Project risk management

Project risk management Introduction Risk management can be described as the proactive management against the possibility of loss. The concept involves the identification of key risk areas and the formulation of possible strategies that can be used to lower the probability of occurrence of the risk, or reduce the potential losses (Crockford 1986, 12; Dorfman 2007, 10).Advertising We will write a custom report sample on Project risk management specifically for you for only $16.05 $11/page Learn More Sometimes risks may also be positive, for instance the risk of completing a project before its scheduled completion date. Management therefore has the task of coming up with an action plan that will guide on the procedures to follow in the event of positive or negative risks (Gorrod 2004, 23). A basic project risk management program involves risk management planning, identification and assessment of risks, risk response planning and monitoring and control of risks and strategies. The ris k management process involves the initial planning phase, whereby management decides on how the process will be carried out. Decisions made include the general approach in the project risk management process, and how management intends to execute key activities in the process (Conrow 2003, 21). Once a suitable plan has been selected, the management team has the task of identifying all potential risks that may have an impact on the project (Delvin 2006, 41). The planning process group has a role to play in the identification of these risks, as well as analyzing the effects of these risks on the project’s objectives. Risk assessment involves the qualitative and quantitative analysis of the identified risks, which are carried out by the process planning group. Qualitative risk analysis looks at the probability of occurrence of the risk event, and the potential impact on the project’s objectives. Quantification revolves the determination of the impact of each of the identi fied risks, and the prioritization of the risks according to their severity and probability of occurrence (Chapman, Ward and Ward 2003, 3; Capman 2005, 32). This can be done through a project risk map which categorizes risks according to their level of consequence and probability of occurrence (Fink 2002, 35; Chapman, Ward and Ward 2002, 74).Advertising Looking for report on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More Risk response planning evaluates the options available to management in handling various types of risks (Kendrick 2003, 2009). Risk response planning is also carried out by the planning process team. There are four basic methods of dealing with risks; avoidance, transfer, mitigation and risk acceptance. Risk avoidance implies strategies used to completely steer clear of risky activities. Management may decide to change suppliers for a particular material so as to avoid the risks posed by contra cting one supplier. Risk transfer means transferring the burden of the risk to someone else, hence making them responsible for the resulting loss. A classic method of risk transfer is through insurance (Harvard Business School 2004, 23). Alternatively management may establish contracts that make vendors accountable for a specific risky portion of the overall project (Heerkens 2007, 100). By choosing to mitigate risks, the project managers will undertake processes that seek to lessen the possibility of the risk, or reducing the impact of such a risk (Wang 2000, 63). Where the payoff resulting from an activity outweighs the potential losses, the planning process team may conclude that such a risk could be accepted. The final step in the risk planning process is risk control (Weel, Lindenaar and Kinderen 2004, 47). This involves constant monitoring of the identified risks in order to ascertain the effectiveness of the chosen risk management strategies (Royer 2001, 39). Periodical risk reviews are important for this function since a change in the status of a risk may warrant a change in strategy (Lientz and Larsen 2006, 29). The risk status indicates the probability and severity of a risk, as indicated in the project risk map. Regular reviews will also point out risks that have passed and identify new risks that management should concentrate on. Key strategic considerations Top management support is crucial for every aspect of the project, more so in risk management (Regester and Larkin 2002, 67). This will ensure timely decision making processes and overall support for the planning process group.Advertising We will write a custom report sample on Project risk management specifically for you for only $16.05 $11/page Learn More Through effective cooperation and coordination, organizational constraints can be removed, thereby making the risk management process smooth (Apgar 2006, 41; Cooper 2005; 73; Blyth 2009, 103). Management support wil l ensure efficient allocation of resources and efficient policy decisions. With upper management support in place, other strategic considerations are enabled (Martin 2004, 63). Stakeholder support is also necessary for the success of any given project. Project stakeholders, including the project management team and the client, need to agree on viable risk management strategies that will reduce the negative risks for both parties. Agreements could focus on realistic deadlines for the entirety of the schedule (Curtin, Hayman and Hussein 2005; 88). Project managers face the task of meeting completion phases in time, and may compromise on quality checks in order to get approval from the client, resulting into higher risks on the performance of the completed project (Lock 1996, 45; 2003; 63; 2007; 94). Communication between the two parties proves to be beneficial if talks are objective. Availability of resources is a major challenge for all project managers, whereby managers compete for labor, money and time with other projects. With top management support, the project management team will be able to define priority areas across all processes and make sure that crucial projects are not affected by the competition for resources. Crucial projects are those that are aligned