Risk Analysis in Project Management

 

Risk Analysis

Introduction

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 

·         Risk analysis involves examining how project outcomes and objectives might change due to the impact of the risk event.

·         Risk analysis is the process of identifying and analyzing potential issues that could negatively impact key business initiatives or projects. 

Once the risks are identified, they are analysed to identify the qualitative and quantitative impact of the risk on the project so that appropriate steps can be taken to mitigate them.

Types of Risk

• strategic risk - eg a competitor coming on to the market.
• compliance and regulatory risk - eg introduction of new rules or legislation.
• financial risk - eg interest rate rise on your business loan or a non-paying customer.
• operational risk - eg the breakdown or theft of key equipment.

Systematic Risk: Systematic risk impacts everything. It is the general, broad risk assumed when investing.

Unsystematic Risk: Unsystematic risk is more specific to a company, industry, or sector.

Process of Risk Management

Step 1: Risk Identification

Every organization has its own “risk profile”

Cyber risk – malfunction of systems or hacking

Operational risk – process may not work, time may exceed, and quality may not be optimum

Geopolitical risk – political upheavals, wars,

Legal risk – may not get key clearances for authorities

Compliance/regulatory risk – fail to follow some government rules and regulations

Financial risk – cost may exceed, finance may not come in time, raw materials may decay or be stolen.

Strategic risk – Competitors may become aggressive, change plan, the project may go against company’s mission and objectives.

Environmental risk – Social costs may increase, larger environmental hazards, displacement of people or there livelihood than anticipated.

Market risk – Customers may change behaviour, fashion may change, profitability may go down,

 

Step 2: Risk Assessment and Analysis

Once you identify the risks that are relevant to the organization, clarify two key pieces of information:

1 The odds that those potential risks will occur (likelihood)

2 What will happen if they do occur (impact)

The analyses will also inform your risk response and management approach, which in turn will:

• Protect the organization’s assets
• Improve enterprise-wide decision-making
• Optimize operational efficiency
• Avoid material damage
• Save money, time, and resources

 

Step 3: Risk Evaluation and Prioritization

• Associated costs and benefits
• Socio-economic risk factors
• Legal or compliance requirements

 

Step 4: Risk Response and Treatment (Managing Risk)

In general, you can choose from one of four risk responses:

• Avoid risk
• Accept risk
• Transfer risk
• Reduce risk

Your chosen risk response will vary depending on the likelihood and impact of the risk. It’s crucial to map these choices to specific actions for effective risk management.

Review all highest-ranked risks and plan measures to mitigate them. Also update the risk management plan with these risk response tactics. Make sure the plan includes details about:

Risk mitigation strategies

Risk prevention methodology

Contingency plans to handle the risks if they occur

 

Some of the common ways of mitigating risk include:

• Accepting the risk of the project, which means understanding the risk it poses but realizing that the benefits outweigh the negative outcomes of the risk
• Avoiding the risk in the project, where team members simply do not participate in an activity that could lead to potential risk
• Controlling the risk, where team members mitigate the risk by reducing the likelihood of its occurrence to reduce the impact beforehand
• Transferring the risk, where organizations get a third party involved (such as insurance) to take responsibility for the risk in case it occurs

 

Step 5. Risk Monitoring

Risk management is an ongoing process that doesn’t end with risk identification or mitigation. To minimize the organization’s risk exposure, it’s crucial to monitor the risk landscape on an ongoing basis.

 

 

Sources of risk in project

Below are few sources of risk that can be available in your project as well. They are:

Schedule: Whether you get the hardware or software out on time, just like planned.

1.      Scope: It is always a risk; whether you have covered all the work required. It will cost you if you have missed any important requirement.

Scope risks:

• A lack of clarity in the scope definition will result in numerous scope creep.

• A lack of clarity in the scope definition will result in conflict in the customer about the scope.

• A lack of clearly defined acceptance criteria will cause delays in acceptance and sign-off.

Technological risks:

Technical risk arises from the capability of the technical solution to support the requirements of the customer. It can be categorized as follows as well:

• The technology will have technical or performance limitations that endanger the project.

• Technology components will not be easily integrated.

• The technology is unproved and will fail to meet customer and project requirements.

• The technology is new and poorly understood by the project team and will introduce delays.

 

2.      Resource: This is also an aspect that is unpredictable; you can’t expect availability of  resources as planned. The planned resources can be used for some other projects as well, in that case you need to get someone new thus creating a problem in both schedule and cost. Sometimes in quality also, in case of inexperience.

Resource risks:

• Main staff may not be available.

• Key skill sets will not be available when needed.

• Key staff will be lost during the project.

• Subcontractors or vendors will below-perform and fail to meet the milestones.

 

3.      Quality: The deliverable can be of poor quality due to some other imposed factors, making it a huge risk.

 

4.      Cost: Estimation of cost can be a risk in your project; if there is something you have planned to purchase and if it is not available, it can prove costly, as you have to wait for this particular item for a longer period.

Apart from above, sources of risk can be organized into categories such as customer risk, technical (product) risk, and delivery risk.  Within each category, specific sources of risk can be identified and risk reduction techniques applied. 

 

5.      Material and equipment risks:

• Required hardware will not be delivered on time.

• Access to the development environment will be restricted.

• Equipment will fail.

 

6.      Customer risks:

Customer risk is related to the customer's key success factors for the project.  A project is not successful if the customer is not successful with the process. It can be sub-divided as follows:

• Customer resources will not be made available as required.

• Customer staff will not reach decisions in a timely manner.

• Deliverables will not be reviewed according to the schedule.

• Knowledgeable customer staff will be replaced with those less qualified.

• Conflict within the customer organization about the desirability or feasibility of the

project will threaten it.

 

7.      Delivery Risks: 

Delivery risk is related to the ability of the complete team to deliver against the plan at the cost and schedules estimated, like;

• System response time will not be adequate.

• System capacity requirements will exceed available capacity.

• The system will fail to meet functional requirements.

Unpredictable risks: 

• The office will be damaged by fire, flood, or other methods.

• A computer virus will infect the development environment or operational system.

Project management risks:

• The inexperience of the project manager will result in budget or schedule slippages.

• Management will deem this project to have a lower priority for resources and attention.