Project Risk Management:
What it is and why it’s vital for Project Success
The world in which we live is undoubtedly full of risks. Do we know how much of the population is affected by the risk of forest fires? How many are exposed to the risk of dam failure or flooding? Or even how many are exposed to the possibility of hurricanes or typhoons? Although we encounter dangers every day, risk management makes it possible for us to put in place measures to avoid disasters most of the time.
While we could continue to speak of natural risks or even industrial risks, it’s an entirely different type of risk, «project risks», that will be discussed. This article on risk management in project management was written by our very own risk management experts, who work alongside clients every day in delivering their large-scale and very complex industrial projects.
In this first article of a three-part series, we will explain not only what is risk management in project management, but also the essential processes, tools, and methods used in managing risk.
Please note that we strongly believe that opportunity management is just as important and goes hand in hand with risk management. To simplify reading throughout the article though, it will be written «risk management» for “risk and opportunity management”.
Project Risk Management sets organizations up for success, and that’s why Risk Managers are integral members of project teams. Learn more in this video.
What are Project Risks and Opportunities?
In order to define project risk management, we first need to define project related risks and opportunities. Risk and opportunity are described by at least 3 basic characteristics: an event, a probability of occurrence and potential impacts on the project objectives. These must be self-explanatory and can be supplemented by its causes.
For example, a risk event could be: «the inability of supplier X to conduct feasibility studies on a modification Y by the end of 2025’ «. The causes of this risk could be due to the supplier’s resources being heavily utilized on other projects and the impacts of the COVID-19 crisis. The consequences would be a delay in implementing change Y. A risk response strategy could be to subcontract out the work or to identify other internal resources capable of conducting the study.
An opportunity, on the other hand, is an uncertain event that, if it occurs, has a positive impact on at least one of the project’s objectives. For example, an opportunity could be: «Do not perform activity Z».
The causes of the opportunity could be due to some feasibility studies in progress, and the consequences would be a financial gain equal to the cost of activity Z. The possible response strategy allowing this opportunity to occur could be to bypass activity Z, leading to a decision not to carry out activity Z (partially or totally).
It is common to confuse the notion of unknown, contingency, risk, issue, and improvement. A clear distinction must be made to ensure effective risk management. See breakdown in Figure 1 below.
Although they are outside the scope of risk management, unknowns should not be underestimated. They can significantly impact the project objectives (time, cost, quality).
What is Risk Management in Project Management?
In answering What is Project Risk Management, simply put it is the set of processes a company implements to protect the project from possible threats and to take advantage of opportunities.
According to the PMBOK® Guide, risk management is defined as the “systematic process of identifying, analyzing, and responding to project risks.”
Risk management allows us to:
- Identify events that are undesired (threats) or desired (opportunities).
- Understand the impacts of these on a project’s objectives.
- Work to reduce the negative effects or increase the beneficial effects.
One key point to consider is that in many sectors today, risk management has become a regulatory requirement, and several standards now exist (e.g. ISO 31000). It must therefore be considered in the organizational strategy and as part of all activities.
Finally, a robust risk management process is an important tool for project managers and should be implemented from the start of a project. It allows us to identify and characterize risks for a more informed view of the project. It allows us to accommodate for the cost of risks early-on, and it guides decision-making throughout the life of the project.
What 2020 has taught us about Risk Management
Risk management involves anticipation. Its objective is to guide companies in preparing for, reducing, or avoiding the negative impacts created by any known event. It also helps to improve opportunities with positive repercussions.
Why start now?
The COVID-19 pandemic has had various impacts around the world, some of which we would never have expected. In the professional world, each company has been affected differently and not all have reacted in the same way. Some were unable to produce because raw materials could not be delivered to them, while their competitors had enough stock to compensate for delivery delays. Some lacked cash flow to survive for an extended time, while others had enough savings to get them through the difficult period.
In these situations, we have been able to more clearly distinguish those companies that were already paying close attention to risk management before the health crisis. It is in the face of new difficulties that, knowingly or not, we will try to better anticipate or predict the unpredictable and to protect ourselves against uncertainties of all types. The trick now is to do it with the level of structure required by your company, department, or project.
At MI-GSO | PCUBED, our experience has shown that risk and opportunity management is essential to success. This begins with developing an organizational risk management strategy. Then the organization can define their risk management process and engage a team of experts to manage it.
A sound risk management strategy helps you to look to the future, capture opportunities that come your way, and deploy the right efforts against any threats.
In our next article, we will review the 5 Key Elements for Implementing Project Risk Management into your organization.
This article was written by: Marie BELGODERE, Jérémie CLAUSTRE, Capucine COMTE, Alioune DIALLO, Emmanuel LATGE, Jessy MIGNOT, Ingrid NGOBAY, Pierre PETILLON, Louann SUGDEN, Chris WAMAL.
Table of Contents