Risk management as an Essential Part of Project Planning - Term Paper Example

Risk management is an essential part of project planning. Why doesn’t it work Introduction The success of projects developed in various industrial sectors has been traditionally related with the effective estimation of risk related with these projects; this risk can be differentiated among projects; however, certain of its elements can be common in projects involved in different activities (Cervone, 2006, 256). In the above context, the role of the risk management in the success of project management can be quite important; moreover, the value of risk management as part of the project planning process has been increased under the influence of the ‘current business environment with a global focus and competition’ (Ahmed et al., 2007, 22); however, still the attention paid by project planners on the risk management process is rather limited – due to their personal perceptions on the value of risk management or under the pressure of specific organizational needs that have been set as a priority (Mobey et al., 2002, 202); as a result, the time and resources used for the development of risk management plans are limited, a fact that further leads to the low quality of these plans. Current paper focuses on the examination of the reasons that cause the ineffectiveness of risk management as part of the project planning; reference is made to the general characteristics of risk management – especially in relation with the project planning. It is proved that most risk management plans fail to meet the targets set by its planners; this fact has adversely affected the projects developed in various industrial sectors; the role of project planners in the increase of effectiveness of risk management plans is quite important. The cooperation among all the participants in the realization of these plans is also required. 2. Risk management and project planning 2a. Risk management in project planning Risk management is an indispensable part of project planning; in fact, there could be no chances for the success of a project if the risk involved would not have been precisely – as possible – estimated in advance (Wood et al., 2003, 254); in the study of Picken et al. (2001, 318) the role of risk management in estimating the cost of a project is highlighted; however, risk management can involve in other sectors of a project – for example in the time required for its completion or the resources needed. Hynuk et al. (2009) note that the project risk management has been proved to be rather effective compared to other forms of risk management, like the portfolio risk management and the program risk management (Hynuk et al., 2009, 14); this view can lead to the assumption that in the field of project management additional attention is paid on the identification and the evaluation of risk – compared to other similar sectors where risk is also highly involved. However, quite often the failure of risk management as part of the project planning is not avoided; the responsibility of project planners on this fact has been emphasized by researchers that have studied the specific field – their views – indicative ones – are presented in the section that follow. 2b. Reasons for the failures of risk management as part of the project planning Risk management may fail to perform in accordance with the targets set by the project managers. The reasons for this failure can be many depending on the plan chosen or the process followed by the project manager. The type of activity in which a particular project involves should also be taken into consideration in order to identify the reasons for the failure of a risk management plan. Artto et al. (2008) refers to the risk management in the construction industry and note that in this industry there are specific risk categories should taken into consideration when developing a risk management policy. These categories are those that are based ‘a) on subcontractors relationships with other subcontractors, b) the contractors competitor, c) the contractors client and d) the non-business actors’ (e.g. a local authority or regulatory body)’ (Artto et al., 2008, 88). It is assumed that if these categories are not taken into consideration for the development of the risk management plan in the construction industry, then these plans are expected to be led to failure; the same assumption could be made for other industrial sectors. In other words, the failure of project managers to take into account the organizational (internal and external) relationships that are likely to affect the performance of a risk management plan, then this plan will fail to meet the targets set by its designers/ strategic planners. The role of project managers in the success of risk management plans is also highlighted in the study of Kutsch (2008); in the specific study it is noted that ‘project managers tend to deny, avoid, ignore risks and to delay the management of risk’ (Kutsch, 2008, 602); at the next level it has been proved that ‘project managers consider risks to be outside their scope of influence and prefer to let risks resolve themselves rather than proactively engaging with them’ (Kutsch, 2008, 602). In other words, the failure of risk management in project planning can be regarded as the result of the failure of the project planners to understand the value of risk; their weakness to understand this concept lead to their refusal to spend time on developing appropriate plans for the limitation of risk – even if such plans are developed they are likely to be inappropriate for the targets set. The close dependency of risk management plans on the skills/ abilities of project planners can also lead to the assumption that in projects where the development of risk management strategies is based on a team of persons, the lack of effective communication among them could lead to the limitation of these strategies’ effectiveness (Picken et al., 2001, 318); in this way, the communication and the cooperation in the workplace are set as additional factors of success of risk management plans; in organizations where the level of communication and cooperation among employees is low there can be limited expectations for the development of effective strategic plans – risk management plans are also likely to negatively affected in such organizational environment. Kendrick (2004) presents four challenges which project planners in modern organizations have to face; it is expected that the failure of project planners to meet the requirements that these challenges set could lead to the failure of the projects undertaken – risk management as part of project planning could be also adversely affected. In this context, project planners need to take into consideration the following issues when having to design/ implement a risk management plan: ‘Do we understand the shareholder value risks of our strategy choices? Do we understand the risks that our structure and processes pose for implementation of chosen strategies? Is the risk appetite of the organization consistent with the risk appetite of our staff? Are we confident that our staff are effective and efficient in reacting to, and dealing with, risk?’ (Kendrick, 2004, 69). The view of Kendrick (2004) leads to similar assumptions with those made through the work of Picken et al. (2001); again the communication and the cooperation in the workplace are highlighted; if the communication between the project planner and the member of his team is poor, then the former will not be able to identity the skills of his team; in this case, the targets set in the context of a particular project will not be met – especially since the risk management plan developed is expected to lead to the production of inaccurate results – a view similar with that of Emblemsvag (2010). The value of communication between the project managers and their teams is also highlighted in the study of Cervone (2006) where it is noted that ‘the most successful project managers maintain open lines of communication throughout their organizations to stay in touch with constituents needs’ (Cervone, 2006, 256) The failure of risk management as part of the project planning can be explained used another criterion: the readiness of the project planners to undertake projects that are of high risk (Sirpal, 1998, 268). If the risk management process in a particular firm is based on the rejection of all the projects that are of high risk, then the profitability of the firm – usually the projects of high risk are likely to lead to increased profits compared to the projects of low or of moderate risk – is set under threat. The value of risk management is also minimized; risk management becomes a tool for avoiding risk instead of a tool for evaluating risk and taking the necessary measures for its limitation. The importance of skills/ abilities of project planners for the success of risk management plans is emphasized in the study of Emblemsvag (2010); in the specific study it is noted that failures in the design or the development of a risk management plan can lead to the production of inconsistent results (Emblemsvag, 2010, 248) – a fact that can give false indications for the expected performance of a project; the organization/ individual who has undertaken the risk of this project will have to cover the damage caused because of this failure. From a similar point of view (Whittaker, 1999), the failure of risk management as part of the project planning could be explained by referring to the level of participation of the project planners in the development and monitoring of risk management plans. Whittaker (1999) conducted a survey among public and private organizations in Canada (employees from 1,450 organizations participated in this survey); it was revealed that ‘the three most common reasons for project failure are poor project planning, a weak business case, and a lack of top management involvement and support’ (Whittaker, 1999, 23) In the literature, the failure of risk management has been also related with its role as part of a specific organizational project. More specifically, the risk management plan required for a particular project can be so complex that its effectiveness cannot be guaranteed in advance; this view has been supported by Hillson (2003) who noted that ‘risk identification often produces nothing more than a long list of risks, which can be hard to understand or manage’ (Hillson, 2003, 85); in the case that a risk management plan refers not to a single project but to a portfolio of projects, then the chances for the success of the above plan are not many (Olsson, 2008, 60). Towards the same direction, it is supported by Ford et al. (2006, 275) that the effectiveness of risk management plans is closely depended on their potentials to be changed under uncertain conditions; in other words, flexible risk management plans are more likely to survive within a challenging and continuously changing organizational environment compared to those risk management plans that include strict rules and leave no margin for differentiation – referring to the case that exceptional conditions in the organizational environment require the development of emergent plans that are may differentiated from the policies that the particular organization used to apply up to the specific point of time. An important factor affecting the potential success of risk management plans is the time at which the issue of risk appears; more specifically, when developing a project it would be necessary that the initial thoughts on the risk that this project involve are developed in the beginning of the project – an issue highlighted in the study of Zhou et al. (2008) who note that ‘risk thinking should start early in the project and not, as many modern design and development methodologies propose, solely as part of the development process itself’ (Zhou et al., 2008, 166); any delay in thinking of the risk of a project under development could result to the failure of the project – either in the short or the long term. McGrew et al. (2000) focus on a quite common failure of risk management plans: the estimation of a project’s cost; in accordance with the above researchers, the failure of risk management plans to offer a precise estimation of a project’s cost can result because of the following two reasons: ‘a) the acts of intervention during a risk management program may alter the outcome in ways we cannot separate and therefore cannot cost out, b) the tendency of individuals consistently to underestimate or overestimate risk, resulting in interventions that may be ineffective or excessively wasteful’ (McGrew et al., 2000, p. 293). The failure of risk management plans may be related with the failure in binding (connecting) the risks of the past with those of the present and the future; more specifically, the project planners that work on the development of a risk management plan need to take into consideration the previous risks – i.e. those risks that were identified in the past as being related with a specific project – but also the current risks – risks that actually exist (Vargas, 2007, 196); the estimation of future risks will be made using the risks of the past and the present – in the context described above. Rad et al. (2005) develop a similar view supporting that consistency with ‘the corporate policy and the good project management practices (Rad et al., 2005, 229) is a necessary prerequisite of effective risk management plans. In practice, the link between the past, present and future risks and the good project management practices are often ignored when a risk management plan is developed; the consequences on the quality of this plan are obvious – either in the short or the long term. 3. Conclusion Risk management has been found to be a crucial part in the development of successful projects; however, often the specific part of projects is ignored; it is proposed that by setting this process (development of risk management plans) as ‘a parallel activity’ (Kendrick, 2006, 19) could help project managers to improve the effectiveness of their projects; moreover, ‘undertaking adequate pre-project planning’ (Cleland et al., 2006, 6-15) is considered to be a solution for developing more effective risk management plans. At the same time, the challenges involved in the development of risk management plans have been proved to be a lot – as critically analyzed in the literature developed throughout this paper. The reasons for the failures of risk management as part of project planning have been identified in different fields – within the organization (for instance the issue of cooperation among the team of a project), being related with the project’s target, the structure of the plan and so on. Project planners have a major responsibility in developing risk management plans that respond to the organizational needs but also meets specific requirements – in the context explained in the literature presented above. The initial failure of a risk management to respond to its planners’ targets may be appropriately treated during the development of the project; however, if thoughts on risk have not been developed in the initial phase of a project the chances for effective handling of the crisis (e.g. radical increase of the project’s cost or time) when the project is already in progress are quite limited. Bibliography Ahmed, A., Kayis, B., Amornsawadwatana, S., 2007. 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