Risk Management Strategies in Project Management

Risk Management Strategy Definition

Any business, regardless of size or field, can benefit from adopting a systematic plan for dealing with potential threats through a risk management strategy. Instead of viewing risk management strategy as a sequence of discrete tasks, it is more helpful to think of it as an iterative process in which new and existing risks must be continuously detected, analyzed, managed, and monitored. It allows for continuous assessment and response, ensuring that the company's people, property, and resources are always safe.

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Risk Acceptance 

This approach talks about accepting risks without taking any action to prevent them from happening. It works well as sometimes the cost of eliminating risks goes higher than the original cost of risk. You will need to be confident that if the risk happens in the future, you will be able to manage it at that time. 

Risk Transference 

With this approach, the responsibility of managing risk is given to another party. This does not imply that the risk is eliminated, but now it will be handled by another organization. Insurance comes under this type of risk management. 

Risk Avoidance 

It means avoiding the risk altogether or eliminating the possibility of risk. This approach is suggested when the impact of the risk is significant for your organization. A typical example of this is that you will avoid investing when you find an investment is too risky after analyzing the risks. However, it is not advisable to avoid every risk as you may lose out on many growth opportunities. 

Risk Reduction

This approach refers to mitigating risks through proper actions to prevent them or minimize their impact. This is a standard method of treating risk. With this approach, you can adopt measures and tactics to help you manage risks more effectively. A fine example of this is the introduction of the quality management system to minimize the manufacturing defects of products.  

The one you pick will determine whether or not you will be able to manage each risk to your organization effectively or whether or not you will be forced to face potentially disastrous repercussions.

Why is Having a Risk Management Strategy Important?

Even though most firms face some degree of project and operational risk, it is crucial to do a SWOT analysis to determine your company's strengths, weaknesses, opportunities, and threats.

1. Business Continuity and Operational Effectiveness

No matter how well you think you've prepared your company, unexpected operational risks can arise at any time. Threats can come in the shape of anything from a new cyberattack to a supplier or service provider that suddenly can't meet your company's needs to a catastrophic piece of equipment breaking down. An established risk management process and plan allows you to guarantee internal controls to avoid fraud.

2. Protection of Your Company’s Assets

It is crucial to safeguard your company's assets, whether physical items, materials, or data. According to a new analysis by IBM, mega-sized data breaches typically cost businesses in the United States $3.86 million, with over 8.5 billion records stolen in these incidents between April 2019 and 2020. So, it is crucial from the standpoint of commercial insurance to develop a comprehensive and workable plan for risk management.

3. Customer Satisfaction and Loyalty

Your customers will feel more at ease doing business with you since they are familiar with your logo, brand, digital presence, and reputation. In addition, customers will feel more at ease continuing to do business with you if you have a solid risk management plan in place and use it. By taking preventative measures, you may keep your company's name and stand intact. 

4. Realizing Benefits and Achieving Goals

Effective risk management is crucial to completing projects on time and accomplishing their goals. Implementing efficient procedures for identifying, assessing, and managing risks can help your business eliminate low-return projects and activities more quickly. It improves the likelihood that your project portfolio and overall business performance will meet or exceed your expectations and that you will realize the anticipated benefits.

5. Increased Profitability

Most organizations' primary goal is to maintain a positive profit margin. Financial losses can be enormous after an incident like a breach, and dealing with the aftermath sometimes requires spending countless hours on end in tedious meetings with legal and insurance representatives. Keeping your company profitable requires careful management of market, credit, operational, and reputational risks.

What are 4 Examples of Common Risk Responses?

Depending on the nature of the risk, the manager may choose to employ a variety of risk responses. The same action may not be necessary for every possible risk. Avoidance, reduction, acceptance, and transfer are frequent risk responses regarding risk management measures. Here are four common examples:

1. Avoiding Risks

The goal of taking this course of action is to eliminate the possibility of the risk materializing or constituting a hazard in the first place. If there is no immediate threat to the health or safety of employees or the business, it may be prudent to forego fixing a poorly performing product.  

