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When entering a business an investor is hopeful that the business will be successful, grow and give good returns on investments. However, the ability to evaluate the risk involved in the business, understand and manage the risk is very important. The business environment sometimes seems obvious but various risk variables may be involved. The ability to identify the risks involves helps a company to be prepared for the risk or evade the risk. Implementing a new project for a non-financial company may be challenging but proper approaches in identifying, measuring and managing the risk can be very helpful.
Overview of Risks Management
Risk management is part of the process of projects appraisal, implementation and management. In essence, Risk management involves identifying the risks involved in a project, analyzing the risks, planning for implementation of a project and managing the risks involved. Risk management involves a proactive approach that preempts the potential risks for managing a project (Glenn, 2000, p107). Risk management also involved reactive planning, identifying triggers, controlling the risks, risk monitoring and use of computer simulations for risk management.
Risk management is part of projects implementation and management. Each project has potential risks and opportunities that should be evaluated before and in the process of implementing a project. Risks are not always bad to a company. Some risks can help a company to identify other opportunities that could be very important to the company. The process of identifying the risk is important in implementing a project. The process can help the people involved in the new project to have in-depth knowledge of the company’s business, identify challenges in the area of business, evaluate other companies in the same business and build cohesion among themselves (Abkowitz, 2008, p56). Sometimes the feared risks are not as great as assumed and sometimes the risks are not real. Risk assessment and management, thus help the management to be ready for eventuality or possibilities.
Risk management in a new project
Implementing a new project is usually a challenge. A new project may lead to success to a company or lead to failure. In business, it is expected that any investment should be able to bring returns on the resources invested. Since resources are scarce, taking blind chances is usually not a good decision. Instead, investors prefer to evaluate a prospective project to make the best decision to their investment plan. Project appraisal in project management helps to evaluate various variables that can influence success of a project. Risk management is one of the most important steps in project appraisal.
The risks involved in a new project differ from one project to another. For example, the risks involved by a financial company may differ completely to risks in non-financial company. Although some companies may be involved in similar businesses, the risks involved in individual company may differ in a bigger way (Royer, 2001, p41). In addition, risks involved in a project are not stagnant. The dynamic nature of risks calls for continuous evaluation of the risk and proper response to the risks from time to time.
Identifying and defining risks
Risk identification step is the basic step in managing risks. In this step, the risks involved in a project are identified through various approaches. The aim of risk identification step is to have a clear understanding of the potential risks in a project. As the initial step in managing risk, failure in this step can lead to failure in the whole process of risk management. Ability to define a risk is considered as a major step in managing the risk.
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Risk management is broader than trying to avoid risks but an approach that optimize a given context despite of the risks. For this reason, risk identification and deification does not aim at scaring away a company from a project but prepare it for the risks. Systematic ways of identifying risks is the most preferred approach. This methods offer logical means of evaluating a business environment or a new project for the possible risks.
It is appropriate that a business should be able to identify the risks that it faces. Various systematic approaches are used to identify the risks involve. Approach such as risk checklist, questionnaires, analysis of financial statement, analysis of company’s operations and workshops are some of the approaches in identifying risks. Organized collective approach to risk identification is also important in risk management.
The success of risk management falls more on the ability to know the risks (Chris & Stephen, 2002, p113). A new project may bring in new risks and opportunities to a company. The ability of the project planner to identify the risk helps in identifying the most appropriate approaches to handle the risks. There is no doubt that risk identification is the most important step in managing risks; success in the other steps fully depends on it. The scenario where risks that were not identified happen would lead to failure of the project. Risk control that is necessary to mitigate or avoid risks in a project cannot be applied to risks that are not initially identified. Risk identification process has the objective of identifying the risks in an effective way.
One view to risk identification is to let an individual such as project leader or project management make the identification. This view leaves this responsibility with a project manager while other people involved in the project are not involved. Some project managers prefers this approach with believe that as the most senior individuals in a project, they are in a better position to know the risks that can affect the projects (Royer, 2001, p31). This approach has advantages but also its limitations. When one individual is involved in risk identification, he or she would be able to identify the risk faster than when more than one person is involved (David, 2003, p89). On the other hand, an individual may not be able to have in depth knowledge of all aspects of the project. In this case, the individuals may not be able to identify all potential risks that can affect a project. There is also possibility of bias in the risks identified due to the individual’s bias.
