Assess and manage risks

Concepts

The ability to identify, assess, and manage risks is key to executing successful projects within any industry. This article will provide a deep-dive look into the fundamental aspects of risk management and suggest ways you can harness this knowledge to ace your PMP exam.

I. Understanding Risks in Project Management

Project risks are uncertainties that can significantly impact your project’s objectives, budget, timeline, or quality. Risks can either be threats, which can have negative effects, or opportunities, which can bring about positive impacts. To navigate these uncertainties, you must understand and apply the principles of risk management.

II. Risk Identification

The first step in risk management involves identifying potential risks. In project management, risks can emerge from various sources, including technical, economic, environmental, organizational, and political factors. Therefore, a risk identification process should incorporate tools and techniques like brainstorming, interviews, checklists, and risk breakdown structures (RBS) to ensure an exhaustive identification of risks.

Example: In a software development project, risks could arise from technical issues such as programming errors or outdated technologies, or organizational matters like changes in company leadership or shifts in project objectives.

III. Risk Assessment

Once you have identified the potential risks, you need to assess them based on their likelihood of occurrence and their potential impact on the project. This step involves qualitative risk analysis, which categorizes risks based on their significance, and quantitative risk analysis, which assigns numerical values to the risks.

Example: The risk of a programming error may be high due to the language being new to the team, thus the likelihood is high. However, its impact might be low if the team is skilled in debugging.

A common technique for presenting risk assessment results is through a Risk Matrix.

Risk Matrix	High Likelihood	Medium Likelihood	Low Likelihood
High Impact	Risk A	Risk B	Risk C
Medium Impact	Risk D	Risk E	Risk F
Low Impact	Risk G	Risk H	Risk I

In the matrix, Risk A would be the top priority for the project manager, requiring immediate preventive and corrective measures.

IV. Risk Management

Managing risks entails the development and execution of strategies to address the most significant risks. Risk response strategies for threats include:

Avoidance: Changes in project management plan to eliminate the threat or protect the project objectives.
Mitigation: Lowering the probability or impact of a risk.
Transference: Shifting the impact of the risk to a third party.

For opportunities, the response strategies include:

Exploiting: Making changes to ensure the opportunity arises.
Enhancing: Increasing probability and/or positive impacts.
Sharing: Allocating ownership to a third party to ensure the opportunity is realized.

Example: In the software project, a mitigation strategy could involve arranging for additional training for the team in the new programming language, reducing the likelihood of errors.

In conclusion, risk management is a core element of project management that you must master to pass the PMP exam. By identifying, assessing, and managing risks effectively, you can take charge of project uncertainties and steer your project to success. Remember that risk management involves not just combating threats but also identifying and seizing opportunities for the betterment of the project.

Answer the Questions in Comment Section

True or False: Risk management is an optional process in project management.

True
False

Answer: False

Explanation: Risk management is crucial in project management as it helps identify, analyze, and prepare for issues that may potentially affect a project’s outcome.

Which of the following is NOT a part of risk management?

a) Identification of risks
b) Analysis of risks
c) Ignoring risks
d) Risk response planning

Answer: c) Ignoring risks

Explanation: Ignoring risks is not a part of risk management. On the contrary, risk management involves identifying, assessing, and addressing risks to ensure a project’s success.

The process of prioritizing risks for further action or analysis by assessing the impact and the probability of occurrence is known as:

a) Risk identification
b) Quantitative risk analysis
c) Risk ranking
d) Qualitative risk analysis

Answer: d) Qualitative risk analysis

Explanation: Qualitative risk analysis is the process of prioritizing risks based on their impact and the probability of occurrence.

A positive Risk Response Strategy is:

a) Avoid
b) Transfer
c) Mitigate
d) Exploit

Answer: d) Exploit

Explanation: Exploit is a positive risk response strategy as it seeks to ensure the risk occurs to take advantage of an opportunity.

True or False: All risks identified should be avoided in order to ensure project success.

True
False

Answer: False

Explanation: Not all risks need to be avoided. Some may be accepted, mitigated, transferred, or exploited based on the project’s specific circumstances and risk tolerance.

Which of the following risk management strategy involves selecting alternate project strategies, adding resources, or changing the project scope?

a) Risk Avoidance
b) Risk Mitigation
c) Risk Transfer
d) Risk Explosion

Answer: a) Risk Avoidance

Explanation: Risk avoidance involves changing the project plan to eliminate the risk or to protect project objectives from its impact.

In the context of risk management, what does SWOT stand for?

a) Strengths, Weaknesses, Opportunities, Threats
b) Strengths, Weaknesses, Opportunities, Techniques
c) Systems, Weaknesses, Obstacles, Tactics
d) Systems, Workflows, Opportunities, Threats

Answer: a) Strengths, Weaknesses, Opportunities, Threats

Explanation: SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. It is a framework used in risk assessment to identify internal and external risks affecting a project.

True or False: Risk management process is only limited to the planning phase of the project.

True
False

Answer: False

Explanation: Risk management is not limited to the planning phase. It is an ongoing process throughout the lifecycle of the project.

Which of these elements is NOT included in a Risk Register?

a) Identified risks
b) Risk response plan
c) Blank risks
d) Risk analysis findings

Answer: c) Blank risks

Explanation: There is no role of blank risks. A risk register should include risk details, analysis findings, risk responses, and information about risk ownership and timing.

A ‘Risk Tolerance’ in project management refers to:

a) The level of risk that an organization can withstand without any impact.
b) The degree of uncertainty an entity is willing to take on.
c) The maximum financial impact a single risk could have.
d) The ability to completely avoid any risks.

Answer: b) The degree of uncertainty an entity is willing to take on.

Explanation: Risk tolerance refers to the degree of uncertainty an entity is willing to take on in anticipation of a reward.

A risk contingency reserve refers to:

a) An amount of money previously set aside to cover cost overruns
b) A fund allotted to cover identified risks that materialize during the project
c) A budget for avoiding any possible risks
d) An insurance premium for project risks

Answer: b) A fund allotted to cover identified risks that materialize during the project

Explanation: In project management, a risk contingency reserve is a funding or time added to the project to cover identified risks should they materialize.

True or False: Risk appetite and risk tolerance are the same.

True
False

Answer: False

Explanation: Risk tolerance refers to the level of risk an organization is willing to accept, whereas risk appetite refers to the amount and type of risk an organization is willing to take to meet its strategic objectives.