Techniques and Strategies of Project Risk Management - Essay Example

Management of Risk

Table of Contents

Introduction3

Critical analysis of the concept of risk4

Effective risk management for complex projects5

Accountability in risk management12

Measurement and ranking of risk13

Outline of project risk management strategy for complex projects16

Conclusion and Recommendations20

Reference List22

• Introduction

The business environment in 21st century is very different in the sense that competition and globalisation is constantly reshaping the entire paradigm of project management. The management of any project has always been challenging and difficult task due to presence of multiple variables determining the final outcome. Classical project management techniques like scheduling cost management, scope analysis, etc. have proved to be incredibly reliable approaches in managing the project efficiently (Pryke and Smyth, 2012). However, in modern world these techniques are not sufficient to control the inherent risk of projects. One of the commonly noted reasons for projects to fail is due to unclear definition of requirements. The project managers constantly face the pressure from different stakeholders to efficiently execute the project before designated deadline. However, adherence to project deadlines depends on many factors including efficient risk management. In modern business environment, the work process has become highly complex in nature involving international stakeholders, dynamic customer requirements, proper integration of functionalities, etc (Kwan and Leung, 2011).

Project risk management uses set of techniques and outlines strategies which identifies the factors threatening the success of the project and chooses the best course of action that will mitigate the identified risk. In other words, risk management is more like a subset of project management activities which needs to be implemented at functional and project level for overall success of the project. In regards to the above discussion, the main objective of this assignment is to discuss how appropriate risk management practices can assist in minimising risk for your project.

• Critical analysis of the concept of risk

The concept of risk in project management cannot be easily predefined because such risk could arise from any event or uncertainty. The main variables which are directly influenced by project risk are cost and time. In general, project risk is defined as an uncertainty that affects the success or failure of overall project. More specifically, such risk could arise from any present or future events and risk characterises the probability of occurrence and possible impact on project deliverables and costs.

Throughout the entire project lifecycle, uncertainties can emerge from any event like issues related to planning, designing, client requirements, government restrictions, unexpected increase in cost, and so on.

The basic process of risk management aims to maximise efficiency and effectiveness of the project management process. Since the details of risk vary according to the requirements and specifications of the project, there are general stages which are almost universally implemented. It includes three basic parts namely, risk identification, analysis and action (Pryke and Smyth, 2012).

Before the risk management process is implemented, it is necessary to first identify the risk and then analyse various course of action that can be taken to mitigate risk of the project. However, scholars and practitioners like Kwan and Leung (2011) have mentioned that it is not easy to predict and manage risks when the business operates in international markets. There are different stakeholders with different requirements and any miscommunication can lead to negligence and project failure.

The management of risk by project management professionals in modern world has become difficult because of reasons such as globalisation, advancement of technology and changing business environment. A complete risk management cycle should include the following processes:

• Risk management planning – In this stage, the decision regarding the best approach and activity of the project is planned.
• Risk identification – This stage determines risks which might influence the project and documenting process.
• Quantitative risk analysis – This stage analyses the likelihood of overall risk occurrence.
• Qualitative risk analysis – This stage aims to prioritise risk for subsequent analysis by combining probability of impact and occurrence.
• Risk response – This stage develops actions and alternatives to improve opportunities to minimise the objectives of the project.
• Risk monitoring – This stage identifies risk, new risk, identifies appropriate risk response and evaluates the effectiveness of project lifecycle.
• Effective risk management for complex projects

In the contemporary era, management of risk is becoming one of the most difficult errands for the project managers and project management professionals. Risk has always been intrinsic and integral part of projects, as the project management professionals have to deal with uncertainties. A project risk is defined as any uncertain, unpredictable event or situation that directly influences the expected outcome of the project (National Academy of Sciences, 2012). Risk management of project is a systematic process that identifies and assesses the risks of project and maximise its chances of success. In practice there are no project which can be considered as risk-free because studies like Jun, Qiuzhen and Qingguo (2011) shows that there can be infinite number of events negatively influencing successful outcome.