2. Accepting Risks

Sometimes it's not the best course of action to try to escape something; instead, it could be best just to accept it. For example, accepting a risk may be appropriate if the danger's occurrence is remote or its potential consequences are low. It's also important to consider the context of risk; if it isn't a pressing problem right now or won't alter the long-term strategic direction of your business. 

3. Mitigating Risks

The most frequently mentioned risk response is to reduce the risk. However, this isn't always a viable option. If the danger offers a significant threat or problem, and avoiding or simply accepting it won't cut it, then this might be the best course of action. However, if a risk has a negative impact and could be costly for your business, staff, vendors, or consumers, it is essential to lessen or eliminate it. 

4. Transferring Risks

In some cases, you and your team won't have much choice but to face adversity head-on and do what you can to overcome it. Lack of knowledge about the risks or insufficient training is two possible explanations. In such instances, it may be prudent to seek assistance from an outside agency, consultant, or even another department within the same organization.

Who is Responsible for Developing a Risk Management Strategy?

The company type, structure, complexity, resource availability, and team's talents will all play a role in determining who will be the ideal person or function to identify, appraise, and implement a risk management strategy. But who is in charge of formulating plans for dealing with such threats? Someone in the risk management team, the audit crew, the project manager, the risk expert, or even an external consultant should be in charge. 

Critical Steps to a Watertight Risk Management Process

1. Identification

The only way to effectively deal with potential dangers is to be aware of them. The first stage is to describe the events that could impact your organization's capacity to reach its goals and allocate responsibility for dealing with them. The four primary areas of risk to evaluate at this point are:

• Hazard risks
• Financial risks
• Strategic risks
• Operational risks

2. Assessment

The identified risks must be evaluated for their potential severity. It requires assessing the likelihood and impact of the risks, as some have the potential to destroy the company while others may merely be a little annoyance.

At this point, it is common practice to employ risk matrices as visual assistance to evaluate the likelihood of hazards occurring and the severity of their potential impacts. It is essential to determine which dangers require more attention and how quickly you need to act to limit the damage.

3. Treatment

Your plan for dealing with potential threats is also known as your risk management strategy. You can accomplish this in one of four ways:

• The best way to deal with a potential danger is to avoid it altogether
• Risk is transferred when it is assigned to another group or organization
• Reduce or cure the impact of the threat right away by taking preventative measures
• Take up the risk with all its potential repercussions, or plan accordingly for its management

The degree of specifics in your response plan for each risk should equal the issue's magnitude and therefore be prioritized.

4. Monitoring

Risk management should be viewed as an iterative process, not a linear one. Whoever takes on the risk will be accountable for monitoring it and keeping the rest of the company informed of any developments. An issue that seems unlikely to impact your firm one month could become a significant concern the next. The key is to keep lines of communication open at all times so that there are no unpleasant shocks down the road.

5. Reporting

Reporting at each of the four stages mentioned above for efficient risk management is crucial to propelling decision-making. In addition, to better understand if current techniques are adequate, this exercise should help to justify any alterations or revisions.

Early on in the process of risk management, you should define the reporting framework by deciding on the type and format of reports to be generated and how often they will be caused.

Risk Management Challenges: The Threat of Spreadsheets

Economic, fraud, regulatory, climatic, and cyberspace risks have never been more apparent on the dashboards of risk professionals. Using spreadsheets to manage the risk process is a significant vulnerability for the organization, but fixing this issue is low on the priority list. 

To ensure that best-practice corporate governance is being implemented, ensure that authorities are focused on using spreadsheets. Statutory, reporting and compliance duties heap heavily on the shoulders of the leadership teams of public and private sector organizations. Failure to comply with these commitments may result in monetary penalties, criminal sanctions, and a reduction in the value of the company's stock. 

What are the 10 Types of Risk Management Strategies to Follow?

