Risk management techniques help businesses identify and address risks, create baselines for acceptable risks, and prepare for unexpected threats. Thorough risk identification, risk assessment, risk analysis, and risk control also help to improve enterprise-wide communication, collaboration, and decision-making.
A robust risk management process benefits every function, including sales, marketing, procurement, project management, and accounting.
Risk management specifically within project management is the process of recognizing, assessing, and responding to any risks that may develop throughout a project, to keep that project on schedule and achieving its objectives. Risk management shouldn’t be reactive; it must be a part of the project planning process to identify potential risks and determine how to manage them if they arise.
This post discusses the importance of project risk management in organizations. Combined with effective traditional risk management strategies, it can help safeguard your business, drive your projects on time, and assure competitiveness.
What Is the Importance of Project Risk Management?
By recognizing, analyzing, and responding to risks that threaten a project’s objectives throughout its existence, project risk management is essential to accomplishing the goals set out in the project charter. To succeed, it’s crucial to select quality projects, define project scope, and create accurate estimates, all of which contribute to a successful project conclusion.
Insight on the feasibility of project objectives arises by identifying and analyzing project risks, which aid in project planning. Project risk management aims to identify potential risk events and keep stakeholders fully informed. The primary benefit of project risk management is an increased chance of a successful project.
The consequences of poor project risk management can be dire. A lack of planning and risk identification can give the false impression that all hazards have been considered and that there are no issues threatening success. Alternatively, the initiative could be abandoned prematurely, missing out on potential benefits.
The organization must understand that risk management is not free. But if done correctly, the extra costs and time spent during the project planning process will save you from headaches, missed deliverables, and potential failures throughout the rest of the project lifecycle.
How to Identify, Analyze, and Prioritize Project Risks
Risk management starts with risk identification, analysis, and prioritization. Documenting and communicating all identified risks to relevant stakeholders is essential.
How to Identify Key Stakeholders
Stakeholder involvement is crucial to the long-term success of a business. Stakeholders provide valuable perspectives and help with decision-making. Some stakeholders are affected by the project directly, others indirectly. So identifying stakeholders is critical if you are working to advance your organization’s objectives.
Here are four steps to help identify your company’s stakeholders:
- Make a list of stakeholders. Who are the people or groups affected by your project? This may include functional groups, company leaders, customers, suppliers, government agencies, and labor unions. Be specific and comprehensive.
- Recognize the rationale behind each stakeholder or stakeholder group. Why is the stakeholder on your list? How will that group be affected by the project? Do they provide funding and resources? Does the project affect them directly or indirectly?
- Stakeholder analysis. Determine involvement and communication requirements for each project stakeholder. Do they need to be involved in your project closely, or will quarterly updates suffice? Who will be your biggest critics, and who will be your biggest advocates?
- Managing your stakeholders. Present the project charter, schedule, and communication cadence to stakeholders to assure they support the project. This gives you an opportunity to explain what you need from them, such as resources, funding, and support. Likewise, they can share their expectations, such as communication and specific deliverables.
Risk Identification Techniques
When developing your risk management plan, it’s vital to identify all the risks that may affect the operation of your company.
Decision Tree Diagram
A decision tree diagram helps project teams and enterprise risk managers to assess each decision’s potential impact and then choose the best option to minimize risk.
SWOT Analysis
SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats) is a method for evaluating these four components of your project and the environment that may affect your project. With the aid of a SWOT analysis, you can determine where your business performs well right now and where to be wary of potential risks to create a winning plan.
Fishbone Diagram
A fishbone is also known as a “cause-and-effect diagram.” It is an effective tool for identifying the root causes of a particular problem and factors influencing specific effects.
Additional business risk identification techniques include:
- Brainstorming
- Risk surveys
- Root cause and checklist analyses
- Assumption analyses
Risk Analysis and Prioritization
When analyzing identified risks, you will estimate the probability of occurrence, impact of the risk, and urgency. This information will help you categorize risks, determine which threats pose the most significant potential harm, and prioritize your mitigation strategies accordingly.
You may also find your organization is exposed to risks from vendors, agents, contractors, and service providers. Third-party risk management is valuable to strengthen trust and streamline processes with business partners while protecting your business.
To analyze and prioritize risks, you can use any of these tools:
- Risk probability and impact matrix: rate and prioritize potential risks based on probability and impact.
- Pareto chart: identify risks based on the cumulative effects.
- Fault tree analysis: identify the probabilities of various potential outcomes from given faults.
5 Effective Project Risk Management Techniques
Here are some effective risk management techniques to control project risks:
Identify Past and Future Risks
Perform a historical analysis of past projects and the risks that affected them. How did you address them? Then identify any new risks that could affect this project. Next, check each potential threat and the critical risks associated with each. Finally, log all these risks in a database so you can develop a risk register.
Identify Direct and Indirect Results of a Risk
A futures wheel diagram is an effective way to identify every potential risk’s direct and indirect results. Brainstorm with relevant stakeholders to chart out this diagram. Consider the impact of the risk on the project’s timeline, quality, and cost.
Make sure you review all possible consequences (positive and negative) of each specific risk, as well as subsequent repercussions. Also, discuss and document possible actions to control, mitigate, or eliminate negative consequences.
Conduct Risk Audits
If your organization already has a risk response plan, that’s great, but you’ll still need to examine and document the effectiveness of risk responses and controls as they apply to your project. Such an audit will reveal any gaps to be addressed to shore up your risk management program.
Design a Risk Action Plan
If a risk comes to fruition, how will your project team members respond?
Each risk on your risk register should have a corresponding response strategy. There are four primary strategies:
- Risk avoidance: avoiding risk means you seek to eliminate all uncertainties
- Risk transfer: pass risk liability to a third party, such as by taking out an insurance policy
- Risk mitigation: implement controls to reduce the risk probability below a certain acceptable threshold
- Risk acceptance: accept risks and devise strategies to control and monitor them
Identifying the right approach for each risk can help your project management risk owner and team members know what to do, so they can respond quickly and keep mitigation and remediation costs to a minimum.
Prepare a Contingency Plan
Preparing contingency plans is vital for project risk management and mitigation. A template for a process decision program chart (PDPC) can help.
To start, create a tree diagram of the project with all relevant objectives and activities. Then, identify potential problems for each element and countermeasures or preventive actions.
Not all actions may be feasible, so focus on the ones that are.
Simplify Project Risk Management with Reciprocity ZenRisk
The risk management techniques highlighted in this post can help you identify, analyze, monitor, and control your organization’s project risks.
If all of this sounds overwhelming, Reciprocity’s ZenRisk platform can be a valuable addition to your project risk management process. Automated workflows help you streamline activities, reducing the need for manual follow-ups. Built-in templates make risk registers, assessments, and audits a snap, giving your team members more time to focus on project deliverables.
This single platform provides visibility across the organization with insightful reporting and dashboards to enable risk-based decisions.
For more information about ZenRisk, contact an authorized ZenRisk representative or schedule a demo!
