The Process of Risk Management - Case Study Example

Running Head: Project Risk Management Project Risk Management Managing and Planning for Risk Type here Project Risk Management We can define risk as the likelihood of a loss (Why Project Risk Management, pg 2). Risk is an amalgamation of both expected problems, threats, and the possible prospects within any project. It is one of nine knowledge areas of the Project Management Body of Knowledge (PMBOK) (Creating the project charter, pg 45). The process of project risk management involves the identification, analysis, and planning of prospective risks that would have an impact on the project. It is important to clarify here that risks can be both positive and negative. Therefore, we can also define risk management as the act of reducing negative risks while trying to maximize positive risks. The process of risk management involves determining the outcome of the risk and using it to refine the objectives of the project, determining loose ends, and thus, improve the effectiveness and efficiency of the overall project. We can define the process project risk management into several steps, however, organizations usually combine the steps according to ease of use and utility. One of the main objectives of project risk management is to identify the risks with the highest consequences and possibility of occurrence and then develop possible action plans in case any of risk actually occurs (). Progressive elaboration, which improves the management’s ability to handle details well also encompasses risk definition as part of its process. Organizations depict different behaviors when it comes to handling risk. Firms that are aggressive and are in a sustainable leading position in their industry would take up projects that are very risky. Similarly, in such firms project managers with creative, innovative ideas are welcome in spite of the project being risky. On the other hand, risk averse organization who are mostly followers in their industry would hesitate from taking on risky project and project managers who take on risk and are aggressive in their management approaches would not be welcome here (What is a project, pg14). The initiating, planning, execution, monitoring and controlling, and closing process groups consists of sub-processes that are used throughout the project lifecycle. These are the knowledge areas (Creating the project charter, pg 44). The monitoring and controlling and execution process groups are very high on the risk probability of occurrence whereas the other process groups have low probability (What is a project, pg 29). The nine knowledge areas of PMBOK have been divided in such a way that each one involves some amount of integration of the other. Project risk management is core to any project and this is why, it begins with the development of project charter. The project charter is a formal document that authorizes the project to begin working and commit the resources. The project charter involves project statement of work, business case, contract, enterprise environmental factors, and organizational process assets. Each aspect of the project charters involves some form of risk assessment such as under the enterprise environmental factors, a project manager has to assess the risk tolerance of the stakeholders meaning the level of risk, the stakeholders of the project and the firm are willing to take for the execution of the project. (Creating the project charter, pg 68). Process of Risk Management We can also define risk as the product of expected consequences of an event or loss and the likelihood of occurrence. Risk could be characterized into two categories: Macro-risk and Micro-risk. Macro-risk is consideration of risk for a large population of events, where as micro-risk deals with risks on an event-by-event basis. Both forms of risk managements are used depending on the situation (Why project risk Management?, pg 2). Macro-risk Management – In the insurance and finance industries, risk is calculated using statistical tools: data collection, sampling, and data analysis. Under this method, a large population consisting of individual data for the calculation of loss and likelihood is used. Once, the individual data has been collected, the population is characterized using histograms and distributions. A mean of the population is calculated that is representative of the whole population for most decisions. Hence, we manage the risk in the macro sense by allowing the high and the low values of the population to balance each other. Macro management of risk is mostly employed when considering portfolio of projects and at the enterprise levels (Why Project Risk Management?, pg 5). Micro-risk Management – Calculating the mean of population is necessary, but it is not complete. Risk management involves taking action so that we can influence the outcomes. Managing risk on the micro level means considering each case as a separate one, means we are considering each project in the portfolio as a separate investment. Firms employ several different tactics depending on the situation to manage these risks, for example, the screening criteria in banks are used for avoiding giving loans to people who can turn out to be poor credit risks. Under micro risk management, projects are also considered individually. Filtering of the projects helps in selection of only those projects that provide the best opportunities. Risk management would be filtering those projects that would eventually fail; however, it is not always that obvious. By risk management of a project we mean, trying to improve the chances of success of any project. Unlike macro risk management, the project manager does not have to deal with