Risk Assessment in Project Management

Risk Analysis and Management is a key project management practice to ensure that the least number of surprises occur while your project is underway. While we can never predict the future with certainty, we can apply a simple and streamlined risk management process to predict the uncertainties in the projects and minimize the occurrence or impact of these uncertainties. This improves the chance of successful project completion and reduces the consequences of those risks.

Project team members at various levels identify and handle risks in different flavours. However, this will be ineffective without a structured risk management framework, as this leads to:

Incomplete impact evaluation, leading to loss of:

• Knowledge of the overall impact on the project objectives, like scope, time, cost, and quality
• Identification of secondary or new risks arising from the already identified risks
• Lack of transparency and a communication gap within and outside the team

Thus, it is very important for any project organization to set up an effective risk management framework. The key elements of a risk management program include:

• Process
• Integration
• Culture
• Infrastructure

These elements of a risk management program are flexible. They have to be,  because strategies, organizational structures, operating philosophies and risk profiles vary in complexity across industries and firms.

Step 1: Identify Risk

An enterprise risk assessment process identifies and prioritizes a company’s risks, providing quality inputs to decision makers to help them formulate effective risk responses, including information about the current state of capabilities around managing the priority risks.

Risk assessment spans the entire organization, including critical business units and functional areas. Effectively applied using business strategy as a context, risk assessment considers attributes such as:

• Impact
• Likelihood
• Velocity
• Persistence

Step 2: Source Risk

Once priority risks are identified, they are traced to their root causes. If management understands the drivers of risk, it is easier to design risk metrics and proactive risk responses at the source. Will this step present challenges?  Almost certainly. Overcoming them is key to success.

Step 3: Measure Risk

There is an old adage that says, “If you can’t measure something, you can’t manage it.” Because not all risks are quantifiable, increasing transparency by developing quantitative and qualitative risk measures is common practice.

Measurement methodologies may be simple and basic. Here are some examples of how to measure risk:

• Risk rating or scoring
• Claims exposure and cost analysis
• Sensitivity analysis
• Stress testing
• Tracking key variables relating to an identified exposure

More complex methodologies for companies with more advanced capabilities could differ — and might be more complicated.  But remember: ignoring risk won’t make it go away. Other risk management methodologies might include analyzing these complex factors:

• Earnings at risk
• Rigorous analytics that are proprietary to the company
• Risk-adjusted performance measurement
• Examining value at risk

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Step 4: Evaluate Risk

Based on the priority risks identified, their drivers or root causes and their susceptibility to measurement, the next step requires that management choose the appropriate risk response.

There are four categories of risk responses:

• Avoid
• Accept
• Reduce
• Share

These responses can be applied to groups of related risks consisting of natural families of risks that share fundamental characteristics (like common drivers, positive or negative correlations, etc.) consistent with a portfolio view.

The organization first decides whether to accept or reject a risk based on an assessment of whether the risk is desirable or undesirable. A desirable risk is one that is inherent in the entity’s business model or normal future operations and that the company believes it can monitor and manage effectively. An undesirable risk is one that is off-strategy, offers unattractive rewards or cannot be monitored or managed effectively.

If an entity chooses to accept a risk, it can accept it at its present level, reduce its severity and/or its likelihood of occurrence (typically through internal controls), or share it with a financially capable, independent party (typically through insurance or a hedging arrangement).

Step 5: Mitigate Risk

Depending on the risk response selected, management identifies any gaps in risk management capabilities and improves those capabilities as necessary to implement the risk response. Over time, the effectiveness of risk mitigation activities should be monitored.

Step 6: Monitor Risk

Models, risk analytics and web-enabled technologies make it possible to aggregate information about risks using common data elements to support the creation of a risk management dashboard or scorecard for use by risk owners, unit managers and executive management.

Dashboard and scorecard reporting should be flexible enough to enable the design of reports to address specific needs, including reporting to the board of directors. Examples of dashboard reporting, which often features “heat maps” or “traffic light” indicators, are provided in the Application Techniques of the COSO Enterprise Risk Management Integrated Framework. Monitoring also includes activities of an internal audit function.

The purpose of the risk management process varies from company to company, e.g., reduce risk or performance variability to an acceptable level, prevent unwanted surprises, facilitate taking more risk in the pursuit of value creation opportunities, etc. Regardless of purpose, the good news is that a large body of knowledge on the risk management process is readily available so that companies can adopt a process view that best fits their circumstances.

Conclusion

Risk management is becoming the most challenging aspect of managing software projects. While we can never predict the future with certainty, we can apply a simple and streamlined risk management process to predict the uncertainties in the projects and minimize the occurrence or impact of these uncertainties.

Risk management not only helps in avoiding crisis situations but also aids in remembering and learning from past mistakes. This improves the chance of successful project completion and reduces the consequences of those risks.

This certainly is not the end of the journey for us on effective risk management. It is a constant learning process to be able to constantly improve our practices to increase our process efficiency.