One of the inevitable tasks project managers have, as part of any project, is risk management. Project risk management can be a hard thing to master and the uncertainty while managing can be stressful. This article explains what the impact of a risk management plan is and how to manage future projects more successfully by detailing what you and your team need to keep in mind. Definition of Project Risk According to PMI, the project risk may be defined as the chance of certain occurrences adversely affecting project objectives, the degree of exposure to negative events, and their probable consequences. As a result, the project risk is defined by three risk factors: The risk event or identification (what can possibly happen to harm the project) The risk probability (how likely is the occurrence of the event) The amount at stake ( what could potentially be lost). Identifying, analysing, and responding to risk factors throughout the whole project process (and in the best interest of its objectives) is defined as risk management. A risk factor is a situation that may induce project risks. It increases the chances of something happening that will stand in the way of your project objectives. The impact of a risk factor should be calculated for in the risk management plan. Each stage of a project life cycle can pose new risk factors for your project. 3 Common Types of Project Risks Each project has its own risks that depend on the project's current environment and each of them needs to have its own project risk management plan. We can split risks into two groups - external and internal. External risks cannot be controlled by an organisation and include political, economic, and natural risks. Internal risks are the ones that a project manager or a risk management team can manage, and they are the most common project risks. Cost Risk Cost risk is the growth of project costs that were not calculated. In other words, it is the risk that the project will cost more than its allocated budget. This is perhaps the most common of all the project risks, and it happens due to poor budget planning, not managing resources correctly, inaccurate cost estimation, and scope creep. Cost risk can often lead to the other two common risks - schedule risk and performance risk. Schedule Risk Schedule risk is the risk of activities taking longer than expected. Typically this risk is also due to poor planning. Schedule risk is closely related to cost risk because an inaccurately planned schedule often leads to increases in cost since longer projects simply cost more. Schedule risk also leads to delays and that results in missed timelines and a possible loss of competitive advantage. Schedule risk can also lead to performance risk - missing the timeline to perform its intended mission. Performance Risk Performance risk is essentially the danger of the project failing to deliver results that meet the project's specifications. The source of this risk is difficult to identify because it might be attributed to a variety of circumstances. A project team can deliver the project within the budget and schedule, yet nevertheless, fail to achieve the expected results and benefits. Additionally, performance risk can contribute to cost and schedule risk if a team's or technology's performance causes the project's cost and length to rise. In the end, the organisation wasted money and effort on a project that didn't work out. What is Risk Management in Project Management? Risk cannot be managed, per se. Risk has to do with uncertainty, probability or unpredictability, hence the term risk management tends to be misleading. There is no way to truly have control over events happening during the project. Risk management must be seen as preparation for possible events in advance, rather than responding to them as they are happening. With more time on hand, it is possible to find alternative action plans and choose the one that is most in line with the project's goals. Because you are not able to control the event itself, you must control and regulate how you react to it. As a result, risk management is defined as the formal process whereby risk factors are systematically identified, assessed and provided for. In other words, project risk management accounts for strategies that ensure a more robust response to risks. Those include response planning, mitigation, deflection and contingent planning. Why is Project Risk Management Important? Risk management is a very important part of project management because it can exponentially increase the chances of a project's successful outcome. Developing and sticking to a project management plan is extremely beneficial as it: Assists you in avoiding major disasters. Increases your revenue by lowering your costs Ensures successful project completion Gives you a competitive advantage Increases a sense of accountability and responsibility Assists you in discovering new possibilities Risk management is inseparable from the cost, schedule and quality of the project. Consequently, it has to be a key component of the project management process. 6 Key Steps in the Risk Management Process For handling project risk, you need to have an effective risk management plan. The process of making one usually consists of these six steps: Identify the Risk This is the first step in the risk management process because you cannot resolve a risk if you do not know what it is. There are many ways you can get the project risk identified but one of the most common ways is by brainstorming together with your team and stakeholders. You can also find people with relevant experience to your project and schedule a meeting with them. When thinking of all the ways things can go wrong, note them. List all the ways a potential project risk can grow and even check past projects' data. It is important to keep all of the collected data in a risk register so you can reflect on the past in order to improve future projects. Analyse the Risk Risk analysis is a process that is used to identify and analyse potential problems that could negatively impact the project. Once you identify risks, you can begin to analyse them. Many implications, such as avoiding future lawsuits, addressing regulatory difficulties, complying with new legislation, lowering project risk, and minimising its