Steps to Implementing Project Risk Management for Your Project

Editorial Team

For your business’s project to be successful, you’ll need to implement a solid project risk management strategy.

Without project risk management, even the most tightly-planned projects may end in failure. This important concept allows for companies to identify and appropriately plan for any risks that may occur. This better allows them to adjust to any potential difficulties, allowing for the project to continue with as little interruption as possible.

For those without a solid project risk management strategy in place, unexpected errors can cause significant delays and even failure. It’s for this reason that business owners should ensure that a proper plan is in place before implementing new strategies.

Below, we include a comprehensive guide to building the perfect project risk management strategy. Keep the below information in mind as you work to bring your company’s project to successful completion.

Our step-by-step guide will walk you through the four basic steps that you’ll need to take in order to build the perfect project risk management plan.

1. Plan Risk Management

The first step in the development of a project risk management strategy has two parts: planning and preparing a risk management plan.

Proper risk management planning requires business owners and managers to follow a four-step process. This process includes:

  1. Conducting planning sessions
  2. Involving project stakeholders
  3. Complying with their organization’s objectives and policies
  4. Standardizing project templates

Let’s take a look at each of these four requirements in turn.

For starters, the risk management planning process starts with conducting planning sessions with relevant individuals. These meetings work to facilitate discussion among project members in order to develop the groundwork for their risk management plan.

Next, management should be sure to involve all stakeholders in the process. As stakeholders bear part of the business’s risks, companies should make sure that they have a say regarding the eventual risk management plan.

Of course, this plan must comply with the company’s objectives and policies in a general sense, as well. For example, a company must learn to handle risks in such a way that it proves beneficial to both their image and to their bottom dollar.

Finally, during this planning portion, those involved must start creating and standardizing the list of items that will be used during the risk management process. These documents include risk registers (includes information about all risks), risk status reports (includes the current status of the risk), and risk breakdown structures (creates a hierarchy of risks).  

Having standardized documents will ensure that all teammates are working in unison, helping lead to a faster resolution of any risks faced.

Following the risk management planning phase, organizations should start on the second phase: developing a risk management plan.

A risk management plan outlines the company’s response in the event that a certain potential risk becomes a reality. For a risk management plan to be successful, it must include all of the following:

  1. Project Description
  2. Risk Management Methodology
  3. Roles and Responsibilities
  4. Stakeholder Risk Tolerance
  5. Communication Plan
  6. Risk Breakdown Structure
  7. Strategy

As you can see, the risk management plan should be an involved document that provides a comprehensive overview of the company’s response to any risks faced during the project management cycle.

The first step to developing a project risk management is to include a project description. This description should give all involved a clear idea of what your project is and where it is headed.

Next, a risk management methodology must be established. This outlines your company’s plan in the event that your project encounters a certain risk.

Part of having an established methodology includes knowing the specific roles of every team member in helping address risks that your project may face. For this to be a success, project managers and team members alike should have a clear understanding of what their roles will be in the risk management process. By clearly defining these roles, you can streamline your company’s response when or if a risk is encountered.

Next, those involved must establish the stakeholder risk tolerance. This refers to the amount of risk that stakeholders are willing to accept for a project. This tolerance level may different from organization or even from project to project, depending on the views and values of stakeholders.

After this has been established, those involved need to ensure that their plan is communicated clearly and fully to relevant parties. Once this has been done, a risk breakdown structure should be created. Risk breakdown strategies define the scope of certain potential risks and provide a hierarchy. This structure organizes risks into separate categories based on how they might affect the company.

With this information, management and stakeholders then create a risk management strategy that will serve to guide the team throughout the project management process.

2. Identify Risks

The next step of the risk management process is to identify risks. It’s during this process that the team brainstorms possible risks that might affect the outcome of the project.

There are several methods to identify risks. These include:

  1. Interviews
  2. Brainstorming
  3. Cause and Effect Diagrams
  4. Affinity Diagrams
  5. Root Cause Analyses
  6. Audits
  7. SWOT Analyses

Let’s look at each of these effective methods in turn.

Interviews are conducted to find the right individuals and approaches appropriate to determine risks that could be facing the project. Brainstorming, on the other hand, involves team members using their knowledge to predict a vast number of potential issues with the project.

Cause and effect diagrams attempt to show a correlation between parts of a business plan and potential risks that could be associated with them. Root cause analyses work to show a similar cause and effect relationship between different situations.

To better illustrate the points being made, many companies tend to use affinity diagrams. These diagrams organize verbal information into different categories to allow team members to more effectively process the information.

An audit occurs when a company decides to have a separate group, either internal or external, evaluate the situation to assess for any additional risks that may not have been caught.

Finally, SWOT analyses work to identify strengths, weaknesses, opportunities, and threats facing a project. These can be used to identify both internal and external threats.

