The Importance of Project Risk Management A basic

The Importance of Project Risk Management • A basic dictionary definition states that risk is “the possibility of loss or injury. ” • A project risk is an uncertainty that can have a negative or positive effect on meeting project objectives. • Project risk management is the art and science of identifying, analyzing, and responding to risk throughout the life of a project and in the best interests of meeting project objectives. • Project risk management involves understanding potential problems that might occur on the project and how they might impede project success.

Some Risk-related Definitions • Risk appetite: the degree of uncertainty an entity is willing to take on, in anticipation of a reward • Risk tolerance: the maximum acceptable deviation an entity is willing to accept on the project or business objectives as the potential impact • Risk utility: the amount of satisfaction or pleasure received from a potential payoff.

Some Risk-related Definitions ü The y-axis represents utility, or the amount of pleasure received from taking a risk. ü The x-axis shows the amount of potential payoff or dollar value of the opportunity at risk.

Some Risk-related Definitions • • Utility rises at a decreasing rate for a risk-averse person. When more payoff or money is at risk, a person or organization that is risk-averse gains less satisfaction from the risk, or has lower tolerance for the risk. • Those who are risk-seeking have a higher tolerance for risk, and their satisfaction increases when more payoff is at risk. • A risk-seeking person prefers outcomes that are more uncertain and is often willing to pay a penalty to take risks. • A risk-neutral person achieves a balance between risk and payoff.

Processes of Project Risk Management Ø Six major processes are involved in risk management: ü Planning risk management ü Identifying risks ü Performing qualitative risk analysis ü Performing quantitative risk analysis ü Planning risk responses ü Controlling risk

Planning Risk Management • Planning risk management is the process of deciding how to approach risk management activities and plan for them in a project. • By reviewing the project management plan, project charter, stakeholder register, enterprise environmental factors, and organizational process assets, project teams can discuss and analyze risk management activities for their particular projects. • The main output of this process is a risk management plan.

Planning Risk Management • Broad categories of risks might include: ü Market risk: Will users accept and use the product or service? ü Financial risk: Can the organization afford to undertake the project? ü Technology risk: Will hardware, software, and networks function properly? ü People risk: Does the organization have people with appropriate skills to complete the project successfully? ü Structure/Process risk: How many distinct user groups does the project need to satisfy?

Identifying Risks • Identifying risks involves determining which risks are likely to affect a project and documenting the characteristics of each. • It is important to identify potential risks early, but you must also continue to identify risks based on the changing project environment. • Also remember that you cannot manage risks if you do not identify them first. • Four common techniques for identifying risks include: brainstorming, the Delphi technique, interviewing, and SWOT analysis.

Identifying Risks • Brainstorming is a technique by which a group attempts to generate ideas or find a solution for a specific problem by amassing ideas spontaneously and without judgment. • The Delphi technique is an approach to gathering information that helps prevent some of the negative group effects found in brainstorming by deriving a consensus among a panel of experts who make predictions about future developments.

Identifying Risks • Interviewing (a fact-finding technique for collecting information in face-to-face, phone, e-mail, or instantmessaging discussions) people with similar project experience is an important tool for identifying potential risks. • SWOT analysis can be used during risk identification by having project teams focus on the broad perspectives of potential risks for particular projects.

Performing Qualitative Risk Analysis • Performing qualitative risk analysis involves prioritizing risks based on their probability and impact of occurrence. • People often describe a risk probability or consequence as being high, medium, or low. • A project manager can chart the probability and impact of risks on a probability/impact matrix, which lists the relative probability of a risk occurring and the relative impact of the risk occurring.

Performing Qualitative Risk Analysis • Many project teams would benefit from using this simple technique to help them identify risks that need attention. • To use this approach, project stakeholders list the risks they think might occur on their projects, and then label each risk as being high, medium, or low in terms of its probability of occurrence and its impact if it does occur. • The project manager then summarizes the results in a probability/impact matrix or chart.

Sample Probability/Impact Matrix

Performing Quantitative Risk Analysis • Performing quantitative risk analysis involves numerically estimating the effects of risks on project objectives. • Quantitative risk analysis often follows qualitative risk analysis, yet both processes can be done together or separately. • Large, complex projects involving leading-edge technologies often require extensive quantitative risk analysis. • The main techniques for quantitative risk analysis include data gathering, analysis and modeling techniques, and expert judgment.

Decision Trees & Expected Monetary Value • A decision tree is a diagramming analysis technique used to help select the best course of action when future outcomes are uncertain. • A common application of decision tree analysis involves calculating expected monetary value (EMV) which is the product of a risk event probability and the risk event’s monetary value. • To create a decision tree, and to calculate expected monetary value specifically, you must estimate the probabilities or chances of certain events occurring.

Expected Monetary Value (EMV) Example Using EMV helps account for all possible outcomes and their probabilities of occurrence, thereby reducing the tendency to pursue overly aggressive or conservative risk strategies.

Planning Risk Responses • Planning risk responses involves taking steps to enhance opportunities (positive risks) and reduce threats (negative risks) to meeting project objectives. • Using outputs from the preceding risk management processes, project teams can develop risk response strategies that often result in updates to the project management plan and other project documents.

Planning Risk Responses The four basic response strategies for negative risks are: o Risk avoidance: eliminating a specific threat, usually by eliminating its causes (such as using familiar hardware or software) o Risk acceptance: accepting the consequences if a risk occurs. o Risk transference: shifting the consequence of a risk and responsibility for its management to a third party (such as purchasing special insurance or warranty protection) o Risk mitigation: reducing the impact of a risk event by reducing the probability of its occurrence (such as having competent project personnel)

Controlling Risks • Controlling risks involves monitoring identified and residual risks, identifying new risks, carrying out risk response plans, and evaluating the effectiveness of risk strategies throughout the life of the project. • The main outputs of this process include work performance information, change requests, and updates to the project management plan, other project documents, and organizational process assets.