Importance of Risk Management in Project Management

✅ Paper Type: Free Essay	✅ Subject: Project Management
✅ Wordcount: 2322 words	✅ Published: 8th Feb 2020

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Abstract

Risk and management thereof should be considered one of the most important factors to any project success. As technology develops and the complexity of new projects increases it is crucial to have robust processes that drive systematic risk analysis. Within the past decade there have been several developments in risk management methods, showing that risk management is not a one size fits all activity (Ho, Zheng, Yildiz, & Talluri, 2015). Unfortunately, risk management is often not prioritized or is rushed in the modern project management environment. This lack of attention to detail in risk management can lead to disastrous consequences for the project or the end user of the product. A systematic approach to risk management could have saved the lives of the seven astronauts aboard the Space Shuttle Columbia. Any organization that wants to be successful should implement robust strategies for risk management.

Risk management is a universal task for any project large or small. A risk in project management is anything that has a level of uncertainty that can have an impact on the projects objectives. Project risk management is often focused on mitigating negative risks but should also be used to exploit positive risks. The approach to risk management is similar for all project, but the amount of time and effort spent car vary greatly. An effective risk management plan should flow up into the project schedule and budget. Additional time, resources, and expenses should be accounted for as necessary at the beginning of the project to ensure project success. The purpose of risk management is to identify and effectively manage risks to reduce the overall project risk that is acceptable to all key stakeholders (Kloppenborg, Anantatmula, & Wells, 2019). Stakeholders who are fully aware of all project risks can make better decisions to direct the initiatives of the company.

Discussion

Risk Management Planning

It is important to understand and accept that risk is a part of every business move and must be considered during micro or macro strategic planning. According to Pukala, Sira, & Vavrek (2018) “risk is an integral element of each business activity” (p. 154). By understanding that risk is a part of each business activity it reinforces the need for risk management activities. Identifying and evaluating risk can be used as a tool for evaluation of business moves and can provide very useful information to stakeholders.

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It is important to manage and frequently reassess risks throughout the course of the project. Management of risks through all stages of a project is important to avoid shortcomings in product design resulting in extra costs generated through project delays, penalties, extra labor, resource allocations, additional planning and rescheduling (Gosnik, 2011). As projects develop and innovation is brought forth it brings risks with it as well. A failure to evaluate the risks throughout project development could lead to detrimental setbacks towards the end of the project. At any point there is a change in scope or requirements risk should be reevaluated.

Risk Analysis

By performing an in-depth risk assessment teams can identify underlying risk and put the team in a proactive position to manage risk. This proactive approach can lead to better project planning and estimation. According to Caldas (2009) systematically assessing project scope is one of the most appropriate ways to identify sources of risk. Scope elements are those that describe the entire package of work that the team needs to perform (Caldas, 2009). By defining these elements, the team addresses the sources of risk and thereby minimizes risk (Caldas, 2009). Just as project management has five phases risk management also has five phases. Galil (2014) outlines the steps of risk management as:

Risk management involves implementing five key processes: identification of project risks, logging and prioritizing project risks, identification of risk mitigation actions, assignment and monitoring of risk mitigation actions, closure of project risks (p. 44)

By understanding and following these 5 key processes risk management can be organized and tracked in a very similar manner as any project. Identification of project risks should be considered the most critical portion of project management. Poor risk management can lead to problems such as poor quality, not meeting customer or user requirements, increased costs, and possible loss of business (Baharuddin & Yusof, 2018). A critical review of risk will help to identify gaps and ambiguity in requirements. In closing these gaps, the scope of work can be more accurately defined which is necessary to create an accurate project schedule and budget.

A complex, detailed, accurate risk register lays the ground for the 4 additional key processes. Risks that are identified should be logged and prioritized according to their potential impact to the project. When evaluating risks, it is necessary to quantify the main risk factors of the projects (Chatterjee, Zavadskas, Tamosaitiene, Adhikary, & Kar, 2018). Risk can often be prioritized based on two criteria; likely hood of the risk occurring, and the impact the event has on the project objectives. Those that have the highest negative risk should be assigned risk mitigation actions and those with a high positive risk should be assigned actions to exploit the risk. Once actions are assigned they need to be assigned to individuals and tracked. Just as it is necessary to track progress of the schedule it is just as important to track actions to manage the risks to closure. Without tracking and managing risks the identification phase was a poor use of time and resources and can lead to risks having large impacts on project success.

Types of Risks

Risks come in all sizes and forms each is its own unique challenge. To complete a throughout evaluation of all risks associated to a project it is important to get a diverse group of team members together. Everyone brings a different perspective to the table which makes it more likely that important risks will be uncovered early. An engineer is likely to identify technical difficulties in a project while someone in the contract department will likely discover restrictions imposed by the customer contract.

While it is important to manage all risks, some are not possible to control. The economy, political activity and even the weather trends may be necessary items to consider based on the nature of the project being evaluated. For example, construction projects are dependent on a wide variety of risk that the team is unable to control. The weather can have extreme impact on a construction project schedule, the city issuing permits for the project can also delay the projects, or city ordinances can limit how and when the work is performed. While these risks cannot be managed by the team their impact can be mitigated through careful planning.

Risk Responses

For each risk identified during a risk assessment a response to the risk should also be created. Managing risk requires suitable risk responses to effectively reduce the possible impact (Chatterjee et al., 2018). According to Kloppenborg, Vittal, and Wells (2019) when addressing negative risks there are several appropriate risk responses; avoid, transfer, mitigate, accept, and research. Avoiding risk is one of the best responses but often the most difficult as risk is integral to conducting business. Risk can be transferred in a few commons ways. An example of the most common risk transfer action is insurance. Just like insurance on a car an organization can choose to insure a project, thereby transferring the risk to the insurer. Mitigation is the most commonly practiced strategy for managing risk. Risk mitigation is an effort to reduce the overall risk by reducing either the likelihood of an event occurring or the impact an event will have if it occurs. Accepting risks is often done if the severity of the risk is low or if the risk cannot be controlled by the project team. The final action for addressing negative risk is research. While researching risk does not reduce the impact a risk can have it can be necessary if a risk is not fully understood. Actions that are initially assigned research as a risk response should later be transfer to another response.

Risk management should not dominate a project, it is necessary to focus on opportunities as well (Klakegg, 2016). As stated by Klakegg (2016), empirical studies show there is often a stronger focus on mitigating risks than exploring opportunities. Opportunities are categized as positive risk for which there are also several responses. Responses for positive risk include; exploit, share, enhance, accept and research. Exploiting opportunities can be accomplished by bringing these items forward and giving them visibility to stakeholders. If a team is unable to exploit an opportunity to its full potential, they may choose to share it. For example, a team that creates an innovative product for a customer project may choose to work with a company that specializes in similar products to mass manufacture the design and take it to the public market. Enhancing the opportunity is an effort to maximize the reward of the opportunity of the likelihood that the opportunity will occur.

The process of risk management must be understood by all stakeholders as a systematic application of procedures for identification and response to risk (Pana & Simionescu, n.d.). In the process of risk identification ambiguity in project requirements can be eliminated. These initial efforts must be followed up by responses to each risk to ensure that risk is properly managed. By thoroughly evaluating risk project teams are taking a step in the direction of total project success.

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