(Source: Author’s creation)

The concept of project risk management in modern world is very complex and in most of the cases it involves international strategic partners. The process of risk identification is not only conducted before initiation of the project but it should be identified throughout each phase of the development process.

There are many risk identification techniques and tools that are widely used by private and public limited companies. The project management professionals need to first identify the key risk inputs. The foremost important input in project management is the requirements which need to be fully understood and assessed in terms of technical and financial viability. The project management professionals should focus on identifying the uncertainties that the project might encounter during the various stages of development. Such uncertainties could arise from any type of events like internal or external. The internal events include risks and uncertainties specific to the organisation. This could happen when the project manager suddenly quits the organisation during intermediate stages of development. It could also arise when the company’s resources are suddenly restricted due to insufficient liquidity of cash flows or unavailability of adequate technical resources. Most of the projects are developed in incremental stages (which are known as progressive elaboration) and hence, at any particular point of time, the project management professionals do not have complete information on deliverables and objectives (Atkinson, Crawford and Ward, 2006.).

It may be noted that the various assumptions and estimates of risk identification and management process are highly project specific and are therefore influenced by the size and complexity of deliverables. However, the following techniques and tools have been widely accepted and used globally to identify project risks:

• Information gathering – One of the critical success factors of any project is the process of information gathering. The more information project management professionals have, the less will be chances of project failures. The information on specific projects can be gathered from various sources including client-end, speciality consultant groups, regulatory bodies, team members, external and internal stakeholders.
• Review of documents – Documentation is the most important part of project management. A peer review of relevant documents, study reports, schedules, preliminary plans, estimates, etc. can often identify hidden risks.
• Communication – Excellent communication at all levels is absolutely necessary because any miscommunication can lead to loss of materialistic information which further increases probability of project failure.
• Fishbone diagram – This is an important tool for identifying the causes of risks and it depicts how the various elements of system are inter-related under the mechanism of causation. An example fishbone diagram is depicted below:

Figure 2: Sample Fishbone Diagram

(Source: Fishbonediagram.org, 2016)

• SWOT analysis – This process critically analyses the internal strengths and weaknesses in addition to external threats and opportunities.

Once the risk has been identified, the next stage is to determine how to minimise risk by assessing the severity of consequence and estimating the probability of occurrence. Some of the risk management and mitigation alternatives available to the project management professionals are:

• Acknowledge the existence of particular risk and make deliberate choices to accept and manage it.
• Adjust the requirements or predefined constraints to mitigate risk and it could be attuned by changing schedule, technical requirements, funding and scheduling.
• Implement actions that will minimise the likelihood of risk occurrence.
• If the organisation does not have required expertise and capabilities to manage risk and produce required deliverables then it is advised for the project managers to hire specialists and experts who can implement the project effectively.
• The project management professionals and other stakeholders should monitor the changes in business environment and also the impact of risk.

The alternatives explained above are not sufficient to effectively manage risk. The following project risk mitigation plan could assist the project management professionals and other stakeholders in handling complex projects:

Understanding clearly the needs of the customer – One of the most effective processes in project management is relationship with the client. Throughout the project lifecycle there can be many amendments and revisions to the initial requirements and specifications. Uncertain changes during any stage can delay timely delivery and even halt the project for indefinite period. A close relationship with the community will help to detect any potential threat at an early stage.

Taking the assistance of experienced professionals – A project might be feasible but due to the complexity of requirement, it might need external assistance. The organisation might have financial resources but could lack technical expertise or alternatively it might lack financial resources but have talented professionals. In either case, it is advisable to enter into strategic partnerships (if possible) and minimise project failure risk.

Hire a risk manager – The organisation can hire a risk manager who is highly experienced and knowledgeable in this domain as he or she will be responsible for identifying and implementing risk management plan. It is also important to provide necessary authority along with the position so that the implementation process does not get lost in hierarchies.

Developing strategies – A simple response matrix (shown below) can be developed to determine the best course of action.

