathematically spoken,
the risk value is the statistically expected value of impact or damage
that risk event could cause.
Priority of Risks: Impact vs. Probability
It is common practice to include those risks with either very high probability or very high impact into the top priority risks, even if their risk values are low.
Preventive, Mitigating, or Corrective Actions
Step 3 focuses on
identifying preventive or corrective actions, again in brainstorming
sessions, and by referring to lessons learned from earlier projects. In step 4,
evaluation of actions and residual risks, we estimate the cost of each
action. For most events, we cannot reduce the probability of its
occurrence down to 0 %. After taking preventive action, we usually end
up with a residual probability which, of course, is lower than the
original one. If we now multiply residual probability with the impact we
obtain the residual risk value. By adding the cost of action we get
the expected value of action.
By comparing risk value with the expected value of action we can decide if we want to take the
action, i.e. integrate it into the WBS or not.
The decision to
prepare for corrective actions depends on the company’s or
organization’s accounting principles: it is good practice to include
them in the project contingency.
As we proceed through the planning
phase, and later through the implementation and closure phase, we repeat
these risk management workshops periodically since new risk events can
come into our view which we should not miss.
35+ templates, tools, and checklists in one set
To save you time in your daily work as a project manager, I packaged more than 35 project management templates, tools, and checklists into one zip-file. You un-zip it, and you get all items in doc-format or xls-format. They strictly contain only standard Microsoft Word® or Excel® functionality, no macros, no other VBA code. You are allowed to use your own logo.
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