Project risk management is the act of proactively identifying and mitigating risk. Imagine that your team is working on developing new software for a client and you have allotted six months to complete the project. However, once you are in the thick of it it becomes apparent that it will take closer to nine months to complete. As a project manager, you have a choice. Do you proactively build a contingency plan now to deal with this issue? Or do you wait until the project is due and you’ve run out of time and address the situation on the spot?
Most people would agree that the first scenario would be the best way to handle it. By proactively dealing with potential problems you save yourself and your team from losing valuable time. Not to mention, you will spare everyone involved a lot of unnecessary stress and frustration.
And as the project manager, it is your responsibility to keep the best interests of the project in mind. Which means you need to watch out for anything that threatens to hurt or derail it. This is what is known as project risk management.
What is Project Risk Management?
A project is defined as a temporary effort that has a definite end goal and a beginning and end point. On the other hand, a risk is an unplanned event that threatens to undermines your efforts to complete your project.
Project risk management is the practice of analyzing, evaluating, and responding to anything the threatens to cause harm to your project. It is a proactive way of approaching problems rather than just reacting to them once they happen.
So why do you need to worry about risks?
First of all, it is the project manager’s job to anticipate and mitigate any risks. Every project plan should include a section on risk management.
Of course, it is impossible to plan for every potential outcome or to foresee every possible risk. And in order to achieve success, you do have to take risks every once in awhile. But there is a fine line between the positive risks you take voluntarily and the risks that you didn’t prepare for.
As a project manager, you have to understand that no plan is ever foolproof and that you will always be exposed to some sort of risk. Project risk management can be tricky but it is not impossible. You will never be able to completely safeguard your project but you can get as close as possible.
Positive Risks vs. Threats
Most people assume that all risks are inherently negative but this is not true. There are actually two different types of risks: positive risks and threats.
Threats have the potential to damage or completely undermine your project. Meanwhile, a positive risk can impact the project in a beneficial way. The biggest difference between positive risks and threats lies in how you will approach them.
You manage threats so you can minimize their impact but you manage positive risks so you can fully take advantage of them. A few examples of positive risks would be:
- Having someone unexpectedly recommend your company to a brand new client.
- Finishing your project a month ahead of schedule.
- Signing up twice as many customers as you had hoped for.
- Being exposed to a unique and unplanned marketing opportunity.
Many people think of positive risks as surprises that they hope will happen. However, a positive risk can quickly turn into a threat and vice versa which is why you should plan for all possible scenarios.
4 Steps for Effective Risk Management
The purpose of risk management is to identify and minimize all potential risks to a project. That’s because identifying and assessing potential risks is the best defense you have against potential problems.
Identifying risks and developing strategies to deal with them will greatly improve your chance of completing your project successfully.
Risk management is ultimately a problem-solving process. You will start by determining where any potential problems exist, analyze them, and then come up with possible solutions.
Here are four basic steps for effective project risk management:
Identify the Risk
The first step is just to spend time brainstorming and identifying any potential risks.
If caught early enough, just identifying the risk may be enough to minimize or eliminate it altogether. But if you ignore it, you risk letting it become much worse.
Imagine that you are planning an outdoor family get-together. You check the weather report and see that there is a chance of rain on the day it is scheduled for. Identifying this problem gives you options but if you ignore it you risk ruining it.
Regularly monitoring and checking up on your project will be the best way to identify risks that threaten to destroy it. You can then assess and categorize the risks you have identified.
Analyze the Risk
Once you have identified the risk you need to analyze it. Some good questions to ask yourself are:
- What is the root problem of this potential risk?
- Is there any action I can take to manage this?
- What are the potential consequences of doing nothing?
- What can be done to reduce the likelihood of this problem actually happening?
Try to analyze every possible outcome and look at both sides of the issue. After all, there are instances when it is worth it to take on calculated risks. Ask yourself what you have to gain or lose.
Identify the Necessary Action
Now that you have analyzed and evaluated each risk, you have to decide what action you are going to take. Very small risks may not be worth spending a lot of time on but it is rarely a good idea to completely ignore potential risks.
Let’s look at our example of the outdoor family get-together. Some possible actions you could take are to switch to an indoor location or reschedule your event altogether.
Monitor Your Project
The final step is to carefully monitor the risk and to ensure that your project is carrying on as it should. So even if you have taken action, you still need to watch the situation to ensure that everything is still going according to plan. At times, you’ll still stumble upon risks that you couldn’t have ever foreseen.
Project risk management is the process of identifying and responding to risks in order to keep your project on track. Risk management is a proactive approach to planning and identifying anything that could impact your project’s performance.
Your entire organization can improve by adopting a mindset of risk management. By creating a consistent set of standards you won’t feel like you have to reinvent the wheel every time you begin a new project. Having a process already in place to manage and deal with risks will allow you to plan, strategize, and make better decisions.
Have you ever done project risk management? Any other tips on how to do it right? Let us know down in the comments!