with the overall objectives and targets of the organization. Lack of stakeholder involvement during the planning process may lead to unclear goals for the project management team (Pickerton 2003; 74), hence the risk of unsatisfied stakeholders once the project is complete. This usually happens when the client has not explicitly described the visions and goals of the project (Haynes 2002, 55). Lack of consulting with the end users of the project, who may not necessarily be the sponsor, may also not yield the desired results. As a consequence, the project will fail to achieve it full intended value. Constant communication and consultations with the stakeholders are required in order to conquer this p roblem. Any changes to the project should be communicated well in advance so as to get approval from the sponsor and the stakeholders (Hillson and Simon 2007, 37). The project management team should provide options, with implications of each, so that the sponsor can make an informed decision.Advertising Looking for report on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More Another important consideration that project managers should make is the applicability of local standards and codes. Different states have unique standards requirements, so the project management team should be familiar with those requirements and ensure that people hired meet the set professional qualifications. Extra training of personnel will be required, which may come at an extra cost for the contracting company. The training sessions are important in that they reduce the risk of mistakes being made when the project is underway, and as a way of conforming to state regulations. A major problem faced by most project managers is that of estimating costs in a project (Barkley 2004, 71). Most projects start out with misinformation, with both the sponsor and the contractor relying on cost estimates to base their decisions, which may be lower than the actual costs incurred. Because of this, either side may experience losses due to lack of sufficient information. Various controls and a ccounting measures need to be involved from the start of the project that will make it easier to track down any variances in the costs illustrated in the budget. Risk management theories The critical chain theory focuses attention on schedule development and management in project management (Goldratt, 1990, 1997 and 1998)). The main aim of risk management in projects is that of converting uncertainties and risks into certain outcomes or promises. The critical chain theory in project management focuses on the resources needed to carry out specified tasks so that the whole project can be on schedule (Goldratt and Cox 1984; 77). Critical chain project management identifies and inserts buffers into projects that monitor the schedule and financial performance of the project (Dettmer 1997, 7). The theory follows the same methodology as the critical path theory, with the latest completion dates for each task. Safety time is aggregated to tasks within the buffers, thereby avoiding the risk of time wasting due to bad multitasking (Dow and Taylor 2010, 99). Goldratt (1984, 61) introduced the theory of constraints by explaining that all organizations face several challenges, or constraints, that limit the achievement of the overall objectives. The theory therefore urges organizations to identify these constraints and restructure themselves in order to protect the organization’s interests. Five focusing steps have been recommended for this purpose, also known as the Process of Ongoing Improvement. As with the risk management process, the organization has to first identify the constraint and then decide on how it will exploit the constrained process. Thirdly, the organization has to reorganize itself with the decisions made. Once the decision has been supported throughout the organization, the organization can make other changes in its systems in order to break down the constraint. Lastly, the constraint will have to be monitored since it can move to other processes , where the organization will have to repeat the five focusing steps again (Gray 2010, 15; Klein 2000, 31). Management of project risk The risk management process begins with the identification of all potential risks that may affect the project. The project management team can use various strategies to identify such risks, though risk analysis is not carried out at this phase. The objective of the risk identification stage is to merely state all risks that the team may encounter, so a comprehensive list is required by the stakeholders of the project. In the planning process, the project risk manager may be asked to document the risks and their characteristics; therefore he must collect as much relevant information as possible. Some of the techniques that may be employed for this purpose include a brainstorming session, whereby scheduled meetings and interviews with the stakeholders are carried out in a bid to list all potential risks to the project. If the project management team ha s valid experience in its line of work, it may revisit some of the risks it identified in a similar project. The learning process will be facilitated if the company maintains a log of previous work, performance and customer satisfaction records (Klein 2000, 47). Traditional risks will be identified from historical information, past projects and industry findings (Cooper et al. 2005, 106) In research and development, the most common risk identified is that of the risk of failure. As such, companies engaging in RD overlook the importance of project risk management and concentrate on their research work (Frigenti and Comnimos 2002, 126; Frigenti 2007, 157). There are other factors that may lead to the cancellation of a research work other than failure, and management has to identify such risks before it is too late. Risks associated with RD can be categorized into project, technical, internal and external risks. The project management team cannot afford to concentrate on one form of ri sks since the others may be overlooked (Coudhury 1988, 65; Allen and Jarman 1999, 70). The company could use the project