Risk Management Plan: Importance of Risk Management

Risk Management Plan

About Risk Management

In order to understand the importance of risk management, the report will provide an overview of risk management principles. This report will look into the responsibilities of a project manager and the development of a risk management plan that will mitigate the impact of risks encountered during the various stages of the project’s life cycle (Taylor, 2005).

Overview of a Risk Management Plan

A risk is an event or factor that can derail the completion of a project. There are several sources of risks. It can come from the environment, the people working on the project, the members of the community, the various stakeholders involved in the project, and the socio-economic forces that are shaping the area, city, or region where the project is undertaken. It is an example of a framework that leaders can use to identify and assess the severity of the risk outcomes (Strauch, 2004). A risk management plan provides the necessary information needed to develop the appropriate risk mitigating strategies.

A well-coordinated risk management plan will help the company decide if there are enough resources to handle a specific project. An effective risk management plan enables corporate leaders to make a decision to cancel or vote against a particular project, if they know that there is not enough time to complete it. An effective risk management plan can help corporate leaders realize the company’s ability to provide access to the right resources, and talent pool necessary for project completion.

Defining risk and risk management plan Source
A risk is an indeterminate or volatile event that can cause a positive or negative impact on a particular project. Strauch, 2004
A risk has an element of uncertainty and it has an impact on the project’s objectives. Taylor, 2005
Risk management applies skills and techniques to alleviate the impact of random and uncertain events. Haddow, 2008
Risk management includes planning for risk, identification of risk, analyzing risk, and developing risk response strategies. Haddow, 2008

Objectives of the Risk Management Plan

One of the major objectives of a risk management plan is to determine major impediments in all the stages of the project’s life cycle. A risk management plan helps corporate leaders to realize that availability of resources, and a favorable window of opportunity cannot guarantee the success of a project in the long run. In most cases, potential sources of risks are not obvious in the early stage of project implementation but may become evident at the middle or latter stages of the project lifecycle.

The second major objective is to assess the severity of the said potential risks. Project duration, project cost, and project requirements are types of information that are easily obtainable without the help of a dedicated risk planning committee. However, there are certain sources of risks that must be quantified using probability measures, in order to determine if the potential gains of the project is worth pursuing based on the probability of risks involved.

As a result, a risk management plan enables corporate leaders to make the correct decision, whether to go on with the project or not. Second, it helps mitigate risk by creating plans and procedures that will help the company protect human resources, and other assets in a crisis event.

The failure to anticipate potential risks can lead to significant losses for the company. The same thing can be said if the risk event was not properly identified and a risk a management plan is not in place. However, the reverse is true if potential risks were identified in the early phase of project implementation and steps were taken to mitigate the impact of a particular risk (Verma, Ajit, & Karanki, 2010).

Importance of Risk Management

An effective risk management plan enables senior managers to identify different types of risks that could derail project implementation and project completion. An effective risk management plan ensures the prevention of harm, loss of property, and injury to workers and stakeholders. The absence of a risk management plan could lead to project failures or controversies that could damage the reputation of the company. Thus, it provides an early warning system and enables senior managers to become more proactive in making decisions.

Risk Management Process

Basic Risk Management Process

The following table outlines the basic risk management process.

Stages Description
1.Identify and document
potential risks in the
project.
The three components of risk:
  1. the event;
  2. the probability of event occurrence; and
  3. the impact to the project (Fraser & Simkins, 2010).
2.Analyze and assess
the identified risks.
Collect pertinent information from the following documents:
  1. Project charter;
  2. organizational policies or guidelines;
  3. Work Breakdown Structure;
  4. Network Analysis and
  5. Contract Documents or Departmental project document (Taylor, 2005).
3.Develop strategies to
eliminate or mitigate the impact of risks.
The project manager prepares an appropriate response in the event that a crisis occurs within the duration of the project implementation.
4.Implement and monitor risk management plans. The project manager identifies new risks and develops appropriate measures to counteract its impact on the project. The project manager evaluates the effectiveness of risk response plans.
5.Review risk response plans. The project manager evaluates and documents the risk management plans.

