Project Risk Management

What Is Project Risk Management?

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Risk management is gradually becoming an extremely necessary aspect for every business in the increasingly competitive business market. What is project risk management? How to plan a  risk management framework? Let’s discover more in this article.

What is Project Risk Management?

What is a risk?

Until now, there is no unified definition of risk. Different schools or different authors give different definitions of risk. These definitions are rich and varied, but can be divided into two major schools of thought:

  • Classical school: According to the traditional school, the risk is considered bad luck, loss, or danger. It is the loss of assets or the decrease in actual profit compared to the expected profit. Risk is also regarded as uncertainties occurring in the business and production process and adversely affects the existence and development of an enterprise. In summary, from this point of view, the risk is damage, loss, danger, or factors related to danger, difficulty, or uncertainty which may happen to people.
  • Modern school: According to the modern school, the risk is a measurable uncertainty that brings both positive and negative impacts. Risks can bring losses to people, but they can also bring benefits and opportunities. If people actively study risks, people can find preventive measures, limit negative risks, and accept opportunities that bring good results for the future.

Risk consists of 3 factors: the probability of occurrence, ability to affect the object, and duration of influence. The essence of risk is uncertainty, then if it is certain (probability is 0% or 100%), it is not called a risk.

Risks can be distinguished according to the following criteria:

  • Dynamic risk: associated with change, especially in the economy. Those are risks whose consequences can be beneficial, but can also bring loss (the change in customer tastes may be suitable for the product that the business is trading or not? Is the change in technology suitable with the financial capacity of the business, is the change too fast or not?…)
  • Static risks: the consequences of which are related only to the occurrence of losses or not, but not to the possibility of profitability, and are not affected by changes in the economy. Static risks are often related to objects: property, people, civil liability.

Project risk management

Project risk management is the process of identifying, assessing, and controlling threats to capital and income within an organization. Threats and risks in the business can come from many different sources such as financial uncertainty, legal liability, errors in strategic management; or threats also come from information technology security, data-related risks…

Project risk management is usually performed by managers and leaders to identify situations, problems, and events that may affect the business in the future to promptly take preventive measures. Therefore, they can limit the amount of risk while finding ways to turn the risk into an opportunity for success.

In the management system in the enterprise, project risk management is considered a relatively important factor with core values ​​that need to be considered in parallel with production and business activities.

Project Risk Management
Project Risk Management

 

Project risk management framework

Project risk management plan

Besides the case-only plans and products such as alternative provider lists or insurance policies, companies that successfully manage their risk also use common practices to manage the potential hazards they have identified. In many cases, new positions are created, such as enterprise risk managers, or new departments are developed to integrate risk management into day-to-day operations, including maintenance and repair teams, including quality control and equipment maintenance.

In general, all project risk management processes follow the same basic steps, although sometimes different terms are used to describe these steps. These 5 steps of the project risk management process combine to deliver a simple and effective risk management process.

Project risk Identification

Risk identification is the first step in the project risk management process. This step will determine the effectiveness of risk management. Managers need to detect, identify and conduct the treatment and analysis of potential risks in the business.

To be able to do this, it is necessary to know and have clear information about the business, operation method, operation, organizational structure along all issues affecting the business. The risks will depend on different environments such as human resources, financial resources, or stakeholders… Therefore, the risks of one enterprise cannot be applied to the risks of another corresponding enterprise.

Risks in a business can be divided into the following four groups:

  • Strategic risks: risks arising from issues related to governance, business environment, and stakeholders such as customers, competitors, investors… (planning and allocating resources, acquisitions, divestments, and relations with related parties…).
  • Operational risks: risks related to the efficient use of resources in daily operations, risks from processes, systems, people, and culture… or due to the influence of events outside. For example business continuity, daily business processes, information management, safety – health – environment….
  • Financial risks: risks arising from transactions of a financial nature, including purchases, sales, investments, and loans or other business activities (such as interest rate risk, exchange rates, commodity prices, taxes, capital structure, liquidity, credit…);
  • Compliance risks: risks related to the observance of regulations/regulations of enterprises, laws and other legal documents of the State related to business activities of enterprises, issues Legal issues related to contracts/commitments (control environment, ethics, fraud, contract provisions, etc.)

The classification of risks will help us to focus and deal more effectively with the problem that exists.

Project risk analysis

Once you’ve identified potential problems, you need to dig deeper into the risks. In this step, it is necessary to estimate the probability and impact of each risk to decide which risk to focus on first.

Several factors such as the potential financial loss for each organization, the duration of the impact, and the severity of the impact will greatly contribute to an accurate analysis of each risk. Taking a holistic view of risk will help you spot common problems and know how to adapt the project risk management process for future projects.

Project risk response planning

The project risk management plan will be implemented in the most specific and detailed way when approved by the leaders. After that, it will be notified to all employees and relevant departments to implement.

The plan needs to be clearly stated about the tasks and roles of each individual and group to perform well and bring the highest efficiency.

Project risk monitoring and control

The project risk management plan is never perfect. Implementation and actual losses have led to the need to change plans and absorb information to make other rational decisions to respond to risks. Risk monitoring and control include the following steps:

  • Identifying risks and planning strategies these types of risk
  • Classification of risks
  • Keeping track and check existing risks on a regular basis
  • Risk reporting: Risks need to be continuously updated and reported to help leaders or team members understand the status or threats they need to face. Risk reporting needs to be transparent and clear in order to make it accessible to all authorities and understand the situation.

Project risk efficiency measurement

You assess or rank risk by determining risk level, which is a combination of likelihood and consequence. You make the decision about whether the risk is acceptable or if it is serious enough to warrant a change.

  • Determine the rate of incidents since the statistical information does not contain all events that have occurred in the past
  • The opinions and statistics available are considered the primary source of information
  • Rate of incidents will be doubled by events with a negative impact

Recent studies have shown that the benefits of project risk management depend less on the method of management and more on the frequency and manner of risk assessment.

Conclusion

Although project risk management is essential for business operations, it also has certain limitations. Many techniques in risk analysis, such as modeling or simulation, will require large amounts of data to be collected. This data collection can be costly and unreliable. At the same time, using data in decision-making may result in poor results if the indicators used to reflect reality are more complex than the situation.

Project risk management also has limitations in terms of lack of analytical expertise and time. Risk management programs are developed to simulate risks and threats that have a negative impact on the company. Although cost-effective, complex programs require trained personnel with comprehensive skills and knowledge to obtain highly accurate results.

In general, project risk management is a process that every business needs to control the risks that may threaten its growth. However, it is necessary to have an appropriate project risk management process and method to optimize human resources and costs.

The above article has provided you with basic information about project risk management as well as how to plan a risk-management framework. Now, it’s time for you to start with the first step of this framework.

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