impact, can be proactively addressed. This can be determined using qualitative and quantitative risk analysis. Risk analysis includes analysing the likelihood, severity, and response plan for each risk you have found. While determining the project risk's severity, it is important to consider how the risk will affect the project's goals; can it cause a delay in its completion, undermine the budget or other resources, etc. For that reason, the best option is to include the opinions of a project team or key stakeholders in this step. The response plan you come up with for each risk is what the project team will use when the risk arises to quickly address it. Prioritise the Risk Because not all project risks are equal, an evaluation is needed so project managers know what resources they can gather towards the risk's resolvement. By categorising your list of risks as high, medium, and low, you can know which ones deserve to be more thoroughly investigated and which ones are not that serious. With a clear perspective like this, you can begin to plan for how and when these risks will be addressed. Some of them require immediate action because they can derail the entire project, while other risks, though still important, do not threaten the successful completion of the project. Assign a Risk Owner for Each Risk This step in the risk management process is key. All the hard work done identifying, analysing, and prioritising risks would be for nothing if you don't assign the task of overseeing it to someone. A risk owner can be anyone - often it is a team member who is the most suited to monitor the risk. Then that person is responsible for identifying risk as well as leading the work towards its resolvement. Every risk should have a person responsible for it. That way, every potential threat to the project's success is covered. Respond to the Risk In this step, you can put to use everything you have prepared so far. But first, you need to identify if the risk is positive or negative. A lot of the time, people think of all the potential events that can occur as a threat - something that will impact the project negatively. However, that is not always the case. Sometimes events that take place can be good for your project. Those opportunities are then called positive risks and you should seize them to the best of your ability. For each identified risk there should be a strategy for its management and mitigation. Once the strategy (preventative or contingency plan) is developed, the next step is to manage risk according to its priority. The manager communicates with the risk owner and together they decide which action plan to use to resolve the problem. Monitor the Risk This step is tracking the progress of the initiative chosen for risk resolvement. Whoever is in charge of the risk will also be responsible to monitor and report its progress towards resolution. Project managers have to stay updated and have an accurate picture of the project’s overall progress. This enables them to identify and monitor new risks. Updating is achieved with a series of meetings set up to manage the risks. While managing risks, it is important to always be transparent. Everyone involved in a project should know what is going on so that they can know what to pay attention to and help prevent and manage any risks that may arise in the future. 5 Tips to Reduce Risks in Project Management Although it is not possible to eliminate them completely, using the following five tips can be helpful to effectively reduce the number of risks. 1. Creating a Risk Management Plan Having a detailed risk management plan as a part of an overall project plan is essential to the successful completion of the project. The risk management plan should define what is used for identifying and prioritising risk, risk tolerance, how team members will respond to the risk, how it will be communicated, etc. Basically, it serves as a guide for you and your team throughout the project execution. So, investing time and effort into its development is more than worth it - sometimes your whole project depends on it. 2. Keeping Risk Register Up to Date The risk register is a list of all possible risk events that have the potential to negatively impact the project. The risk register can either be combined with your risk management plan or a separate document. In it, project managers should track what risk events have occurred, how the team has responded, and if (and which) new risks have surfaced. The risk register helps project managers stay on top of potential problems. This is why it is crucial for it to be kept up to date - so all the information referred to is accurate. By doing so, the project managers, team members and other key stakeholders can always have a clear picture of the project's progress. 3. Understanding the Risk Event Usually in risk management, people think about the risks in terms of possible outcomes more than as the risk events themselves. Risks should be looked at as "something may occur due to some reason and it will impact something". Those "somethings" are what you need to understand. They do not always end up being a bad thing, as risks can also be positive opportunities. This helps with risk management because by looking at risks from this angle, you can understand the risk's root, what the risk event is and how to address it. 4. Being Proactive (Instead of Reactive) When unplanned events do occur, it is necessary to be agile and react as soon as possible. Controlling a situation is much more important than just responding to it after an event has already taken place. Investing time in each step of the risk management process can prepare you to take preventative steps and reduce the probability of the risk event occurring. 5. Developing Project Management Skills Above all, managing projects and their associated risks efficiently require a solid foundation of project management skills. Earning a certificate in project management is one of the best ways to enhance these abilities. Managing your projects properly can lead to higher profits, better relationships with clients, and the ability to grow and expand your business. Programmes such as the Institute's Certified Project Management Diploma, are designed to help you develop these crucial skills. Click here to learn more.