Effective Management Of Project Risk And Procurement: Strategies And Techniques

Concept of Risk

Question:

Discuss about the Risk Management and Financial Institutions.

The report here discussed about the effective management of risk through discussion of the concept of risk, processes adopted for measuring and ranking the risk and the strategies adopted for effective project risk management. There is also discussion about the appropriate practices responsible for minimizing the project risk with theories, examples and arguments. There is also a critical analysis of the theories, concepts and models for practicing the project risk and procurement management. Further, there is also discussion on how the knowledge from the theories of project risk and procurement management can be used for developing insights and sort out current problems. The report also gives an overview of the complex models of Project Risk and Procurement Management along with a systematic analysis and creative synthesis of ideas

Identification, understanding and evaluation of risk are required in business management otherwise; businesses can undergo dreadful consequences. However, most people relate the concept of risk with health, death or injury but there are many other types of risk that business face (Aven 2012). Risk can be categorised as risk of harm and risk of detriment. The risk of harm often related with something that is living like the natural environment or a person. However, in business context, the risk of harm relates to an injury incurred by people involved with the business that can be people from the management or employees.

The risk of detriment refers to some kind of economic loss that the business incurs (Halbert and Rouanet 2014). This kind of risk includes split in an organization, loss of property or loss of stakeholders. Detriment risk is therefore responsible for causing damage of a major kind. Thus, it is important for the managers of any business to manage and identify risk so that consequences of risk reduced.

The basic step for measuring the risk for business is to have a clear understanding of the risk. Following the mentioned steps can help in measuring and ranking of the risk (Brownlees and Engle 2012):

1. Identification of the risk: It is necessary for the business to identify the kind of risk it undergoes which includes strategic risk, compliance risk, operational risk, financial risk or reputational risk.
2. Estimating the Likelihood of the Risk: After identification of the risk it is very necessary to identify its likelihood by measuring it on a five-point scale like quite unlikely, very unlikely, medium likely, quite likely and very likely.
3. Estimating the Impact of the Risk: After the identification of the risk it is very necessary to estimate how the risk will affect business. Therefore, it is necessary to estimate whether the risk have minimal impact, low impact, high impact, medium impact and devastation impact.
4. Through creating a Scorecard for the Risk: Creating a scorecard for the risk helps in summarising the risk and its relative impact on the business.

Strategies for Project risk management adopted for preventing project risks from occurring and thus minimizing the impact on the project in case any kind of risk occurs. The existence of project risks attributed to uncertainty (Larson and Gray 2013). There always remains a possibility where something unknown or known might pose a hindrance in achieving the project goals. The strategies adopted can therefore, act as a rescue in handling such risks. The project manager should therefore undertake four basic strategies for effective project risk management. These are as follows:

1. Identification of the Risks: The identification of any risk that might have an impact on the business is very necessary. Possibility of any risk can be identified either by brainstorming, interviewing, going through risk profiles, going through historical data, through assumption analysis and through work breakdown structure analysis.
2. Assessment of the Risk: Once the potential project risk identified it is very necessary for the project manager to determine the risks that need to be managing on an immediate basis since these are the risk that will have major impact on the project. Along with this, the manager also needs to identify its likelihood.
3. Identifying Risk Response Development: There are however four response strategies for every risk that includes:

• By avoiding the risk: There are certain changes needs to be made in the project plan for avoiding risk. For instance, this can be done by either shortening or extending the schedule, reducing scope or changing the strategy of the project.
• Transfer the Risk: This involves passing of the risk to a third party. However, it does not change the nature of the risk but the responsibility of managing the risk goes to some other party. These include insurance, warranties, guarantees, performance bonds and fixed price contracts.
• Mitigate the Risk: This implies reducing the impact or probability of risk event. Risk mitigation may be done by simplifying the processes, safety training and choosing stable supplier
• Through Accepting the Risk: This is a scenario when the project team does not undertake any changes in the plan in dealing with the risk. In such cases, the manger is also unable to choose appropriate response strategies for the event

1. Ensuring Monitoring and Controlling Risks: This involves implementation of the risk response strategies, monitoring the events that are responsible for the trigger, tracking the identified risk and identification of new risk.