The responsibility of identifying the potential risks to the new project should be collective. The project team as a group has a wider view of the risks that can affect the new project. By sharing the information through systematic ways, the risks involved would be identified easily leading to higher possibility of success of the project. Brainstorming among project team help expose the potential risks.
Although brainstorming would be good approach to identifying risks, there are certain requirements that should be fulfilled. All members in the brainstorms should feel comfortable to express their thoughts without criticism; there should be enough time every one and rush conclusions should be avoided.
Evaluating the risks
Although, risk identification is an important step in managing risks to the new project, failure to measure the risks may lead to failure of the process. The new project may have various different risks. For example, the risk may include stiff competition, technology change, bad weather or unresponsive market (Bilal, 2003, p57). All the risks involved should be able measurable. The popular approach to measuring risk is classifying the risks depending on their nature and their effects to the project. Other approach attempts to offer quantitative of qualitative values to the risks. The value offered a risk shows the nature of the risk, urgency and the effort that should be applied on the risk.
Occurrence of a risk is a probability. The risks are events or occurrence that can happen or not. With this in mind, the frequency of risks identified is determined as a way of determining the probability for occurrence of a risk (Culp, 2001, p27). A part from the frequency of a risk, the magnitude of the risks identified should be determined. Risks involved in a new project may vary in nature and magnitude. For example, the risks involve in the new project may involve resource, operational, financial or market risks. These risks have both frequency and magnitude variable. The likelihood for occurrence of each risk in evaluated to come up with an estimate of the chance for the risk to occur (Evin, 2000, p44). The other variable, magnitude, is very crucial in decision-making. The magnitude of the risk determines the effect of the risk to the company in event of occurring. For example, the financial risk could be evaluated in terms of dollar or percentage over investment. This information helps the decision maker to decide whether to avoid the risk in the new project or control it.
Three major steps are involved in assessing the risks involved in the new project. First, the risks are prioritized according to the probability and magnitude. The risks are then compared to find out how they differ or have in common. Finally, cost/benefit analysis is used to determine the cost of the risks as compared to the benefit to the company.
The process assigns a value or rating to the risk identified. The rating helps to compare every risk with the other risks and give a quick for making decisions over the risks. Quantitative indexing is preferred to qualitative assessment (Turner & Gelles, 2003, p89). Quantitative ranking could be used to create cross reference matrices for all the risks involved in the new project. From the matrices, the risks can be categorized according to their effect on the project, for example, the classes may include minor, intermediate or severe. Such classes give a quick ways of making decision over the risks.
Assessment of project risk can suffer from oversimplification. The qualitative approach to assessing the risks may seem to be easy but may lead to over simplification of the risks. For example, a risk that is classified as moderate does not contain features that are unique to it. On the other hand, use of quantitative method gives more details but is more complex. Numeric values and probability distribution are use in quantitative assessment.
For the new project to be successful, risk identification and assessment is not complete. Risk control is the step that has direct effect on successful risk management. Risk control is used to mitigate the effects of the identified risks according to the risk assessment (Graham & Kaye, 2006, p71). Successful use of risk control counters the risks and increases the chance for the project to be successful. In addition, risk control measure offer guideline to handle similar risks in the future.
Risk control can involve threat reduction, failure prevention, consequence mitigation, probability reduction and vulnerability reduction. Risk control depends on the project and the risk involved. In practice, the company can move from risk identification to control but this is not advisable (Graham & Kaye, 2006, p91). Risk assessment helps to decide on the resources that should be used in risk control. In risk control, the company may decide to avoid the risk, reduce risk, transfer the risk to another body or absorb the risk through contingency plans.
Risk management is very important in project planning and implementation. As a company plan to implement a new project, the project may encounter various risks. Risk management in such a project will involve risk identification and definition, risk assessment and risk control. Techniques in risk identification help to point out the possible risks to the project. Risk control on the other hands uses the information in risk identification and assessment to mitigate the risks.
Abkowitz, D. 2008. Operational Risk management: A Case Study Approach to Effective Planning and Response. John Wiley and Son. New York.
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Chris, C. & Stephen, W.2002. Managing Project Risk and Uncertainty. Wiley & Sons, Ltd.
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