Risk Management in Projects - Challenges in Risk Management Strategy Application - Term Paper Example

Running Head: RISK MANAGEMENT IN PROJECTS Name: Grade Course: Tutor’s Name: 27th March, 2011 1.Introduction 3 2.Risk Management Strategy 4 2.2 Risk Identification Phase 4 2.3 Risk Assessment 5 2.4 Development of the Risk Response Plan 8 2.5 Implementation 9 2.6 Feedback 9 3.0 Risk Responsibility 10 4.0 Challenges in Risk Management Strategy Application 10 5.0 Corporate Governance 10 6.0 Risks Associated with Change Management 12 7.0 Team Working 13 8.0 Conclusion 14 9.0 Bibliography 15 1. Introduction Every project is a new idea or an initiative in the company developed to help the company achieve its aims. Information from Great Britain Office of Government Commerce (2007) indicates that the projects need good decision making for it to be successful and this is supported by risk management. Risk management is “the systematic application of principles, approach and processes to the task of identifying and assessing risks, and then planning and assessing the risk responses” (OGCGB, 2007, p. 1). Risk management helps in the identification of the risks, the uncertainties accompanied by the risks and ways to overcome them which contributes to project success, it gives the managers the right knowledge for good decision making, it reduces fraud and waste and provides a better value for money, ensures more efficient use of resources, provides a better basis for strategy setting and eliminates sudden shocks and unwanted surprises (OGCGB, 2007, p. 2). It is because of its importance that it is undertaken in every project. Risk management forms part of management of the organization and without it, there is no management. Take an example of a company with an aim of improving the efficiency of its stock control system. There are so many methods or approaches that can be taken to help the company achieve this. The company selects the use of an electronic stock control system. The company has a reputation to build and maintain, it has resources to manage and also has employees to take care of. Implementing an electronic control system has its advantages but it bears the risk of destroying the company’s reputation if it takes the place of some employees, it bears the risk of requiring a lot of resources that the company cannot bear for its implementation and it also bears the risk of demotivating the employees. The projects viability has to be determined and risk management plays a very important role in that (Andresen, 2007, p. 3). This is a critical discussion paper about project risk management. It has the following sections: risk management strategy, corporate governance, risks associated with change management and team working. 2. Risk Management Strategy Risk management strategy is the approach taken towards managing the risks of the organization. In project risk management, there is a formal process usually taken to accomplish the missions This process different basic processes based on authors’ ideas but in this case four basic phases will be used. These are; risk identification, risk assessment, Risk planning, implementation and monitoring (Andresen, 2007, p. 4). The following case example will be used to show the process of risk management. 2.1 Aerated Drink Project Company X has developed a new soft drink with a different taste from the other four different types of soft drinks it sells. The drink is fizzy blended with salt. It tickles the tongue for some minutes and is mildly pungent. The company’s aim under the marketing and advertising department is to carry out promotional campaigns to launch a new brand. The product name is Zephyr USP and what makes it a brand of its own is its taste which the company refers to as “zyzy”. The promotional campaign is to focus on the taste as a way of marketing it. The project is scheduled to take 20 weeks. One risk has been identified and this is insignificant market response (Case Study). 2.2 Risk Identification Phase This involves determination of the risks involved in the project. There are so many types of risks that can be found in a project. There are risks during project initiation, execution and even after completion. Major possible risks are such as risks due to deadlines, financial risks, risks from applied methods and strategies, risks that arise from the product of the project or the process that leads to the product, risks from personnel and so many other types of risks (Sudhakar, 2010, p. 91). The organization’s exposure to uncertainty is analyzed and for this requires knowledge and understanding of the organization in various areas. This includes; the organizations market of operation, social, cultural, legal and political environment, good understanding of operational and strategic objectives, good understanding of the opportunities and threats to accomplishing the objectives of the project and the critical factors to the success of the project (Sudhakar, 2010, p. 91). It is very important to identify all potential risks that an organization can suffer from to minimize chances of failure. To do this, risk identification should be done in a methodological way for example, there are business activities that enable the successful running and management of the organization. Identification of these activities and then identification of the risks associated with the activities would be covering all areas of likely risk occurrence hence identifying almost all the risks. Business activities can be classified in various categories for example; operational, strategic, financial, knowledge management and compliance with regulations (Smith, Merna & Jobling, 2006, p. 232). The risks associated with the above project are; 1- The project might take longer than expected hence increase the cost of marketing. 