Different risk management strategies serve distinct purposes and have various advantages. Here are ten of them:

Type 1: Business Experiments

This method of managing risk can be used to play out "what-if" scenarios to test out various responses to hazards. Many parts of an organization, including IT and marketing, have specialists who are familiar with running business experiments. The finance department also conducts tests to evaluate ROI and other financial measures.

Type 2: Theory Validation

Questionnaires and surveys of groups are used in theory validation strategies to elicit input based on experience. To mitigate risks associated with developing and releasing a new product or service, it is prudent to solicit timely and appropriate feedback from the target audience.

Type 3: Minimum Viable Product Development

To mitigate danger, businesses should create a "minimum viable product" (MVP) consisting of the software's most essential functions and components. It aids in reducing costs, keeping projects under budget, and speeding up time to market.

Type 4: Isolating Identified Risks

IT departments are accustomed to enlisting outside assistance to identify and fix any security flaws or inefficient procedures that could leave the network open to attack. Doing so makes them proactive in seeing potential security threats before an incident rather than reacting to a malicious and expensive intrusion.

Type 5: Building in Buffers

Managers of any project know they need a safety net, whether it's an audit or a piece of technology. Risks are mitigated by buffers, which keep projects within their specified boundaries. Depending on the project, funding, material, or time can all serve as buffers. The point is to eliminate any potential danger that may be introduced by something out of the blue.

Type 6: Data Analysis

The assessment and management of risks need extensive data collection and analysis. Qualitative risk analysis is one technique that can be used to assist spot trouble spots in a project. A complete qualitative risk analysis is essential to identify and rank risks and create mitigation, monitoring, and reevaluation plans.

Type 7: Risk-Reward Analysis 

As a risk strategy, weighing an endeavor's potential benefits and drawbacks before committing time and money is an excellent way for businesses and project teams to make informed decisions. It's not just about the potential gains and losses of spending money on opportunities; it also sheds light on the price of missed chances.

Type 8: Lessons Learned  

Your business will inevitably gain insight from every endeavor and project it undertakes, whether or not it succeeds. Lessons learned are a powerful resource for lowering project and endeavor risks in the future, but only if teams take the time to record their findings, analyze them, and devise a strategy for moving forward.

Type 9: Contingency Planning 

Even though it's always better to be prepared, it's not always enough to have a solid plan in place. Depending on the circumstances, businesses should prepare for several potential courses of action. The goal of contingency planning is to prepare for the possibility that something may go wrong and to have a plan in place to deal with the specific risks that you anticipate will derail your original plan.

Type 10: Leveraging Best Practices

While the specifics of what constitutes best practices may vary from one industry to the next and from one project to the next, it is generally accepted that adopting such standards saves time and money for businesses. This reduces long-term risks.

Positive Risk Management Strategies

1. Exploit

Exploitation increases the chances of making a positive risk happen, leading to an opportunity. As a project manager, you assigned sufficient and efficient resources to take advantage of this opportunity. This approach reduces the uncertainty associated with a positive risk by ensuring that it happens.

2. Share

When the project team themselves are not fully capable of taking advantage of the opportunity they might call in another company to partner with. The expertise of another company is leveraged to maximize the return on the opportunity. Examples of sharing opportunities include forming risk-sharing partnerships, teams, unique purpose companies, or joint ventures. In this all parties gains as per their investment and action.

3. Enhance

Enhancing involves increasing the probability of occurrence of the risk and expanding its impact. This is done by identifying and influencing the various risk triggers. An example of enhancing an opportunity includes adding more resources to project activities to finish it earlier.

4. Accept

This involves taking advantage of the positive risk as it happens but not actively pursuing it.  It is just like an opportunity coming and being accepted without much pre-planning.