Before moving on to the final steps of the risk management process, let’s first look at two different types of risk analyses that a company can take: qualitative and quantitative. Keep in mind that companies should use both of these techniques to get a comprehensive look at any risks facing the project.

Qualitative Risk Analysis

In any risk management plan, a qualitative risk analysis is performed first. This analysis allows for companies to prioritize and categorize risks based on certain subjective qualities unique to the project.

This analysis has five steps:

  1. Select Risk Characteristics
  2. Collect and Analyze Data
  3. Prioritize Risks
  4. Categorize Risk Causes
  5. Document Results

The first step of the process involves selecting risk characteristics. Here, risks are identified by their potential impact on the project. For example, do they pose issues of money or time? Will they affect company morale or public perception?

Next, the data needed to perform the analysis is collected. Then, this data is analyzed by a set of standards already established in the risk management plan. This often includes analyzing them based on their probability and their impact to the company. When multiplied together, these values provide each risk a score that can help prioritize them based on how pressing they are to the project.

Next, these risks are categorized based on their causes, with the results being documented for use by the team throughout the project.

Once this is done, a quantitative risk analysis must be performed.

Quantitative Risk Analysis

Next, a certain number of these risks will be analyzed with a quantitative risk analysis. These are usually determined based on the score these risks received from the qualitative risk analysis already performed.

In fact, the first step of a quantitative risk analysis is to perform a qualitative risk analysis. Consider the five steps of the quantitative risk analysis process below:

  1. Risk Prioritization (Qualitative Risk Analysis)
  2. Examine Relationship between Risks
  3. Collect High Quality Risk Data
  4. Perform Quantitative Risk Analysis
  5. Results

Following risk prioritization, companies must then determine what relationship exists between different risks. Then, high quality data regarding the probability and the potential impact of each risk must be gathered. This is often collected by looking at historical cases and making a future estimate.

Once this is done, a risk quantitative analysis is performed. This will determine the financial impact of risks on a project, as well as the amount of additional time that may need to be spent resolving these risks. Keep in mind that only a small portion of the overall risks need to be analyzed in this manner.

Because of the important and in-depth nature of a quantitative risk analysis, it’s imperative that team members use only high-quality data. Common risk analysis techniques include the Monte Carlo Simulation and Decision Tree Analyses.

Once these have been run, results are recorded to be reviewed and used by all involved.

After these analyses have been run, it’s time to complete the final two steps of the risk management process.

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  5. Project Schedule Management: Step by Step Implementation Guide
  6. 10 Steps to Implement PMO and Project Management Processes in Your Organization
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3. Plan Risk Responses

With risk identified, management and stakeholders must then plan responses to any risks that have been identified.

To do this, they must plan a risk response strategy that provides specific guidelines on what must be done in the event that a risk is encountered. A risk response strategy must consider the following items:

  1. Avoid or Exploit
  2. Transfer or Share
  3. Mitigate or Enhance
  4. Accept

Under the first strategy, businesses must decide if they would avoid—not accept—a risk, or if they would exploit—take advantage of—the possible benefits a risk offers.

Transferring a risk refers to outsourcing it to a third party, while a sharing it would require both third-party and in-house responsibilities.

Mitigating a risk looks to minimize the impact it has on project operations. Enhancing a risk works to increase the possibility that a risk occurs. It can be differentiated from exploiting a risk in that the approach isn’t as aggressive and leads more to chance.

Finally, the last option businesses have is to accept the risk and work their plan around it.

4. Monitor and Control Risks

The final step of the risk management process is to monitor and control risks. During this stage, companies use the information gathered in the first three steps to keep a constant eye on potential risks throughout the project management process.

To do this, two different actions must be taken: status reviews and audits.

Status reviews, in particular, are an involved process and involve:

  1. Managing Contingency Reserves
  2. Tracking Trigger Conditions
  3. Tracking Overall Risks
  4. Tracking Compliance

Status reviews provide updated information on the current state of risks affecting a project. To do this, companies must be able to accurate manage the contingency reserve—the money set aside to deal with any unpredicted risks.

Next, status reviews involve tracking trigger conditions—those conditions that might cause a certain risk to occur. This can help mitigate situations before the risk is realized.

Additionally, business owners must keep stock of and track overall risks and compliance. This allows a business to know where they stand in relation to the risks they face, as well as manage their responses to them.

Finally, an audit can be conducted to ensure that the company is appropriately monitoring and controlling risks. This is often done by a third-party that can bring fresh eyes and objectivity to the table, providing for a more accurate final report.

The Bottom Line

The risk management process proves important to the overall success of a project. For projects to come to fruition, management and stockholders must first decide what levels of risks are acceptable.

This can be done by following the four-step process outlined above. By identifying and planning for certain risks, companies can then prioritize then and discover the best risk-management strategy.

Keep this information in mind as you plan your company’s next project in order to achieve the most successful results possible.