Risk management - What is risk?
Uncertainty
RISK represents UNCERTAINTY. The more uncertainty there is in an activity the greater the difficult in managing towards a successful completion.
It is fair to say that anything that can AFFECT the PERFORMANCE of the product would constitute a RISK.
However, this event would need to be UNCERTAIN and have a SIGNIFICANT impact.
Naturally, if the affect was insignificant the risk could be largely ignored and if certain the event would constitute part of the main plan and not a contingency (see later for proactive planning and reactive planning with contingency plans).
When something goes wrong and there is no ‘plan’ in place to tackle it you are into CRISIS management. It’s possible that you may get away with this on occasion but regular crisis management will cause a lot of problems… as well as draining morale. If effective risk management fails it is likely that crisis management will come to the fore.
Risk versus issue
There is often confusion between ‘risk’ and ‘issue’.
| Risk: | A potential event that may have a detrimental affect on time, cost, quality and deliverables. |
| Issue: | This is an unpredicted event that requires a decision otherwise a negative affect on the project may result. |
Tight objectives
If the project sets COST and TIME targets are very tight there will naturally be more risk in achieving them.
Conversely, if they are set too loosely this encourages additional risk in terms of potentially poor control.
Clearly, there needs to be mechanisms for setting the various targets with an appropriate level of risk.
This training package will explore ways that may help.
This really indicates that the management of risk is closely linked to target setting and the project’s objectives.
Plan
Risk can affect many aspects of the plan. It is usually a matter of detail as to what becomes routine project management (low risk)[see ‘The Complete Project Management package’] and [see 'The Complete Project Management plus PRINCE2'] and what could be classed as risk management (high risk).
ALL PROJECTS INVOLVE RISK.
Risk is a natural part of any project plan.
There is a natural balance of RISK versus REWARD (benefits). Naturally, the more risk a company takes the higher the reward expected.
However, this is not a licence to carry as much risk as possible in order to gain a high profit or other benefit.
The company that understands the risks will be able to manage them better.
This will mean they will be able to run with a plan containing less contingency and tighter margins. This will be very important in bid situations when putting together a quote to carry out a project. We will cover these issues in greater detail later.
A large part of risk management within a project is common sense but many other risks exist that require clear systems and methods to identify and manage them.
It really depends on the potential impact of the risk.
There are a lot of day to day activities which are managed within this ‘common sense’ approach.
Will a project succeed?
- People wish to know whether the project will succeed.
- Are the completion dates realistic?
- Are individual milestones deliverable?
- Are the individual tasks that make up the project plan correct in terms of their duration and costs?
In general, people are concerned about the overall costs, completion dates and trying to predict what might happen in the future.
Anyway, why should you get the contract to manage a particular project? Are you the cheapest? Do you have the right expertise to do the job?
Basically, there will be many other potential contractors who could get the job.
You will get the contract because you put in the lowest tender, right? Perhaps, but if you go too low then you may end up doing the project at a loss.
What if you say you can finish 2 months earlier than another contractor? If you are unable to deliver you will have to pay penalties.
There is a risk involved in putting in a bid and it would be useful to know how best to assess it.
Also, your project will not be carried out in isolation. The company that you work for will have other projects to manage.
There will be managers that have to predict, for the next financial year, what resource they will use and hence put forward budgets for approval.
The better you can understand the elements leading to the construction of the project plan then the more accurate budgets will be.
Everyone wants something cheap, of extremely high quality and they want it yesterday.
This pressure tends to mean project plans are put together quickly.
Clearly, this will depend upon the size of the project. It is not possible to wait an excessive time until the ‘project plan’ is perfect because it will never happen.
The experience of the project team will determine how long it takes to put together the plan.
The project plan won’t be perfect but at least the project will get underway.
Once the project starts issues will materialise.
Hopefully, the project plan (schedule) that you put together will have benefited from good project risk assessment.
One thing you can be sure of is:
ALL RISK WILL NOT HAVE BEEN ELIMINATED.
6 basic questions requiring an answer
- Who?
- Why?
- What?
- How?
- Resource?
- When?
We will look at these a little more in the next, see '6 questions to define the project'.
Opportunities
Risk analysis may show an area where the project could benefit.
For example:
- If your project relies on weather windows these are notoriously unpredictable, even if years of data exists on which to base opinion.
In a negative view on what may happen the plan may allow for certain events to occur in, say, November. If there is a really good weather window in October, such that the project can be brought forward, the project manager may be caught out if he is unable to bring key activities forward to take advantage of this OPPORTUNITY.
In terms of Project Team motivation a Risk Management Process that just concentrates on negatives can lead to poor team performance. It is therefore important to actively search for risk opportunities.
The aim of the Risk Management Process is to ‘improve the performance of the project by suitable identification, assessment and management of risk’.