What Is Project Risk Management?

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Maddy Osman
Maddy Osman

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Growing your business by launching products or taking on new clients can be exciting, but it can also be risky. Growth involves expansion into higher workloads, and it often requires stepping into new territories. 

Project risk management

You can’t eliminate risk from your business. But you can take steps to better understand and manage the risks associated with new business undertakings. 

Known as project risk management, adequately planning for and mitigating risks that may arise from new proposals will set your company up for long-term success.  

Definition of project risk management

Project risk management is the process of identifying, anticipating, mitigating, preventing, and responding to potential risk events that may occur during a project. Project risk refers to anything in the project that doesn’t go as planned.

One key thing to note about project risk management is that it’s not all about prevention. Instead, it’s about acknowledging that things don’t always go as planned and preparing risk mitigation strategies.

Risk vs. issues in project management

Business projects can have risks and issues. While the two terms may sound interchangeable, they’re not. 

The key difference between a risk and an issue is timing. A risk is a potential event that could happen in the future. In contrast, an issue has already happened. 

Analyzing projects for potential risks at the beginning can help you prevent them from becoming issues. 

You can be better prepared for issues when you include risk management in your project plan. Since you’ve anticipated the problem, you can craft your plan of action ahead of time and respond more quickly. 

Types of project risk management

There are several ways to approach risk management depending on the lens that you look through. Here are the most common approaches to managing various types of business risk.

Financial risk management

In financial risk management, you analyze and plan for budget risks. These risks include rising project costs, a lower-than-expected budget, or low revenue.

External risk management

In external risk management, you analyze and plan for external events that could affect the project. Examples include new regulations, emergencies, weather events, supply chain issues, and market events.

Performance risk management

In performance risk management, you identify and plan for events that can affect performance. These events could include poorly defined KPIs, outdated research, scope creep, missed deadlines, and underperforming employees.

Schedule risk management

In schedule risk management, you identify and plan for risk events that can affect the timeline of the entire project. These risks include certain tasks taking longer than expected, waiting on deliverables, supply-side delays, and shortened deadlines.

Operational risk management

In operational risk management, you analyze and plan for risks that come from organizational operations. Examples include personnel changes, technology changes, and company restructuring.

Examples of project risk management 

People tend to associate the word “risk” with a negative impact. But in project risk management, the term applies to anything that doesn’t go as planned. In other words, it also includes events that can positively affect your project.

Positive risk examples in project management

Positive risk refers to unplanned events that benefit your project. For example, you could complete the project early, spend less than expected, or acquire more customers than projected. 

At this point, you might wonder, “If positive risk benefits my business, why do I have to manage it?”

A positive risk management strategy lets you capitalize on unexpected benefits. For example, say you launch a new ad campaign and expect it to increase traffic to your online store by 20%. Instead, it goes viral and generates a traffic boost of 200%. 

While this is a great result, your website needs to be able to handle the spike in traffic. Using positive risk management, you can plan ahead to ensure a great user experience if your website gets an unprecedented amount of visits.

Negative risk examples in project management 

On the other hand, negative risk means that the unplanned event has a detrimental effect on your project. For example, you could go past your deadline, surpass your budget, or have a supplier shut down in the middle of the project.

The goals of negative risk management are to avoid the risks you can and contain the impact of risks that turn into issues.

For instance, say you identified supplier loss as a possible risk. To manage this risk, you could work with multiple suppliers from the beginning. Or you could have a backup ready in case a supplier shuts down or encounters delays.

Project risk management planning: Seven steps

1. Identify possible risk events

The first step in the planning process is to identify possible risk events before the project starts. This is sometimes referred to as conducting a “premortem.” 

Ryan Renteria, executive coach and founder of Stretch Five, explains that teams should “imagine a future where the project has failed and ask, ‘What are the most likely reasons it failed?’”

For best results, create a meeting environment where people feel rewarded for speaking up about concerns. You want your subject-matter experts to feel comfortable giving honest opinions.

Kristin Chester, founder and creative director of luxury magazine Marquet Media, recommends that you look at your internal dynamics and consider how your strengths and weaknesses may affect a project.

Specifically, you want to consider the impact of risk events on your timeline, budget, deliverable quality, and end results.

2. Prepare risk analysis and contingency plans

After the brainstorming session, it’s time for risk assessment. Determine the likelihood of each risk event happening, the estimated impact size, and a potential response plan. 

Information from past projects can help your team predict risk probability and impact.

Remember that you don’t need to act on response plans immediately. They’re contingencies in case the risk event happens.

3. Prioritize the risk

At this point, you can use your risk analysis to prioritize the risks you identified. 

The priority level of a risk helps you decide how many resources you’ll put toward a response should the event occur. 

This helps you set priorities while looking at the big picture. This way, you can understand which risks deserve more attention and which you can reasonably tolerate.

4. Assign a risk owner

Before the project begins, you want to assign a risk owner to each risk. This person monitors the risk, communicates concerns with the team, and implements the response plan if the risk occurs. 

Travis Lindemoen, managing director of staffing firm nexus IT group, recommends that you choose the “person on the project team who is best equipped to manage and keep an eye on a given risk.”

For instance, someone on your development team might be most appropriate to deal with a risk involving website bandwidth or performance.

Assigning owners ahead of time means risk monitoring is less likely to fall through the cracks. Also, you’ll have a better chance of successfully implementing a risk response plan.

5. Monitor risks and communicate project tracking

Once the project has begun, risk owners should monitor their assigned risk events. They can inform other project team members if a risk appears on the horizon. 

For example, someone tracking a project timeline may alert the team if they have missed intermediate milestones. 

Open communication with project stakeholders (including clients) can help you manage expectations and even avoid miscommunication-related risks. 

Carl Jensen, management consultant and founder of Compare Banks, recommends that project managers “leverage regular conferencing with customers so you can incorporate feedback as you go instead of having to redo work later.”

6. Respond to risk events

It’s not always possible to eliminate risk, even when you take the time to plan. If risk events occur, you’ll need to implement your contingency plans. 

Risk owners should communicate the details of a risk event to key stakeholders. Then, owners should follow the appropriate plan and continue monitoring the risk. In some cases, the ability to respond quickly can reduce the impact of a risk event.

7. Assess your risk management plan

After the project life cycle is complete, you have a lot of information that can help you understand the effectiveness of your risk management plan. 

Ask yourself questions like:

  • Did we predict all the risks that occurred?
  • How accurate was our risk analysis in terms of the likelihood and severity of the impact?
  • Did our risk monitoring let us avoid or limit a risk?
  • How well did we implement response plans?
  • Did our response plans limit the impact?
  • How can we improve our project risk management processes?

Much of project risk management relies on projections, assumptions, and subjective analyses. In other words, it depends on imperfect data. But you can improve your project management skills by looking back to see what you’ve done well and where you can improve.

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