Risks Abound, Now Manage Them
Steve Callahan | April 28, 2014
The heart of risk management consists of identifying and analyzing exposures and then taking the necessary steps to minimize risk. While a variety of methods can be used to manage the multitude of risks inherent in a business as complex as insurance, a foundational component—the project risk management plan—is often neglected.
Without a well-thought-out risk management plan, even the best-managed projects can’t effectively anticipate and mitigate potential risks. Instead, risk management becomes an ad hoc process occurring reactively or, worse, retrospectively after it is much too late to avoid a negative impact on the project.
Given the vast range of opportunities offered by newer technologies, escaping the burden of legacy-bound environments has become critical to successful competitive differentiation. The ability to integrate social media, big data, analytics, and mobile computing alone has become table stakes, challenging companies to successfully deliver on complex projects facing limited funds, short timeframes, and little room for error.
Managing the risk involved in these projects has moved from informal and reactive to a defined process that is integrated into the implementation methodology and governance practices. Completely eliminating risk is all but impossible, thus, the emphasis shifts to the timing of risk identification. The earlier problems can be identified—or better yet, predicted from leading indicators—the quicker corrective action can be taken to reduce negative impact.
So what are the predictive indicators that can be used to identify and address risks early on? An extended review of successful and unsuccessful projects identified the following as the most common warning signs of approaching problems:
- Inadequate Specifications
- Changing Requirements
- Inadequate Change Control Management
- Inexperienced Personnel
- Unrealistic Estimates
- Subcontractor Misrepresentation/Underperformance
- Poor Project Management
- Lack of User Involvement
- Expectations Not Properly Set
- Poor Architectural Design
A structured process incorporating the ranked assessment and constant monitoring of the most likely and impactful risks from the above list is critical from a project scope, cost, and schedule basis. More often than not, projects with insufficient risk monitoring and inadequate contingency planning will take a turn for the worse.
Underestimating or even ignoring risk at any point during the project, whether internal or external, usually has a materially adverse impact—sometimes resulting in outright project failure. Project managers must continuously monitor and analyze known risks while developing an appropriate contingency plan to address the emergence of unknown risks.
Obviously, intentional risk management is an integral part of the project quality assurance effort targeted at minimizing the major sources of rework, schedule, and cost overruns, as well as performance and quality degradation.
There is a strong correlation between the level of risk management in a project and the level of success. Without a structured system for identifying and managing risks, the level of risk tolerance (where reward exceeds the risk) decreases significantly. Applying risk management rigor to a project will improve its outcome.
To incorporate effective risk assessment and governance practices, all project management plans should include these six inputs, sourced from the PMBOK manual:
- Project Scope Statement: a general overview of the project scope, the deliverables and framework for the degree of risk management needed;
- Cost Management Plan: a definition of risk budgets, contingencies and financial resources needed to address risk potential;
- Schedule Management Plan: how schedule contingencies will be reported and assessed;
- Communications Management Plan: the information shared among the project members and stakeholders and protocol on sharing information and risk responses;
- Enterprise Environmental Factors: factors influencing the plan including attitude toward risk and organizational risk tolerance; and
- Organizational Process Assets: including risk categories, risk statement formats, roles and responsibilities, and authority levels.
Determining which risks may affect the project, documenting their characteristics, assessing their impact, and ranking them accordingly is an iterative process that requires realigning existing risk profiles while incorporating new ones as they arise. The primary output of this process is the development of a risk register, documenting a qualitative and quantitative risk analysis, along with risk response planning. The risk register also provides a strategy to manage risks which include mitigate, avoid, accept and transfer.
An investment in project risk management, which typically ranges from two percent to four percent of your project costs, compares favorably with potential cost overruns and lost opportunity costs, which can reach more than 50 percent of the project costs. Taking the necessary time to develop a comprehensive project risk management plan is essential for overall project success. It’s simply a matter of good insurance.
Steve Callahan is a practice director at The Nolan Company, a management consulting firm specializing in the insurance industry. He can be reached at firstname.lastname@example.org
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