The following graphical representation illustrates the risk management process.

Risk Management

Project Management Book Standard

Project risk management

The following graphical representation illustrates the acceptable risk management standards in Australia:

Risk management process model

Risk Management Value in Documents

Risk Management Value

It allows senior managers to improve their decision-making capabilities. It will help them create better quality strategies because of information about risk assessments. As a result, they are able to prioritise the things that they need to do. It helps them provide more risk-intelligent management decisions.

Project Charter

The project charter identifies the project by providing a brief description of its scope and purpose (Tierney, Lindell, & Perry, 2001). It provides a formal recognition to the person chosen as the project manager. It helps the project team, and all the stakeholders understand the business need, customer requirements, and intended outcome of the project (Dekker, 2005).

Project Management Plan

The Project Management Plan or PMP enables the project manager to define and document the process of managing risks. It helps identify the process that will best manage the project (Stoltman, 2004). The PMP produces the following inputs:

  • Project Charter
  • Outputs from planning process
  • Enterprise environmental factors
  • Organizations process assets

Implementing Risk Management Plan

In order to successfully implement the project’s risk management plan, it must be integrated into the company’s operations. Senior managers must therefore be mindful of the company’s internal processes and external requirements. Therefore, the risk management plan should contain the following information:

  • management support with regards to leadership requirements
  • well-defined accountability with regards to how tasks are delegated
  • well-developed reporting systems in order to provide progress reports and issue reports
  • well-defined operating procedures

Risk Management Benefits

The Value of a Risk Management Plan

  • Provides ample preparation to counteract the impact of catastrophic events (Sadgrove, 2005).
  • Shareholders have greater assurance over the project’s success, if there is a risk management plan in place.
  • It helps reduce the cost of insurance.
  • Provides information in crafting strategies to counteract the effect of tougher environmental protection law. In fact, the government can effectively shut down a project because of willful violations of certain laws (Lindell & Perry, 2004).
  • A risk management plan will increase the likelihood of success.
  • At the same time, it provides management the ability to develop a safety net that goes beyond the use of insurance.

Risk Management Avoids

  • It helps protect the company from the negative impact of ruined reputation, and loss of goodwill (Taylor, 2005).
  • It is an effective way to increase investor confidence (Lam, 2003).
  • It reduces the overall cost of the project. Project managers can prevent runaway costs (Sadgrove, 2005).
  • It helps avoid overblown budgets by compelling leaders to solve problems at the earliest possible time (Hughes & Ferret, 2005).
  • It helps the project manager avoid significant design changes.
  • It helps reduce the impact of demoralized workers, and disgruntled customers.

References

Dekker, S 2005, Ten questions about human error: a new view of human factors and system safety, Routledge, New York, New York.

Fraser, J & Simkins B 2010, Enterprise risk management: today’s leading research and best practices for tomorrow’s executives, John Wiley & Sons, San Francisco, California.

Haddow, G 2008, Introduction to emergency management. Butterworth-Heinemann, Boston, Massachusetts.

Hughes, P & Ferret, E, 2005, Introduction to health and safety work, Butterworth-Heinemann, Oxford, UK.

Lam, J 2003, Enterprise risk management: from incentives to controls, John Wiley & Sons, San Francisco, California.

Lindell, M & Perry, R 2004, Communicating environmental risk in multiethnic communities, Sage Publications, Inc., San Francisco, California.

Sadgrove, K 2005 The complete guide to business risk management. Gower Publishing, Burlington, Vermont.

Stoltman, J 2004, Perspectives on natural disasters: occurrence, mitigation, and consequences, Kluwer Academic Publishers, Boston, Massachussetts.

Strauch, B, 2004, Investigating human error: incidents, accidents, and complex systems, Ashgate Publishing, London, UK.

Taylor, J 2005, A survival guide for project managers. AMACOM New York: New York.

Tierney, K, Lindell, M, & Perry, R 2001, Facing the unexpected: disaster preparedness and response in the United States, Joseph Henry Press, Washington, D.C.

Verma, A, Ajit, S, Karanki, D 2010, Reliability and safety engineering. Springer, London, UK.