Before we jump off to project risk management processes, etc, let's first understand what is risk. Project risk is the probable occurrence that a given action/activity (or lack of action) will lead to an undesirable outcome (in the most general cases). There can be choices/options that decide the potential outcome of the probable occurrence of an event/instance. These choices in turn can decide the extent of undesirable outcome e.g. hypothetically consider a situation where, supplier of an organization may not be able to supply required material on time; if an organization select ‘Option A’ then the outcome will be ‘delayed product launch & Loss of revenue’; if organization goes with ‘Option B’ then the outcome will be ‘Increase in input cost’. Thus given organization has choice of Option A, Option B, Option C and so on. These options in turn decide the ‘the extent of loss’. Such extent of loss is ‘Risk’.
There are few terms that get mixed up with risk but they are different from risk.
Essentially, risk is the ‘rating’ of probable event with undesired outcome expressed in terms of ‘probability of occurrence’ and ‘extent of adversities’.
In order to understand why project risk management is important, let's understand why should we worry about project risks. There are plenty evidences and historic data to make you think seriously about project risks. The recent example related to BlueOrigin LLC will make the point. The spacecraft launched by BlueOrigin LLC on 24thAug 2011 was crashed when it started to go-off the course. The reason company provided for this failure was “Flight instability drove an angle of attack that triggered the range safety system to terminate thrust on the vehicle. Had BlueOrigin considered this risk well before the launch of space craft, it could have saved millions of dollars spent in the mission. Though not everything can be controlled, measures to avoid such situations would rescue organization from potential failure. Such is the critical importance of risk management. Again we are not saying that such risk could have been known beforehand but my point is having a right project risk management process that will minimize such occurrences or will equip/help prepare organizations to face such situations.
There may be risks in project that have favorable outcome but organizations are more concerned about risks having adverse impact. In general, any organization has some or other on-going projects which involve resources (people, material, technology, etc.), duration, quality, performance, cost and other parameters to account for is subject to risk. And hence project risk management is very much important aspect that organizations have to focus.
There can be risks that will potentially have adverse impact on resources, performance, duration, quality or cost of the project i.e. you understand that small errors induced in any of above parameters can cost you/organization immensely in future. If you are not equipped well to manage risks, your project is more likely to face setbacks. Hence it makes ‘business’ sense for you to pro-actively manage risks. If risks are identified earlier in the project, their impact can be controlled in better manner. Such types of risk are termed as ‘Known Unknown’.
Loosely speaking, there are two types of risks
Unknown Risks are those risks that cannot be anticipated i.e. ‘Unknown Unknown’. For such risks, better risk management strategy/process can help project manager/organization to quickly determine possible impact & likelihood of impact and thus optimally dilute/eliminate/accept the resulting loss when risk occurs.
Are you Proactive or Reactive Manager?
Project Risk management inherently necessitates a proactive characteristic of a project manager whereas on the other side, crisis management requires different skillset where one has to react once crisis has occurred (analogically similar to Risk vs. issue). Undeniably it is more prudent to take appropriate measures to reduce potential impact than, to wait for incident to occur and try to recover from the loss.
In general, a good organization should have project risk management practice in place to
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