2- Risks associated with the product: These are such as those dealing with health issues like allergic reactions to the product, product safety, and consumer relevance like risks of insignificant response from the market and labeling of the product. Risks of insignificant response from the market 3-Operational risks: These arise from activities of marketing such as shipping, transportation, processing and grading. During promotional campaigns, accidents may occur and this is a risk to the company. 4-There are also risks associated with pricing and these are due to customer market power, volatile markets and seasonal fluctuations. 5-Risks due to unexpected public policy changes in transportation, labeling requirements, producer price support programs and producer security funds sponsored by the government (Henehan, 2006, pp. 1-3) 2.3 Risk Assessment Risk assessment is done to understand the risks and develop response plans. It involves quantitative and qualitative analysis. Qualitative risk analysis involves determining if a risk is positive or negative and if it is minor or major for the project. Quantitative risk analysis is quantifying the risks based on their likelihood of occurrence and impact. This requires the use of already developed approaches and methods such as probability impact matrix. After quantitative risk analysis, the risks can then be prioritized and a response plan developed (Molenaar, 2010, p.23). Risk Assessment for the above Case: a) Qualitative Assessment: Classification Risk Positive Risks The major risk taken to promote the product (Major) Risks due to customer market power, seasonal fluctuations (negative) and unpredictable markets (Major). Negative Risks Risks due to allergic reactions (Minor). Risks due to insignificant market response (Major). Risks from accidents that occur during promotional campaigns or other transportation risks (Minor). Risks due to customer market power, seasonal fluctuations and unpredictable markets (Major). Risks due to unexpected public policy changes (Minor). b) Quantitative Assessment (Probability-Impact Matrix Used) Risks Identified Probability of occurrence (0-1) Impact on the project (0-10) Risk Factor Risks due to allergic reactions (Minor). 0.1 2 0.2 Risks due to insignificant market response (Major). 0.8 9 7.2 Risks from accidents that occur during promotional campaigns or other transportation risks (Minor). 0.8 3 2.4 Risks due to customer market power, seasonal fluctuations (negative) and unpredictable markets (Major). 0.8 5 4.0 Risks due to unexpected public policy changes (Minor). 0.2 1 0.2 c) Risk Prioritization (negative risks): Priority Risks Identified Probability of occurrence (0-1) Impact on the project (0-10) Risk Factor Risks due to insignificant market response (Major). 0.8 9 7.2 Risks due to customer market power, seasonal fluctuations (negative) and unpredictable markets (Major). 0.8 5 4.0 Risks from accidents that occur during promotional campaigns or other transportation risks (Minor). 0.8 3 2.4 Risks due to allergic reactions (Minor). 0.1 2 0.2 Risks due to unexpected public policy changes (Minor). 0.2 1 0.2 This table shows the risks according to priority. When handling the risks, the one with the highest risk factor is considered first. 2.4 Development of the Risk Response Plan A risk response plan has all the strategies of how the risks will be dealt with. Positive risks are opportunities that the company can take advantage of. Like in the case above, risks due to seasonal fluctuating, consumer power and unpredictable markets when positive can be an advantage to the company and if fully exploited. Increased production of the soft drink during high season can help increase sales and reduce losses due to unavailability of the product. Negative risks are dealt with using the following strategies; risk mitigation, risk transfer and risk avoidance (Kasse, 2008, p. 117) Risk avoidance is to leave out the business activity that causes the risk. This is usually done if the project manager has analyzed the effects of the activity and thinks it will cause damage to the project and the team. It is also avoided if mitigation strategies do not change any damage that the business activity will cause. Risk transfer: This is transferring the risk to third party organizations to deal with the risks. In most cases, the risks are transferred to insurance companies. Risk mitigation: This is taking steps to reduce the effects of the risk so that even if the risks occur, the impacts on the project will be very minimal (Kasse, 2008, p. 117-120) 2.4.1 Case Study Response Plan A response plan to the risks identified in the promotional campaign project will be as follows Risks due to insignificant market response: This is a risk that cannot be avoided since the acceptance of the product depends on the consumers’ taste. It is important to have knowledge of consumer wants and needs and to keep in touch with such needs. Because of continuous change in consumer eating habits, purchasing patterns, demographics and dietary requirements, it is a challenge to maintain product relevance. Since the company is uncertain and has no sure way of avoiding the risks associated with insignificant acceptance, insurance can be the best option (Coombs, 2008, p. 150 & NRC, 2005, p. 42). Risks due to customer market power, seasonal fluctuations (negative) and unpredictable markets: Unpredictable markets and seasonal fluctuations cannot be avoided and strategies should be developed to reduce the risk of incurring so much loss. The company can for example reduce the number of employees in areas with low sales and transfer others to areas with high sales to improve efficiency during low sale seasons (NRC, 2005, p. 42). Risks from accidents that occur during promotional campaigns or other transportation risks: This risk can be transferred to be handled by the insurance company. It is very unlikely for accidents to occur but if in any case that do occur, and they cannot be avoided, they should be covered for so that the company does not incur any loses (Coombs, 2008, p. 151). Risks due to allergic reactions: Any organization should be aware of any allergic reactions or health issues related to their product. The organization should then make sure that the customer is informed. The organization should also abide by labeling requirement to avoid any risks associated with it. Another preventive measure is product liability insurance so that any liabilities (risks) that occur are dealt with by the insurance company (Henehan, 2006, p. 3). Risks due to unexpected public policy changes: These risks can be avoided by continuous monitoring of public policy changes that may affect the project sales and promotion. The organization’s production manager can also play a role in influencing public policy (Coombs, 2008, p. 150). 