The Importance of Project Risk Management by Arundhati S T T T T Get Our Tips Straight to your inbox November 11, 2022November 11, 2022 The importance of project risk management shouldn’t be taken lightly. More than 50% of organizational projects fail due to ignored or poor risk management procedures, while over 85% are delayed because project risks were not prioritized. Therefore, project managers should explore the various types of risks and their impact on project success. Businesses, regardless of the niche, face risks that can affect their financial security and lead to bankruptcy and business closure. However, proper project risk management ensures that business risks and challenges are contained. Identifying project risks and mitigation measures early increases the chances of project success. Contents What is Risk Management?Why Do Project Managers Need to Incorporate Risk Management?The Five-Step Process for Risk ManagementWays to Incorporate Risk Mitigation into Project ManagementThe Bottom Line What is Risk Management? Risk management is a business practice that helps project managers identify, evaluate, monitor, and improve risk mitigation processes. Businesses of all sizes should embrace risk management efforts. Unfortunately, small businesses informalize risk management, while large enterprises codify. Managing business risks is important for the business’s stability while it grows. Running your business blindly without proper risk identification can lead to significant losses. For instance, small businesses that operate without knowledge of competitive risks can lose their market share. Ignoring safety risks can lead to workplace accidents and lawsuits while ignoring financial risks leads to financial losses. That said, businesses should have dedicated project risk management resources. Most established enterprises have an entire department, while small businesses may have a small team headed by a risk manager. Generally, both teams focus on identifying business risks, assessing their extent, and preparing a mitigation strategy to avoid consequences. Why Do Project Managers Need to Incorporate Risk Management? Project managers should incorporate risk management for the following reasons: 1. Helps in Project Evaluation The most obvious benefit of risk management is the role it plays in comprehensive project evaluation. Project managers thoroughly evaluate all the steps of the project, enabling them and the whole team to gather detailed information about the project, potential problems, and how risks can be solved before it begins. Project managers and relevant teams can then proceed freely with the project with guaranteed success. 2. Successful Completion of Projects Businesses that ignore or overlook the importance of risk management rely on chance and luck to complete projects. This is risky, especially for large projects with strict deadlines and budgets. For instance, if you begin a project without evaluating the security risks, you will be forced to halt the project if a security issue arises midway. You’ll also waste a lot of time and finances remedying the issue because you didn’t have a risk management strategy. 3. Helps Meet Project Budgets The success of any project goes beyond completing it within the given timeframe. A successful project should also be completed within the budgetary specifications. However, this becomes challenging and impossible if a challenge arises along the way. Risk management ensures that all risks and proper mitigation measures have been identified. Project managers also budget for these uncertainties before starting the project. 4. Helps Identify New Opportunities The benefits of risk management go beyond identifying potential project risks. Businesses can use this opportunity to identify more opportunities. Identifying risks that various project implementation measures bring helps businesses think of alternative methods that provide better results with minimal risks. Businesses should employ a 3-dimensional approach to risk management to identify innovative opportunities. 5. Protects Businesses from Class Action Suits Most plaintiffs, especially employees who sustain injuries caused by workplace injuries, focus on proving to the jury that organizations are negligent and should be charged accordingly. While the cause of workplace injury could be avoided, having a comprehensive risk mitigation strategy is enough defense. The Five-Step Process for Risk Management Your risk management process should feature the following steps: 1. Risk Identification Risk identification is the first step of a risk management process. You should begin by identifying your business or project’s risks based on the operating environment. Common business risks include: Regulatory risks Legal risks Market risks Environmental risks You should also identify as many risk factors as possible. Here, you should leverage the collective effort of your team. Ask team members to suggest risks they might have experienced before or have insights about. Besides internal history and experience, you can also identify risks through external research and consulting industry professionals. 2. Risk Analysis Risk analysis is the second step of risk management that involves identifying the scope of all risks. Businesses should identify links between various factors and actions in the project and risks. Risk analysis also involves determining the seriousness and severity of identified risks. Some risks can lead to business closure, while others can cause minor departmental inconvenience. 3. Risk Evaluation or Assessment Business risks should be prioritized and ranked accordingly. Effective risk management strategies should classify risks based on their severity. Risk evaluation should be done qualitatively and quantitively. Risks that cause minor inconvenience should be rated lower, while those that cause catastrophic impacts should have high ratings and be prioritized. Projects prone to multiple low-level risks don’t require interventions from upper management. However, high-rated risks require immediate action. 4. Treating the Risk Business risks should be contained or eliminated after they’ve been identified. Project managers should assign specific risks to relevant departments or experts. While businesses can’t anticipate all risks, the risk evaluation step increases the chances of success. Project managers should assign teams to identify and implement mitigation measures, starting from high-priority risks. 5. Monitoring and Reviewing the Risk Risk management should be viewed as a process and not a project. Therefore, project managers should continually monitor the risks, especially environmental and market risks, which are always present. Risk monitoring helps businesses determine if their initiatives, changes, or updates implemented are effective. Ways to Incorporate Risk Mitigation into Project Management The ability to visualize risks affecting project implementation and business success is a skill that project managers should have. However, beyond identifying risks, project managers should incorporate risk mitigation measures into project management in the following ways: 1. Communicate Risks to Stakeholders Communicating risks to other members of the team and stakeholders is important for the success of risk management efforts. Most risk mitigation measures fail due to a lack of clear and consistent communication. Project managers and team leaders should communicate the unique impacts of specific risks, the likelihood of happening, and the steps required to mitigate risks from occurring. 2. Implement Responses Early Implementing responses early, especially for high-priority risks, can make a significant difference. Responses to risk mitigation include risk acceptance, risk minimization, and risk avoidance. If the impact of risks is minimal or can’t be influenced, you should consider accepting the risks. Avoiding risk requires businesses to adopt alternative processes or manipulate the project to minimize the chances of facing specific risks. Minimizing risks involves influencing causes or strengthening favorable factors to minimize the impact of risks. 3. Include Risk Management in All Projects Project managers should also embed risk management in all projects for seamless continuity. However, for success, organizations should train their staff in risk management to make it easy for them to detect risks before they worsen. Project managers should also organize brainstorming sessions to help employees identify impending risks quickly. The Bottom Line A good risk management strategy allows businesses to identify various strengths, weaknesses, threats, and opportunities. Planning for unexpected events ensures that project managers can readily respond to risks in case they arise. This requires a clear definition of risks and the identification of mitigation measures. Looking to streamline your project with proper risk management then sign up for the Orangescrum project management tool. It’s free for 15 days with access to all features and it has project management workflows to manage the project risk.