Process of Measuring and Managing Risk

There are huge benefits of risk management in a project as it allows the business from unnecessary monetary loss (Kerzner 2013). In addition to this, minimizing the threats to projects also allows the project manager to ensure timely delivery along with quality results demanded by the sponsors. There are however, certain golden rules which if followed can minimize the project risk. These are as follows:

1. Making Risk Management a Part of the Project: For minimizing the impact of project risk it is important to ensure that risk management becomes a part of the project plan. This will not only save cost but also lead to successful execution of the project. Most professional companies make risk management as a part of their day-to-day operations
2.  Identification of the Risks in the Early Stage of the Project: Identification of the risk at the initial stages of the project also helps in minimizing the project risk (Kendrick 2015). In order to do so, the manager must interact with the team members and other people outside the project who might help in risk identification due to experience in a similar scenario.
3. Ensuring Proper Communication about the Risks: There should be a constant communication about the risk with the team members. This will allow the members of the team to understand its importance and impact and discuss any new risk that they can observe.
4. Considering Both the Opportunities and Threats: There have been instances when modern risk approaches have focused on positive risks that have lead to project opportunities. Therefore it is necessary on the part of the managers to not only identify the project threats but also the opportunities as they make the project more profitable, better and faster.
5. Clarifying Ownership Issues: The task of the manager does not end with the identification of the risk. The project manager in order to minimize the risk must assign a risk owner who will undertake the responsibility for optimizing the risk.
6. Prioritising Risk: There are certain risks that have higher impact than others. Therefore, it is very necessary to prioritize the risk that causes bigger losses (Osei-Kyei and Chan 2015). The risk with lesser impact can be prioritizes based on a criteria or sometimes gut feeling.
7. Through Analyzing the Risk: The project manager should risk analysis at various levels of the project. A detailed analysis of the risk helps the manager to understand the magnitude of the impact on cost, product and quality
8. Planning and Implementing Risk Responses: Implementation of risk response activity that adds value to the project. This act of the manager will not only prevent the occurrence of threat occurring and at the same time minimize negative effects.
9. Registering Project Risk: The project manager must maintain a risk log that enables him in viewing the progress. This method also acts a communication tool for informing the stakeholders and team members and stakeholders about the whereabouts of the project.
10. Tracking Risk and Associated Risk: Through tracking of risk the project manager can actually focus on the current situation of risks (Klauer et.al 2014). This will help him to identify the risk that and affect the project value.

Project risk management is a thoughtful process of decision-making. The alternative being the scenario that involves reckless decisions making not based on careful observation of facts and involves risk (Alexander 2013). Thus, management of risk requires a methodical approach. Therefore, project risk management defined as a formalized disciplined approach that includes a set of processes for sound decision-making.

On the other hand, procurement is a process that is usually adopted in private and public sector organizations. There process of procurement also involves five different categories of risk that includes (Hayes 2014):

1. Technological Risk: These risks involve non-completion, under performance or false performance of the service procured due some technical glitch.
2. Societal or Organizational Risk: Societal risk refers to the lack of acceptance of change by the users within the society. Organizational risk on the other hand refers the failure of the organization that undertakes the process of procurement.
3. Market Risk: This refers to the risk involved in the demand and supply side.
4. Financial Risk: In public procurement the financial risks are of twofold, first refers to the uncertainty in achieving target cost and the second refers to the ability of securing funds.
5. Turbulence Risk: This risk refers to those that emerge from an unpredictable situation that forces the managers to reassess, prioritise and change expectations. This may lead to further dysfunction.

The case study here discusses about the conduction of a risk management workshop by risk manager of a project (Kerzner, 2013). Thus, a meeting was held between the project manager and risk manager to undertake discussion on the project scope, project objectives, process incorporated, efficiency, deliberation and workshop participants.

Based on the discussion risk identification which depends on the following factors like the time allotted for the project, number of participants and quality of participants, the project manager, scope of risk management.

The risk manager developed a risk rating matrix after discussion with the project manager which enabled him to analyse the qualitatively. This approach of analysis is not only simple but also quick. However, the members of the workshop also readily accept the qualitative approach.

The purpose of analysis of the risk is for prioritizing risk so that the higher ranking risk can be effectively taken into account by the management. In this case study, it was found that members of the workshop could determine strategies for treating high and extreme risks only. However, expectation for low or moderate risk can be effectively be handled by the management based on instinct or certain business criteria.