2.5 Implementation Those who are capable of handling the risks among the project team members should be selected and assigned the duty to monitor and control the risks. The risks have been identified and management strategies developed. Implementation is putting into action whatever has been planned. This only happens when the risks occur or incase of avoiding the risks, the strategies are implemented at the right time (Emblemsvåg, 2010, p. 180). 2.6 Feedback This is the outcome of the risk management process. After risk identification, classification, ranking, planning and implementation, it is important to evaluate the effects of the whole process. This determines if the strategies used were effective or not and if a different strategy is required. It also helps identify other risks that come up after avoidance, mitigation or transfer of the risks (Emblemsvåg, 2010, 180-181). 3.0 Risk Responsibility The senior managers of a company may have control over the management of the organization but they cannot handle the risks alone. They have to assign the specific risks to risk owners with expertise in the area of risk occurrence. The senior managers role is to supervise the development, implementation and monitoring of risk management activities and capabilities. By assigning the risks to individual project team members, the risk owners are held accountable for monitoring and minimizing the threats (Barkley, 2004, pp. 116). 4.0 Challenges in Risk Management Strategy Application With a new project in place, a risk management strategy is a new strategy to the organization. The organization therefore faces issues with the internal subsystems of the organization such as decision processes, technology, organizational structure and reward systems. For successful implementation of the new strategy, these subsystems have to be well coordinated. There are also issues that arise due to individual behavior. These are issues such as employee resistance and organizational culture (Ott, KZatz & Thomas, n. d). The culture of the organization has the major components of opposition to implementation of a new strategy. For successful implementation of a new risk management strategy therefore, the culture of the organization has to be well understood so that the critical elements of culture can be identified and dealt with (Mallinger & Rossy, 2007). Another important factor is communication. Without effective communication there is no success that can be achieved even in the management of an organization. The aim, objectives and roles of project team members in ensuring the strategy implementation have to be well communicated (Li1, Guohui & Eppler, 2008, pp. 11 & 18). 5.0 Corporate Governance Corporate governance is the process the board of directors carries out to give the company oversight of management, authority and direction for the company’s stakeholders (Sobel & Reding, 2004, p. 1 and Loras, 2011, p. 7). In order to provide authority, oversight in management and direction, corporate governors have to know the risks that affect the entire organizations. Risks are aligned to the objectives of the company and they affect the achievement of such objectives either positively or negatively. Positive risks are accepted and exploited while negative risks are mitigated to reduce their impacts or eliminated completed. Providing direction needs knowledge on how the company is managed and so it is important for a corporation’s governors to be involved in risk management (Sobel & Reding, 2004, p. 1). Corporate governor involvement in risk management does not involve specific risks like in project risk management but considers all the risks that affect the whole corporation. It means therefore that enterprise risk management is integrated with corporate governance. Enterprise risk management is a structured approach for management of uncertainties that can affect the corporation (Loras, 2011, p. 7). The board of directors provides guidance, authority and oversight in management but for effective corporate governance to be achieved, senior managers, external auditors, board of directors and internal auditors have to effectively play their role. Each group therefore has a role to play in enterprise risk management (Sobel & Reding, 2004, p. 1). Board of directors for example can provide professional cynicism, expertise and judgment to the strategic planning process, guide senior management decisions by determining risk tolerance projections and informing the management, ensure the implementation and effective operation of the company’s risk management process, define specific risk tolerance levels and assign senior management the authority to manage the risks to such levels and ensures that risks management strategies are aligned to company strategies and shareholder value (Sobel & Reding, 2004, p. 2 and Loras, 2011, p. 8). Senior managers own the enterprise risk management process and they are the ones responsible for designing and implementing the risk management structure and approach. External and internal auditors form part of the risk management process and they help the company improve in risk management areas through evaluation of the risk management process by use of professional auditing standards (Barkley, 2004, p. 116). 