a large population of projects. In case of management of a single project, the most important factor is predictability that means we want to manage the changes in the project outcomes. Although, it is impossible to predict the outcome of a project in advance, however, analysis of data and project planning could help in forecasting the range and frequency of the outcome that we can expect. Proper analysis of a situation and planning could help in understanding the situation and take proactive action to mitigate the risks. Risk Planning Sometimes fate or ‘act of God’ are responsible for the failure of projects, however, most of the times project fail usually for one of the following three reasons: They were not executable The constraints are too high Management problems (Planning for Risk Management, pg2) Projects usually fail when the objective of the project is outside the technical competency of the firm. Managing risk and project planning helps in avoiding all of the above mentioned problems. Analysis of the project at each of the stage, right from project initiation to the end helps in preparing for future problems that might lead to failure and prepares the project team for a proactive action (Planning for Risk Management, pg 3). Project Selection – Risk plays as a factor even before the beginning of the project. The process of selecting a project a various projects that the firm could venture into is both risky in terms of creating project risk and drives information from project risk analysis. Risk data helps in the selection of projects by providing realistic estimates regarding projects thus helping in selecting a project best suited for the firm. Selection of the most suitable project reduces risk right away (Planning for Risk Management, pg 3). Risk Management for Project – Risk Management not only encompasses planning for project, it also involves specific risk planning. Project charters, datasheets, scope statements, etc include information regarding the risks of the project. The assumptions that are driven from these initial documents are very crucial for the success of the project as incorrect assumption might lead to incorrect staffing decisions or funding decisions (Planning for Risk Management, pg 12). We need to plan for risks in a manner that is consistent with the overall assumptions and project objectives. Stakeholder Risk Tolerance – Some projects have a high risk factor while others are less risky. The selection of projects depends on the risk tolerance of the stakeholders as well. As some stakeholders might be risk tolerant while other may wish to pick those projects that are less risky. However, assessment of risk also depends on the perspectives of the firm and their toelrance for risk. Planning Data – The data for planning provides data for planning for risk. During scope definition and documents such as work breakdown structure, would provide potential risks that the project is facing. Therefore, adequate project planning is important for risk management. Risk Management Plan Planning for risk management depends on the size of the project. A formal written plan is necessary for large projects. A risk management plan should include information on stakeholders, planning processes, project tools, and metrics (Planning for Risk Management, pg 14). A risk plan includes methodologies and processes, along with assigning the roles and responsibilities of the people involved. A risk plan can also include information such as the definitions and standards that need to be utilized with the risk management tools and the agenda and frequency of risk reviews. It should also include the inputs and outputs of the risk management reports. Moreovoer, one of the most important element of a risk management plan should be a list of events known as trigger events and thresholds that would increase the probability of occurrence of the risk. The trigger events would be different for each project (Planning for Risk Management, pg 14). Reasons behind Risk Management Project Justification – One of the main reasons behind risk management is to ensure that projects undertaken by a firm become successful. Another benefit of project risk management is that it either increases the credibility of the project or proves that the project is not feasible for the firm and it should not be undertaken. Moroever, analysis of risks could also reveal oppurtunities that can help in improving projects. Reduced costs and better management – Analysis of risk helps in reducing the costs by helping in avoiding problems. It also reduces the amount of rework and it helps in keep the project on schedule. Risk management reduces the occurrence of problematic situations as well as reduces the chaos of such situations because of proactive measures. Fine Tuning of plans – Analysis of risk helps in uncovering the bottlenecks of plans and hence, helps in taking corrective action. Management Reserve – Thorough analysis of risks uncovers the needs that may arise in various situations and hence, helps firms in keeping reserves for such situations. (Why Project Risk Management, pg 8). References Heldman, Kim (n.d.). What is a Project? Chapter 1. The PMP Exam Content. Heldman, Kim (n.d.). Creating the Project Charter. Chapter 2. The PMP Exam Content from initiating the project performance domain. Kendrick, C. T. (2008). Why Project risk management? Identifying and Managing Project Risk. Chapter 1. Second Edition. Kendrick, C. T. (2008).Planning for Risk Management. Identifying and Managing Project Risk. Chapter 1. Second Edition. Project Risk Management. Chapter 11. Project Management Institute. A Guide to Project Management Body of Knowledge (PMBOK Guide). Fourth Edition. Read More