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Risk - The Complete Tool Set
The Risk Management Process
The management of risk, in the project environment1, involves four related processes (note: some experts such as Robert Charette [1989] treat risk management as a separate component to risk assessment though most experts see risk management as the overall process). Figure 1 summarises the various elements of risk management.
Fig. 1 - The Risk Management Process
The first is generally termed Risk Assessment. This process involves the identification of risk factors that are intrinsic in the activity being undertaken. For example, in the activity of commuting from home to work, we face a number of risks:
- is the family car working?
- are the trains, buses or public transport on time?
- do we have to drop the kids off at school?
- how long is the commute?
- what is the weather like?
Clearly, the more risk factors involved in the activity, the higher the risk of the activity and the lower the probability of success. If you lived in an apartment next to the building in which you work, the risk involved in getting to work on time is many times lower than that facing a person with a 20 mile commute involving driving to the station, getting kids to school, taking a pre-work study course and public transport.
The second process in risk management is the process of Risk Reduction, Minimization or Containment. This process involves planning and action to reduce the risks and, if that is not possible, to introduce strategies to minimize the impact of failure.
To manage the risks in our commute, we could reduce risk by moving closer to work, obtaining flexible working hours or undertaking community and political action to improve public transport. Contingency planning such as having alternative routes or transport would be part of this process.
The third and fourth processes of Risk Management are the Risk Monitoring and Risk Reporting of the status of risks [particularly High risk factors], the identification of new risk factors that have emerged during the project and reports on the effectiveness of containment strategies. In our commute example, risk monitoring would involve watching the clock and for traffic snarls. Risk reporting could be calling work to say you'll be late and to inform your work colleagues of potential delays for other colleagues.
Risk management also involves the evaluation and management of the impact of failure of the activity. For example, what is the impact of failing to get to work on time?
- you will be fired;
- your pay will be deducted;
- you may miss an important meeting; or
- nothing.
Clearly, the greater the impact of failure, the greater the need for pro-active risk management processes. At the same time as we are attempting to reduce the risks, we could limit the impact by establishing a good reputation at work, negotiating performance agreements not linked to being at work on time and so on (contingency planning again).
The Never-ending Story
The Risk Management process in projects is never ending. It is typical that a project manager will undertake risk assessment at the beginning of projects but they will not continue to monitor existing and new risks as they emerge. In the turbulent project environment of the 2000's, it is normal for projects to change [scope, objectives and so on]. Therefore, Risk Management must be on on-going, continuous and an integrated component of the project management of the project.
- In the broader risk arena, there are as many risk models as there are businesses. For example, political risk, future trading risk, capital risk, war risk and so on.