6.0 Risks Associated with Change Management Changes in organizations can be predictable, can be planned or cannot be known. Market trends as projected by professional analysts for example, can give managers information about the market situations for the company products which may affect the company’s performance. Change is a factor that has to be managed for the success of the organization (Diefenbach, 2007, p 9). It is the process of transitioning an organization from a current state to a new state (Hallencreutz &Turner, 2011, p. 5). The development of new technology for example creates a lot of change that organizations have to make. New technology has enabled the development of new programs that make work efficient, save time and help companies in improving their competitive advantage. Companies are therefore forced to implement such new technologies or in some cases, they are new ideas to make improvements (Yang et al, 2011, p. 4). An organization may also merge with another as a way of expanding its markets in different regions and create change in the organization. There are risks associated with change and these are; resistance to change by employees, some managers and even the end product receiver, risks associated with failure to accomplish the missions of the change (Rippin, 2005, p. 544). The resistance from employees and other managers is because most people do not like change for various reasons. They fear they may lose their jobs because of the change which may require new skills, they fear they may have the skills but not competent enough. Some employees and managers may not just be for idea and would want to sabotage a manager implementing the change (Rippin, 2005, p. 544). The end user of the product may also not be happy with the change and so for a successful change, the consumer or client should also be involved. These two factors can lead to failure of the any change management project. An organization for example may want to move from a functional structured organization to a division structured organization. This organization has to identify the specific risks associated with moving from the functional structure to the divisional structured organization. These may be vast depending on the aims and roles of each functional structure that the organization had (Cameron & Green, 2004, p. 172). Most of these risks can be avoided but identification and risk analysis should provide enough knowledge about their impacts and therefore necessary steps towards controlling them. Employee and other managers’ resistance for example can be prevented by good change management practices such as good leadership skills, effective communication and involvement of the relevant parties in the change management process from the start to completion (Paton & McCalman, 2008, p. 40). 7.0 Team Working In order to show the team work skills required for risk management, it is important to understand what risk management requires. It requires identification and assessment of the risks, development of a risk response plan, implementation of the plan which will help reduce, avoid the risks and monitoring of the outcome of implementation of the risk management plan. To identify all the risks in the project, all the departments involved in the project have to be involved, in order to assess and plan for the risks, the right skills have to be employed and to implement the plan, the right skills and capabilities have to be employed as well (Andresen, 2007, p. 4). Risk management therefore requires effective communication between departments involved in the project and good leadership skills to lead people through management of the risks. Effective communication as a team work skill means the ability to listen, speak knowledgeably, honestly and diplomatically with an open mind. This enables sharing of ideas, concerns and recommendations about project team members and those given by team members. It reduces conflicts among team members therefore reduces chances/risk of project failure (Mackall, 2004, p. 2 and FFI & FP, 2009, p. 1). Commitment is another team work skill that is important in risk management. A good leader should be able to convince the team members of the importance of eliminating or managing the risks. By ensuring that the team is committed to their work, the leader helps in the accomplishment of the aims of the organization. The team members should have the ability to commit to a shared team goal. Like in the case of marketing a new product, all departments above are for the success of the project. All of them have to make sure that the risks that can affect the achievement of the goals are well managed. A team can have all the skills but with no commitment to shared goals, the team achieves nothing. If a team does not have shared goals it means some members have hidden agendas which will affect the accomplishment of the aims of the organization. A risk management team therefore with a shared goal of managing the risks cannot succeed without commitment. Inability to manage some risks due to lack of team commitment affects the overall result of risk management (Mackall, 2004, p. 2 and FP, 2009, p. 1). A risk management team should also have good leaders with the ability to make right decisions after careful debate. This reduces conflicts among members. Support for team members is also essential (FP, 2009, p. 1). 8.0 Conclusion Risk management is done at different levels for example at project levels, at senior management levels and at corporate levels. Under corporate governance, the directors’ role in risk management is just to give guidance and authority to senior managers to ensure that shareholder value is improved and the risk management strategies are aligned to organizational strategies. Senior managers supervise the work of junior managers and the junior managers develop, implement and monitor the risk management activities. 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