Risk Management: Effective Strategies for 2024

Managing projects is not easy: there are always unpleasant surprises, unexpected changes, and the need to start everything from scratch. How can you oversee the plan not going as you expected and make sure that everything unravels the way you intended?

The answer is project risk management. In this article, we’re going to learn everything about it: what it is, what types of risks you should familiarize yourself with, and what are the different methods to manage and minimize risk. Utilizing free employee shift scheduling apps can also play a role in mitigating risks associated with staffing and resource allocation. Let’s dive in!

Understanding Risk Management in Projects

In essence, risk management is the process that helps you uncover various uncertainties that prevent you from reaching your end goal. A full definition is as follows:

Project risk management is a set of procedures that involve identifying and assessing potential risks that may arise over the course of a project, as well as creating alternative solutions to overcome those risks.

On that note… How do we define risk? It’s anything that can affect the project’s completion both in terms of finances and results. If one of the risks you identified becomes a reality, your team should already have procedures set in place to overcome any and all obstacles.

This brings us to an important point: risk management shouldn’t just be a reactionary approach to deal with problems when you encounter them; it should take shape during the planning phase.

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Project Risk Management Types

There are three key types of risks that everyone should know—cost, schedule, and performance—but other forms of risks exist that you should note. After a manager becomes familiar with these types of risks, they can begin creating a set of control procedures to dampen their effects. Below, you’ll find a brief description of the most important types of project risks worth knowing.

Cost risk

This is the possibility of a certain event taking place, which can ultimately lead to budget errors. Examples of this include a sudden increase in the cost of materials and fluctuating exchange rates.

Schedule risk

Schedule risk refers to any event that can cause a delay. For instance, broken machinery, longer-than-expected hiring times, and server failures.

Performance risk

Performance risk is an event that can cause the results of a project to become inconsistent with the budget and performance plan. Even though your project stayed within the planned budget and was completed in time, the unsatisfying results can ultimately lead to wasted resources.

Strategic risk

In a sense, strategic risks are a sub-category of performance risk. The differentiating point is that strategic risk focuses primarily on how an organization uses a strong strategy to achieve the intended goals. Examples of this include using complicated technology and not making use of automated tools.

Market risk

Market risks are arguably the most complicated type of project risk. They’re highly unpredictable, so they require an expert to identify and assess. An example of such risk would be possible uncertainties in the commodity market.

Operational risk

Operational risk refers to any uncertainties that can affect the overall operation of an organization. For instance, procurement and distribution, inferior manufacturing equipment, and worker incompetence.

Legal risk

Legal risks originate from regulatory obligations, which originate from contracts and litigation. For most organizations, all of your legal work will be handled by an in-house lawyer or by hiring a law firm.

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What About Positive Risks?

While most people assume risks are bad, there is such a thing as positive risks. Positive risks are events that can benefit the project. For instance, if exchange rates fluctuate in your favor, even if unexpectedly, then you can rightfully call it a win.

Dealing with negative and positive risks should be approached differently. You should be able to identify various negative risks, assess how much they negatively influence the project as a whole, and consider different approaches to eliminate or at least reduce the effects. As for positive risks, you should know how to fully take advantage of favorable situations.

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Key Steps in Risk Management

With a full understanding of the importance of risk management, strong managers have a go-to set of steps that involve identifying, analyzing, prioritizing, and responding to uncertainties and opportunities, as well as monitoring corrective actions. Allow us to break down these steps one by one.

Step 1: Identifying risks

Take notice of possible events or situations that can lead to unfavorable results. Ideally, you’ll want to identify risks before the project starts, but being able to notice potential risks on the fly can be just as good.

To identify risks, you can conduct interviews with key team members and stakeholders, invite them to brainstorm, conduct an assumption analysis, create a cause-and-effect diagram, or conduct a simple SWOT analysis.

Step 2: Analyzing and estimating risks

Apart from identifying uncertainties, you’ll also need to consider the severity of their possible impacts on reaching your end goal. Analyzing and estimating risks requires experience, but even the most inexperienced person should be able to assess the degree of the most extreme risks.

To get started, try using the Risk Value formula:

RV = Probability × Cost

It will give you a good idea of how certain risks will affect the budget. For instance, if there’s a 40% chance that a certain piece of machinery will fail and that it will cost $100,000 to replace it, then:

Risk Value = 0.4 × $100,000 = $40,000

Thinking in monetary terms (if applicable) can also help you with the following step.

Step 3: Prioritizing risks

Although uncertainties come in all shapes and forms, it’s important to focus primarily on tackling the most potentially detrimental risks.

