Risk management - Why carry out Risk Assessment?

Why carry out Risk Assessment?

Is the project too risky?

This is a basic question that will not only be asked by the project manager but by many other stakeholders.
How will we be able to gauge the risk in a project without some form of ‘formal’ assessment.

Banks and others (e.g. environmental bodies) may insist on a RISK MANAGEMENT PROCESS before releasing funds or giving the green light to a project.
However, while this is an important aspect there will be many other benefits to carrying out a RISK MANAGEMENT PROCESS.

The style and depth of the RISK MANAGEMENT PROCESS will vary depending upon the project.
To fully explore the benefits of a RISK MANAGEMENT PROCESS it should be considered as an integral part of the project management [see ‘The Complete Project Management package’] and [see 'The Complete Project Management plus PRINCE2'] process and not just as an ‘add on’ or some sort of afterthought.

Threat intensity

The biggest worry for any project is over runs and the ensuing costs.

RISK and COST are inextricably linked.
For any given project that has a given level of risk, to reduce the risk further we will have to increase the cost.

On the other hand, for a project with a given level of cost which we wish to reduce we will have to increase the risk.
In summary:

RISK down, COST up
COST down, RISK up

In terms of trying to reduce risk and cost we have to consider a systematic approach.
The aim is to spend money at the front end in identifying risks properly.
These risks can then either be managed well within the plan or suitable contingency plans can be put in place.
This will save future more excessive costs should the risk materialise unexpectedly later in the project.

Identifying these ‘opportunities’ is one of the key points of a formal RISK MANAGEMENT PROCESS.
It is quite likely that without a formal process many of these RISK opportunities will remain masked.

Obviously, there will be times when identified RISK does not come to pass and in hindsight the money invested in this risk will seem ‘wasted’.
It will be difficult to persuade people that this money was not ‘wasted’ but indeed well spent. Sometimes identified risks only fail to occur due to good fortune and not due to good management. This often applies to projects where the weather is a key factor.

In addition, looking at this from the perspective of the Project Manager, what would have happened had the RISK not been identified?
Well, senior managers may well have considered that the good fortune seen in the project was ‘very lucky’ and that the Project Manager had handled the project badly.
This would tend to ignore the rest of the project which has been managed well.

There is a balance in the amount of money spent in looking for and managing risk.
To increase costs in order to seek the Holy Grail of identifying and managing all risks is not practical.
There is a trade off.

How RISK is perceived will depend on the number and size of the projects within the organisation.
If there are a lot of small projects then one which is HIGH RISK but lower cost may be looked upon much more favourably than a company with only one or two major projects.

Improve decision making

The RISK MANAGEMENT PROCESS allows a better grasp of the risks involved and a basis on which to make decisions that may lead to projects accepting a higher risk.
If the risks in a particular area are too high for one company to bear then joint ventures may well result.
However, the taking of high risks (gambles) without the appropriate data to support them may well prove very foolhardy.

The encouragement of the organisation to look for risk opportunities is a good thing and helps to reduce a fear of risk.

A good RISK MANAGEMENT PROCESS will not eliminate the need for REACTIVE management during the project but it will reduce it to an acceptable level.

Clarification of terms

Understanding the significance of these terms and how they are derived is central to the RISK MANAGEMENT PROCESS.

Targets

The expected cost of a project may be £200,000. However, the project manager may set a ‘target’ of £180,000 and retain £20,000 for ‘contingency’.

Expected values

The ‘expected cost’ is precisely that. It is the cost of the project if all goes to plan. This will include all identified risks which we expect to occur and thus have been allowed for within the management of the plan.

Commitments

The sum of the ‘expected cost’ and the ‘contingency’ is a measure of the ‘commitment’ of senior managers to the project.

These are discussed in more detail elsewhere [see Clarification of terms].

Documentation

Documenting the RISK MANAGEMENT PROCESS will help to clarify any uncertainties and remove ambiguities.
This is very useful between organisation departments and for communicating with external resource such as contractors.
Helps to make all of the information gathered in the RISK MANAGEMENT PROCESS visible to all parties.
Documentation can be a very valuable training tool when there is staff turn over and they need to get up to speed in a project.
Supports the rationale for the decision making process. This is a valuable tool for when things go awry to see what decisions were made.
As well as a training tool it can be a source of very valuable information for future projects. This can be a positive commercial advantage for companies. Especially those carrying out projects where similar experience already exists.
The RISK MANAGEMENT PROCESS helps organisations appreciate the type and quality of data to collect now and for the good of future projects.