management plan as a guide for the overall research project, and communicate on a regular basis to the stakeholders. Communication is useful as most researches breakdown due to lack of clarity, resulting into budget cuts or unexplained delays (Lewis 2002, 176; 2007, 103). Change management and systems integration are also subject to risks, so only through the understanding of such risks can the risk management process be effective. The most common risk pertaining to these processes is resistance to change, especially from the end users. Employees of a company may fear change, and would be against additional training so that they can become familiar with new processes or software programs. The main reason for this is the fear that most people have of the unknown, so employees may be resistant to change since they do not fully grasp the benefits of a new system, or fear losing some of their responsibilities in the change management process. End user involvement and clear communication are strategies through which this form of risk can be averted. Change management also brings in the risk of scope, whereby a project’s scope widens in the duration of the program (Kerzner 1992, 67; 2006, 63; 2009, 76). This happens when a change management situation has already began, and the project team keeps on integrating more ideas in the development stage so that the results from the change management program are more than those that had initially been planned for, which may also exceed budget limits. The scope of the change management should be explicitly illustrated and communicated to avoid scope creep. With technology transfer, systems integration and change management comes the risk of data loss in the conversion process. Data conversion risks include missing important information, the comprehensive new system could require data that the old sys tem never had in place, or data from the old system may lose meaning in the new system. The change management team can employ several measures to counter these risks, for instance making sure that there is sufficient back up of available data. A plan should be drawn up to illustrate how data conversion is to be managed. In case of missing data, the organization could do without such data if its unavailability will not affect the new system. Where such data is of vital importance, the organization could add it back into the old system before converting it into the new system, or alternatively add the missing data directly into the new system (Goldratt, E. M., 1997, 77; Gray and Larson 2008, 129). Project planning and implementation strategies Planning is essential form the success of project management for a number of reasons. Project planning helps management organize and schedule tasks, as well as allocate the resources that will be used up by each task. Planning allows for communi cation and coordination of the various parties involved in the project, from the sponsors, to the contractors, to the employees (Goldratt 1990, 88). For it to be effective and comprehensive, planning should entail issues of project work and scheduling, distribution and use of resources, budgetary issues and planning of the information system. Planning involves several steps, starting off with the definition of the project objectives. Once the objectives have been identified, work activities are specified with the involvement of the stakeholders. The specification of the work activities allows for the setting of responsibilities, thereby the project organization is created (Forsberg, Mooz and Cotterman 2005, 132). Tasks are allocated and the schedule is set. A resource map is drawn together with the project budget. Forecasts made to do with time targets, costs and desired performance levels are communicated to the stakeholders in the final stage of the project planning process. For a project implantation process to be successful, the planning process has to be adequate. A sound plan enables for a clear and concise allocation of responsibilities and better contract management by the project management team. Funds have to be available in a timely manner for the implementation process to be smooth. Adequate control and monitoring measures will enable the quick identification and effective management of the risks that may arise in the implementation process (Coudhury 1988, 71). Summary and conclusion Project risk management is a vital element of project management. Where contractors may overlook the importance of planning for risks in the initial stages of the project, and only applying risk management once the project has already commenced, risk planning allows for project managers to be better prepared in the event of risk. Planning enables managers to identify all risks that may occur, and analyze their chances of occurrence and the potential impact that they po se to the project. In this way, the project management team is able to prioritize focus to strategize on how they will manage such risks. Management may also view the need of establishing a contingency plan that will come into effect once a risk has occurred (Cleland and Ireland 2006, 153). Without a contingency plan, management would have to bear serious disruptions in the project, which will have a negative impact on the project’s schedule. Resources have to be actually available for a contingency plan to be effective; otherwise the entire process will be of no value to the project management team. The project risk model identifies and ranks the risks that may occur, whereby assessment is carried out based on the budget risk of the component risks. High complexity risks are those that have the highest negative impact on the project budget, and therefore require special attention, and a contingency plan for such risks is recommended. References Allen, G. and Jarman, R., 1999 . Collaborative RD: manufacturings new tool, 5th ed. New Jersey: John Wiley and Sons. Apgar, D., 2006. Risk Intelligence: Learning to Manage What We Dont Know. Boston, MA: Harvard Business School Press. Barkley, B., 2004. Project risk management. New York: McGraw-Hill Professional. Blyth, M., 2009. 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