(Source: Author’s creation)

From the response matrix shown above it is clear that when the chance of impact is high then it demands more attention of project management professionals. Alternatively, when the risk has high probability of occurrence and the possible impact is also high it is implied that such condition needs immediate attention. Another critical scenario is when the probability of occurrence is there but the impact is high. This scenario should be given some attention before it turns unmanageable.

• Accountability in risk management

In general, the members of the project management should be encouraged to identify the risks and since the project development process is iterative, the risk identification process should also be continuous. In the contemporary era, it is not possible for a single individual or just a specialised group of experts to mitigate the entire risk of project (Kwan and Leung, 2011). The complexity and dynamic nature of the project demands responsibility for risk management should be shared amongst all key stakeholders and not just the project management professionals. The project manager is primarily responsible for taking the final decision regarding whether to proceed with mitigation strategies or implement contingent strategies or abort the project. The following table summarises the risk and responsibilities of every stakeholder:

Table 1: Who should be responsible for risk management?

Stage in risk management process

Responsibility

• Risk identification

All stakeholders should participate and be accountable

• Risk registry

The project manager is accountable

• Risk assessment

All shareholders are responsible

• Risk response and selection of alternate course of action

All stakeholders are equally responsible

• Risk response approval

Project manager(s) are responsible

• Risk contingency planning

The project manager(s) are responsible

• Response management

The project manager(s) are responsible

• Risk reporting

Project manager

(Source: Author’s creation)

• Measurement and ranking of risk

There are many ways through which the risk of project can be measured and one of the widely used tools is the ‘Risk Score Matrix’.

Figure 4: Risk score matrix example

(Source: Needs, 2014)

The above diagram represents a sample illustration of how risk can be evaluated on the basis of consequences, likelihood (probability) and impacts. Basically, the main inputs for measuring and ranking risk are types of risk, probability of occurrence and impact. The project management professionals will have to first identify different types of risks by following the steps explained earlier. The next step is to determine the probability of occurrence of each type of risk and their possible impact upon occurrence. The overall ranking is given by multiplying the level of impact with probability of occurrence. A simple example of this concept is demonstrated below:

Table 2: Risk measurement and ranking

Type of risk

Probability of occurrence

Level of impact

Overall ranking

Financial risk

0.20

Medium

0.40

Quality risk

0.25

High

0.78

Reputational risk

0.25

High

0.72

Credibility risk

0.20

Medium

0.40

Technical risk

0.10

Low

0.10

(Source: Author’s creation)

From the above table it may be noted that the chances of both quality risk and reputational risk is high and their level of impact will obviously be high because damage of reputation and quality can lead to project failure. On the other hand, the chances of financial risk are 20% and level of impact is moderate. The overall ranking is given by multiplying the values of column 2 and 3. The interpretation of column 4 is that the risk of project increase with the value of overall ranking. In other words, technical risk has lower risk while quality is top priority because it has maximum risk. Hence, on the basis of ranking, the following should be the risk management priority:

(Source: Author’s creation)

• Outline of project risk management strategy for complex projects

Risk management has become a vital activity for the project management professionals as companies increasingly undertake ambitious and complex projects involving high degree of ambiguity (Atkinson, Crawford and Ward, 2006). Therefore, managing the risk of the project is very important task for any project manager after all possible risks have been identified, measured and ranked.

A risk management strategy should include a robust framework which will minimise the chances of occurrence of undesirable situations. One of the important assumptions in risk management strategies is to develop various contingencies by critically analysing every possible scenario, negative consequences and undesirable outcomes (Pryke and Smyth, 2012).

According to Atkinson, Crawford and Ward (2006), a risk management strategy helps project management professionals to prepare a coherent and structured approach to recognize, assess and manage risk. In real world scenario, high risk situation exist when there are high chances of suffering monetary losses, reputation damage, dent in relationships with strategic partners and so on. Depending on the nature and level of complexity of the project, risk management strategy should be developed. The outcome of complex projects depends on the following factors:

• Cost
• Timely delivery
• Technical excellence
• Quality
• Value for investment by the stakeholders which is measured by cost or performance
• Social impacts

All the factors mentioned above are critical for implementing the most effective risk management strategies.

