What are the 5 Risk Management Steps in a Sound Risk Management Process?
As a project manager or team member, you manage risk on a daily basis; it’s one of the most important things you do. If you learn how to apply a systematic risk management process, and put into action the core 5 risk management process steps, then your projects will run more smoothly and be a positive experience for everyone involved. A common definition of risk is an uncertain event that if it occurs, can have a positive or negative effect on a project’s goals. The potential for a risk to have a positive or negative effect is an important concept. Why? Because it is natural to fall into the trap of thinking that risks have inherently negative effects. If you are also open to those risks that create positive opportunities, you can make your project smarter, streamlined and more profitable. Think of the adage –“Accept the inevitable and turn it to your advantage.” That is what you do when you mine project risks to create opportunities.
Uncertainty is at the heart of risk. You may be unsure if an event is likely to occur or not. Also, you may be uncertain what its consequences would be if it did occur. Likelihood – the probability of an event occurring, and consequence – the impact or outcome of an event, are the two components that characterize the magnitude of the risk. All risk management processes follow the same basic steps, although sometimes different jargon is used to describe these steps. Together these 5 risk management process steps combine to deliver a simple and effective risk management process. Implementing a risk management process is vital for any organization. Good risk management doesn’t have to be resource intensive or difficult for organizations to undertake or insurance brokers to provide to their clients. With a little formalization, structure, and a strong understanding of the organization, the risk management process can be rewarding. Risk management does require some investment of time and money but it does not need to be substantial to be effective. In fact, it will be more likely to be employed and maintained if it is implemented gradually over time.
Step 1: Identify the Risk.
You and your team uncover, recognize and describe risks that might affect your project or its outcomes. There are a number of techniques you can use to find project risks. During this step you start to prepare your Project Risk Register. The four main risk categories of risk are hazard risks, such as fires or injuries; operational risks, including turnover and supplier failure; financial risks, such as economic recession; and strategic risks, which include new competitors and brand reputation. Being able to identify what types of risk you have is vital to the risk management process. An organization can identify their risks through experience and internal history, consulting with industry professionals, and external research. They may also try interviews or group brainstorming, as discussed in this Project Manager article 8 New Ways to Identify Risks. It’s important to remember that the risk environment is always changing, so this step should be revisited regularly.
Step 2: Analyze the risk. Once risks are identified you determine the likelihood and consequence of each risk. You develop an understanding of the nature of the risk and its potential to affect project goals and objectives. This information is also input to your Project Risk Register. Many organizations use a heat map to measure their risks on this scale. A risk map is a visual tool that details which risks are frequent and which are severe (and thus require the most resources). This will help you identify which are very unlikely or would have low impact, and which are very likely and would have a significant impact. Knowing the frequency and severity of your risks will show you where to spend your time and money, and allow your team to prioritize their resources. More details on risk maps can be found in our blog posts on the topic: The Importance of Risk Mapping and How to Build a Risk Map.
Step 3: Evaluate or Rank the Risk. You evaluate or rank the risk by determining the risk magnitude, which is the combination of likelihood and consequence. You make decisions about whether the risk is acceptable or whether it is serious enough to warrant treatment. These risk rankings are also added to your Project Risk Register. What are the potential ways to treat the risk and of these, which strikes the best balance between being affordable and effective? Organizations usually have the options to accept, avoid, control, or transfer a risk. Accepting the risk means deciding that some risks are inherent in doing business and that the benefits of an activity outweigh the potential risks. To avoid a risk, the organization simply has to not participate in that activity. Risk control involves prevention (reducing the likelihood that the risk will occur) or mitigation, which is reducing the impact it will have if it does occur. Risk transfer involves giving responsibility for any negative outcomes to another party, as is the case when an organization purchases insurance.
Step 4: Treat the Risk. This is also referred to as Risk Response Planning. During this step you assess your highest ranked risks and set out a plan to treat or modify these risks to achieve acceptable risk levels. How can you minimize the probability of the negative risks as well as enhancing the opportunities? You create risk mitigation strategies, preventive plans and contingency plans in this step. And you add the risk treatment measures for the highest ranking or most serious risks to your Project Risk Register. Once all reasonable potential solutions are listed, pick the one that is most likely to achieve desired outcomes. Find the needed resources, such as personnel and funding, and get the necessary buy-in. Senior management will likely have to approve the plan, and team members will have to be informed and trained if necessary. Set up a formal process to implement the solution logically and consistently across the organization, and encourage employees every step of the way.
Step 5: Monitor and Review the risk. This is the step where you take your Project Risk Register and use it to monitor, track and review risks. Risk management is a process, not a project that can be “finished” and then forgotten about. The organization, its environment, and its risks are constantly changing, so the process should be consistently revisited. Determine whether the initiatives are effective and whether changes or updates are required. Sometimes, the team may have to start over with a new process if the implemented strategy is not effective. If an organization gradually formalizes its risk management process and develops a risk culture, it will become more resilient and adaptable in the face of change. This will also mean making more informed decisions based on a complete picture of the organization’s operating environment and creating a stronger bottom line over the long-term.
Conclusion
Risk is about uncertainty. If you put a framework around that uncertainty, then you effectively de-risk your project. And that means you can move much more confidently to achieve your project goals. By identifying and managing a comprehensive list of project risks, unpleasant surprises and barriers can be reduced and golden opportunities discovered. The risk management process also helps to resolve problems when they occur, because those problems have been envisaged, and plans to treat them have already been developed and agreed. You avoid impulsive reactions and going into “fire-fighting” mode to rectify problems that could have been anticipated. This makes for happier, less stressed project teams and stakeholders. The end result is that you minimize the impacts of project threats and capture the opportunities that occur.
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