Prioritizing risks means looking at all possible events and determining which of them requires your utmost attention. You can prioritize risks based on how probable they are or by how high the Risk Value figures are.

After placing the risks in order from most to least concerning, go over the list a second and third time. With every review, you should have a greater understanding of why one risk sits at a higher or lower position than another. Please note that nothing is set in stone; you’re more than free to switch the positions of risks based on how you and your team feel about them.

Step 4: Responding to risks

Now that you know what risks there are and how severe are their effects, it’s time to come up with methods for tackling each risk. In general, there are four ways of approaching risks—avoiding, transferring, mitigating, and accepting.

• Avoiding: Eliminating the threat from impacting the project (canceling the project)
• Transferring: Shifting the effects of a risk to another party (insurance)
• Mitigating: Reducing the probability of the risk from occurring (going with another vendor)
• Accepting: Handling the risk if and when it occurs (setting up emergency funds)

Step 5: Monitoring risk responses

The fifth and final step in risk management after implementing a response to a threat is assessing how effective it is at solving the problem. It’s entirely possible to fine-tune a response tactic on the fly to cover any bases that you might’ve missed during the planning phase. If the project goes swimmingly, you won’t need to monitor your risk response tactics.

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5 Bonus Tips on Reducing and Managing Project Risk

Completely eliminating risk out of the project equation is impossible, but that doesn’t mean we can’t dampen the effects. Apart from the go-to method of managing project risk mentioned above, we’d love to give you a few more pointers.

Create and update a risk register

A risk register is a log containing all potential risks that are likely to occur during the course of a project. As you brainstorm to come up with potential risks, keep a written record of anything you and your team can identify.

Over time, the project will grow and become more complicated, making it easy to lose track of things. But with a risk register stored at a centralized location (head offices, cloud storage, etc.), you’ll have easier, quicker access to see which areas are most prone to uncertainties.

After the project is completed, keep the log in a secure location. When the next project comes, you won’t have to start the risk management process from scratch.

Take advantage of positive risks with automated tools

Identifying positive risks can be as difficult, if not more so, than identifying negative risks. For that, it’s highly advisable that you make use of software to help manage the most time-consuming parts of a project.

In marketing, for instance, programmatic advertising can help minimize human factors and risks associated with them. Here, the automated algorithms serve your ads on the right websites for the best possible price. It can help advertise without paying more than you could and ensure the better quality of incoming leads. Thus, automation of advertising processes helps you to optimize your overall marketing budget and decrease the risk of spending money on nothing. 

Proactive trumps reactive

The most common mistake people make is handling risks with a reactive approach. While that’s a skill in and of itself, a proactive approach is much more sensible. It affords you more time to think of alternative solutions to a singular problem before you come across it.

Investing time before the project begins or during the early stages can help you develop a more comprehensive risk log. Doing so can also help you reduce the risk of unfavorable events affecting your project and, ultimately, your bottom line.

Stay up to date with industry trends

Due to the dynamism of all industries, it’s crucial that you brush up on industry knowledge and trends. Understanding how the market works will give you the upper hand when it comes time to identify and assess potential risks.

You can stay on top of the industry by attending seminars, participating in workshops, or even earning a degree in management. While experience is the best teacher, it’s ideal to avoid making mistakes altogether.

Involve the whole team

In short, two heads are better than one. It’s better to have the insight and brainpower of multiple people from multiple angles than it is to view risks with one set of eyes.

The mistake that many people make is taking responsibility for the whole project. Even though the success and failure will be attributed to the manager, seeking as much input and feedback as possible from every part of the organization will fully prepare your team for any unfavorable events that might occur.

One of the more effective methods to get everyone involved is to assess risks from the bottom-up and top-down. Involving every part of the organization empowers members to voice their opinions. Of course, rewards should be handed out where they’re due.

If you are managing a team of 5 or more and looking to boost efficiency, Everhour is the perfect tool to keep your team on track. With seamless time tracking, you can easily estimate task durations, set clear budgets, and generate detailed reports inside Asana, Trello, Jira, or any other pm tool.

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Risk Management Final Thoughts

Project risk management is a complicated process that requires first-hand experience and a desire to stay up-to-date. With careful analysis, it’s possible to avoid or soften the effects of negative risks over the course of a project.

The benefits of risk management are hard to overestimate. Try implementing the project risk management tactics laid out in this article, and you too will see how much easier it is to successfully complete the project on time, on budget, and to utter satisfaction of everyone involved!