Figure 6: Rader complexity diagram

(Source: National Academy of Sciences, 2012)

The diagram shown above indicates an example of sample project complex score. The various dimensions and ranking of project determines the complexity scoring:

Table 3: Complexity Ranking

Dimensions

Rank

Complexity score

Cost

1

75

Schedule

2

85

Technical

3

87

Context

4

65

Financing

5

60

(Source: Author’s creation)

From the above table it is clear that for managing complex projects, it is necessary to manage these 5 dimensions. The complexity scores will vary according to requirements and specifications of the project. For instance, the above Rader complexity diagram scores technical complexity to 87 and scheduling complexity to 85. Similarly, cost and financing complexity is scored 75 and 60 respectively. While the basic outline remains same under this framework for managing complex projects, the scoring and ranking will vary from one project to another.

Another popularly used tool for analysing and managing complex modern world projects is the five dimensional project risk management approach:

(Source: Author’s creation)

The 5 dimensional approaches depend on traditional three-dimensional project management which includes cost, schedule and technical parameters. In the 5-dimensional approach, the context and financing has also been included because with the increasing complexity of the project, funding becomes a very common restriction influencing the success or failure of the project. Similarly, in many cases, the very context of the project could become risk factor as many customers fail to satisfy the following criteria:

• Properly define the designated task
• Clearly mention the design related issues during initial stages
• Late customer approvals
• Scope addition to engineering or production efforts
• Recommend changes on pre-developmental stage instead of requesting changes at much later stage

The concept of 5-dimensional approach provides a basic set of guidelines on requirements that need to be satisfied and optimised. The project management professionals in contemporary era are expected to ensure that project is delivered on time and necessary financing is available (National Academy of Sciences, 2012).

• Conclusion and Recommendations

A formal project risk management approach assists the project managers to identify the risks of specific projects and determine the likelihood of success. Some of the best practices that can assist in minimising the risk for projects in modern era are summarised below:

• Determination of appropriate risk manager
• Develop high-level risk mitigation strategy
• Identify the best course of action that needs to be taken to mitigate the identified risks
• It is absolutely necessary to be clear about what actions need to be taken (for example, appropriate actions depend on agreements, management discretion, consent of international strategic partners)
• Based on the identified actions, the project might require backward planning (that is, re-evaluating schedule, design and cost considerations) or forward planning (that is, estimation of time of project delivery)
• It is always recommended to maintain a contingency planning (this must include all identified event triggers that can increase risk and appropriate decision points)
• Finally, a continuous monitoring, task reviewing, risk analysis and redefining strategy is vital to overall success of complex projects in today’s highly competitive environment.
• Reference List

Atkinson, R., Crawford, L. and Ward, S., 2006. Fundamental uncertainties in projects and the scope of project management. International journal of project management, 24(8), pp.687-698.

Fishbonediagram.org, 2016. Example #1 – Poor Product Quality. [online] Available at <http://fishbonediagram.org/example-1-poor-product-quality/> [Accessed 01 July 2016]

Jun, L., Qiuzhen, W. and Qingguo, M., 2011. The effects of project uncertainty and risk management on IS development project performance: A vendor perspective. International Journal of Project Management, 29(7), pp.923-933.

Kwan, T.W. and Leung, H.K., 2011. A risk management methodology for project risk dependencies. IEEE Transactions on Software Engineering, 37(5), pp.635-648.

National Academy of Sciences, 2012. Guidebook: Project Management Strategies for Complex Projects. [online] Available at <http://www.pwfinance.net/document/research_reports/Research%20Misc%20Guidebook.pdf> [Accessed 1 July 2016]

Needs, I., 2014. Building an Effective Project Risk Management Scoring Matrix. [online] Available at <http://www.keyedin.com/keyedinprojects/article/building-an-effective-project-risk-management-scoring-matrix/> [Accessed 1 July 2016]

Pryke, S. and Smyth, H., 2012. The management of complex projects: A relationship approach. New Jersey: John Wiley & Sons.