Author: Chelsea Elm
A project manager must be able to handle risk well to be able to guide a project to its completion. As the complexity of projects has increased over the years and as products and services have become more technologically sophisticated, the need for risk analysis has significantly increased.
A project manager is probably not able to address every single risk, but needs to take steps to identify them and plan to handle them should they occur. A useful way to categorise risk is through two distinct dimensions:
Probability.This dimension represents how likely it is for an event to occur. The range is between 0% and 100%. It can"t be 0% since it will never be a risk and it can’t be 100% since it will become certainty.
Impact.This represents the size of the impact of the risk if it occurs. The larger the impact the more critical the risk.
Considering these two dimensions, all risks can be divided into four types as explained below:
Low impact, Low probability. You can usually ignore these risks (subject to specific industry standards).
Low impact, High probability.You may get numerous risks in this category. You should take steps to reduce the likelihood of their occurrence.
High impact, Low probability.When they happen they are bad, but it is rare for these to happen. For these you should take steps to reduce their impact, perhaps using contingency plans.
High impact, High probability.These risks are frequent and since they can be disruptive, you must consider them as top priority. If you find yourself here consistently, you need to step back to the drawing board and carry out detailed analysis.
Project management involves the identification of risk and understanding which category each risk belongs to. To carry out a valuable risk analysis, correct and accurate prediction is critical.
To carry out a thorough project management analysis, use the following steps:
1. Divide the project into work breakdown structures (WBS). This allows you to chunk the project into smaller parts which allows you to handle each part easily.
2. Identify the inputs and outputs of each WBS. Since the completion of each WBS depends on what is available at the start, it is critical to identify these inputs so you can accurately analyse risks later on. You also need to identify what is required from each WBS, so that the risks of not delivering those outputs can be identified. In other words, if you don"t know the exact standard of the output required for each WBS, you will have difficulty identifying critical risks.
3. Having identified the WBS and their inputs/outputs, you need to link them us to see which WBS leads to others. If work is halted in one WBS, you need to know the impact of this on other WBS and the associated risk.
4. Identify critical dependencies. Is there a WBS that many others rely on and its completion is critical to the success of the project? For this, you can use critical dependency graphs to visually analyse the project.
5. Identify risks across the whole project. Consider the following types:
A. Risks in each WBS
B. Risks of receiving wrong inputs or no inputs at all
C. Risks of product wrong outputs or no outputs at all
D. Risks identified based on critical dependency graph
E. External risks
F. Project management risks
6. Score these risks based on the likelihood of their occurrence. You can use calculations, historical analysis or use statistical calculations to identify these values. Use a scale of 0 to 100% probability.
7. Estimate the impact of each risk on the success of the project. For each risk assign a number between 0 and 100 representing its impact on the project. For example, an impact of 100 means the total failure of the project as a result of a specific risk.
8. Draw a 2D map using the two dimensions of probability and impact. Plot the risks you have identified on this map using the two dimensions.
9. Based on the specific priority identified earlier when handling risks, address each risk and devise plans to reduce their impact or draw up contingency plans.
Good project management relies on foresight and vision. Most of the time, the data and information are available before disaster occurs. It only requires us to look a bit deeper into the project and walk through it as it would unfold in the future. Those who can master the art of risk analysis usually go on successfully manage projects, even those that are insanely complex. Project managers who fail to grasp the importance of risk management and 'black swan' events can wake up one day and be faced with a lot of lost effort, wasted time and resources.
About the Author
Chelsea Elm is a training consultant in the training industry with a UK based training company providing ready made management training materials on soft skills, leadership, training and emotional intelligence. You can find out more about this article in project management training materials. Also see free training exercises on soft skills, team building and management.