Risk Management is a balancing act. Here’s our thoughts on how managing risk and the approach to risk can be handled to keep your projects on track.
Risk management is, and has always been, a tricky conundrum. This is where you, as a Project Manager, need to identify, analyse and respond to uncertainties when making decisions related to your project. Of course, when you add the word ‘risk’ to anything, it can cause mixed feelings. A risk that pays off is a huge uplift, but no one likes taking unnecessary risks.
This is where a solid risk assessment framework is key to making decisive and well-thought out decisions to reach the end-goal of your project with as few problems as is possible.
- The likelihood of a negative outcome occurring
- The impact if the negative outcome does occur
- The likelihood of a positive outcome occurring
- The impact if the positive outcome does occur
- The feasibility of possible responses to a risk
- The cost of possible responses to the risk
In many situations, there will be attendant risks whichever way a decision is made, and these will need to be compared. Possible negative outcomes also need to be balanced against possible positive outcomes. Though risk management tends to focus more on the former, there are situations in which possible positive outcomes play a significant role in decision making. It is not the job of a risk manager to make these decisions, only to ensure that those doing so are as well-equipped as possible to understand the balance of risk.
The risk assessment process needs to be carried out repeatedly across different project management phases to take into account changing risk profiles.
Risk management in innovation
An awareness of positive possibilities is especially important when it comes to innovation. Large businesses and organisations are particularly bad at this because they have a lot to lose, be it profits, funding or credibility, so they tend to be very cautious about doing anything new. This focus on the risk of failure, however, can distort the overall picture and means they miss out on opportunities, with strong ideas being ignored in favour of the status quo. Over time, this creates a risk of falling behind the competition.
A more positive approach to risk management, which balances possible losses against possible gains within each project and acknowledges that gains from a certain proportion of successful projects will balance out the losses from those that fail, allows established businesses and organisations to be more successful innovators.
Successful risk management in innovation requires a proactive approach. Because this is new territory, tried and tested solutions to identified risks won’t always work. Project management methodologies need to be flexible and ready to try new approaches – but that doesn’t mean indulging in projects where the risk potential is too high. It’s also necessary to be ruthless when risk tolerance levels are breached.
Avoiding natural bias
We all have inbuilt psychological biases when it comes to dealing with risk. Therefore, very few people can assess risk objectively without taking a formal, analytical approach. We can see this in impulsive people who are far too quick to take unreasonable risks, and in anxious people who play it safe to the point where they achieve nothing, but often it’s more subtle and harder to spot. Correctly structured risk management removes the danger of bad decisions resulting from this kind of bias. It also enables the production of reports that everybody can understand in the same way. This prevents complications resulting from crossed wires and means that if the risk manager changes part way through the project management cycle, disruption will be minimal.
Some areas of risk management are harder to approach in this way than others. Areas dealing with health and safety or consumer response, for instance, can benefit from expert assessment in the form of qualitative risk analysis, even though aspects of them might also be subject to quantitative risk analysis. The latter – also known as data risk analysis – is the natural choke for assessing risks that are easily understood in numerical terms.
Data risk analysis
Data risk analysis uses mathematical tools to calculate the balance of risk and establish priorities. It also makes it possible to run simulations to help establish the likely results of different approaches. It’s particularly useful in complex scenarios where multiple risks must be assessed together because it means the probable results of different strategies involving combined risks can be displayed side by side. Most of the best organiser software available today includes tools for use in this kind of modelling
Using data risk analysis to make numerical projections makes it much easier to compare strategies involving different types of risk. It means that everybody in a project management office is looking at the options in the same way, and it makes it easier for senior managers who lack risk management expertise to understand those options and make good decisions.
As well as making it easier to understand the options available, good risk management makes it easier to justify decisions, both at the time and retrospectively. It means that funders can be encouraged to support a project based on clear, quantifiable data, which demonstrates the value of the approach to be taken. It means that when negative outcomes do occur, managers can show that they nevertheless made the best decision possible in light of the uncertainties involved, reducing the reputational risks involved with failure.
Well-presented risk analysis reports demonstrate that the business strategies they relate to are based on fact and reason rather than on conjecture. This does a lot to establish the credibility of an organisation. Even if not every decision produces good results, it demonstrates that the potential for achieving good outcomes remains high. Over time, this is important to brand building, attracting investors and maintaining team morale.
Ultimately, every organisation takes a different approach to managing risk because they all have different objectives and priorities. Legal obligations may need to be factored into decision making, as may broader aspects of corporate policy. The underlying mechanics of risk management, however, remain the same. By systematising the process of identifying and analysing risk, an organisation can reduce human bias and place its decision-making on much firmer foundations.