Read more: Risk Management Cycle: Process and Framework

Negative Risk Management Strategies

1. Avoid

Avoidance eliminates the risk by removing the cause. It may lead to not doing the activity or doing the activity in a different way. The project manager may also change or isolate the objective that is in trouble. Some risks can be avoided by an early collection of information, by improving communication between stakeholders, or by the use of expertise.
Example of this approach includes extending the schedule or changing the scope of the project activity. Another example could be a risk that is too hazardous that it may lead to loss of life and is avoided by shutting down the project altogether.

2. Transfer

In the Risk Transfer approach, the risk is shifted to a third party. The third party, like an insurance company or vendor, is paid to accept or handle the risk on your behalf and hence the ownership, as well as the impact of the risk, is borne by that third party. This payment is called a risk premium. Contracts are signed to transfer the liability of risks to the third party.
Risk Transfer does not eliminate the risk, but it reduces the direct impact of the risk on the project. A few Transference tools are insurance policies, performance bonds, warranties, guarantees, etc. This approach is most effective in covering financial risk exposure.

3. Mitigate

Mitigation reduces the probability of occurrence of a risk or minimizes the impact of the risk within acceptable limits. This approach is based on the fundamental principle that earlier the action taken to reduce the probability or impact of a risk is more effective than doing fixes to repair the damages after the risk occurs.
Example of mitigating a risk includes the use of advanced technology or best practices to produce more defect-free products. Mitigation may require a prototype development to measure the risk level. In the case where it is not possible to reduce the probability of the risk, the risk impact reduction is targeted by identifying the linkages that determine the risk severity.

Read more: Project and Program Risk Management

4. Accept

Acceptance means accepting the risk, especially when no other suitable strategy is available to eliminate the risk. Acceptance can be passive acceptance or active acceptance.
Passive acceptance requires no other action except to document the risk and leave the team to deal with the risks as they occur. In an active acceptance approach, a contingency reserve is designed to recover the losses of time, money, or resources.

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Contingent Risk Response Strategies

These strategies are implied only when certain events occur. The execution of these strategies happens only under certain predefined conditions. The team waits for sufficient warning signals before implementing these strategies. These signals could be missing milestones work items or deadlines etc.

These strategies include using Financial reserves, Staffing reallocations, and implementing Workarounds to minimize the loss, repair the damage to the extent possible and prevent a recurrence.

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FAQs

1. What are risk management strategies?

Risk management strategies are a combination of approaches an organization takes to cope with the risks coming. These strategies are typical to organizations of all sizes and across different categories. These processes evolve in a cycle where each new risk is identified, examined, and managed. In addition, continuous monitoring is done to check how the risk is adequately tackled. 

2. What are the 7 risk management measures?

• Identifying the number of risks
• Calculating the number of risks that happened 
• Checking the number of risks that have happened more than once.
• Comparing the risk prediction versus the actual severity of the risk 
• Limiting the number of unidentified risks 
• The costs involved in risk management
• The number of risks that are tackled and closed.

3. What are the 10 Ps of risk management?

• Planning 
• Product 
• Process 
• Premises 
• Purchasing/procurement 
• People 
• Procedures 
• Prevention and protection 
• Policy 
• Performance 

4. What are the 12 principles of risk management?

• Organizational context: The nature of risks is different for different organizations
• Stakeholders' involvement: You should involve your stakeholders in the risk management process as much as possible
• Organizational objectives: While managing risk, you should consider your organization's overall objectives
• Management of risk approach: This focuses on adopting best practices for risk management and learning from mistakes
• Reporting: It ensures the importance of maintaining transparency in communication
• Roles and responsibilities: Everyone should understand the significance of their role in the risk management process
• Support structure: This talks about the support system one should avail in case any query arises during the process
• Early warning indicators: It is important to forecast early warning signs to react effectively to a risk that occurs or is about to occur
• Review cycle: Regular monitoring of the risk management procedures 
• Overcoming obstacles in managing risks: This involves doing everything possible to manage the risk best
• Supportive environment: Creating an environment where every team member should feel comfortable discussing things related to risk management
• Make continuous improvement: By looking at past mistakes, you should manage risks and examine the current risks your organization is experiencing.