Theory and practice matches in terms of use of source as common risk classification structure and effectiveness of group process. Therefore, in contrast to the theory, the practice needs to segment objectives of the project into product factors and process, use checklist after undertaking the process of brainstorming and the depend of risk on various factors. There is also need for interchanging the ability of events and causes on a frequent basis, greater weight age on consequences than the likelihood, carrying out partial analysis in exact circumstances since risk depends on various factors. Thus, the theory however clearly put an emphasis on the need for flexibility in one of its approaches allotted for the process of risk management (Haimes, 2015).

Strategies for Minimizing Project Risk

The theory and practice puts forward important techniques and concepts that are necessary for understanding the core competencies of risk related to project management and procurement management (McNeil, Frey and Embrechts 2015). This will enable project managers in preparing an accurate plan for risk and procurement management for their project. The managers will also be able to put use the techniques and tools for identification and resolving risk in their projects. They will also develop an ability to link risk and procurement concepts to the framework of the project. In other words, proper knowledge will also ensure them to adopt a reflective and professional approach for managing their project (Hull 2012). The knowledge will also enable the managers in effectively using oral and written communication about the risk factors of the projects at a professional level. Further, proper knowledge will also enable managers to critically think and synthesize any complex data related to the project.

Nowadays, project risk and procurement management considered important for an organisation because without proper understanding of it, a firm is not being able to define the objectives of project for the future (Fernández-Diego 2013). However, if the project objectives of a company are determined without considering risks then there might be chances of losing the direction whenever a risk strikes.

Therefore, in recent years companies have incorporated risk management departments. The role of the team working for the department is to come up with strategies that help in guarding the risk, identification of the risk, execution of the strategies and motivating employees in cooperating with the strategies (Caron 2013).

Larger organisations face more risk so they should have strategies that are sophisticated. Moreover, they should also allow their risk management team for accessing the risk that might pose as a hindrance to the business. These risks cause adverse affects to the business and therefore needs prioritization and treatment accordingly (Taylor, Artman and Woelfer 2012). Therefore the goal of the risk management team is thus to ensure that the company only opts for risks that will not pose a barrier in achieving the primary objectives.

Complex projects in the field of aerospace, nuclear power, transportation and information technology brings in substantial challenges. The challenges include cost escalation, technical problems and legal disputes. These projects are therefore, quite vulnerable when it comes to performance (Pryke and Smyth 2012). The complexity arises due to multiple stages of design, procurement, construction, testing, changing requirements of the customers, performance priorities, government regulation and standards and delays in discovering rework. The complex projects are so much in trouble due to their complexity and hence are difficult to handle even under suitable circumstances. Due to the uncertainty factors these factors also involve certain amount of risk.

Critical Analysis of Project Risk and Procurement Management Theories and Models

The challenge of risk management in dealing with such complex projects includes systematic analysis of the risk, incorporating strategic control in exposing the project risk and undertaking a continuous learning process (Thamhain 2013). Until recently, it was found that there was insufficient systematic analysis of past problems related to complex projects. Even the project managers lacked tools used for analyzing and controlling such projects.

The outcome of a complex project measured in terms of technical performance, timeliness, cost, quality, social impacts and value for money. However, the sources of risk for such projects depends substantial impact on the project outcome and the surrounded uncertainty (Kendrick 2015).

Thus, to ensure project risk management of complex projects systems dynamics used as a powerful tool assessing the performance (Wilensky and Stroup 2013). Thus, through the adoption of system dynamics techniques, computer simulation models of various projects developed. However, system dynamics not only addresses the dimension of the complexity explicitly but also provides an answer to many critical questions related to performance. The scopes provided by the system dynamics methodology not only make it an effective but also an appropriate tool for strategic risk management. Thus, system dynamics model can act as the basis for identification and control of significant project risk (Flyvbjerg 2013). The steps however includes: simulation with a previous project, establishment of a baseline for performance for the project under consideration, identification of the sensitivities of the performance, identifying the major risk sources, analysing the sources that would lead to reduction of the risk, evaluating tradeoffs for performance /risk, preparation of contingency plans.

However, the manager of such projects admitted that another category of risk is quite prevalent in such projects (Yoo et.al 2013). This includes, lower than expected availability of labour regionally, high attrition rates amongst workforce, slower delivery of vendors, slower perception of the management in dealing with the variations in actual productivity, slower rate of rework wherever required.       

Thus, such projects the managers can reduce risk through identification of five potential areas (Iossa and Martimort 2012.). These include proper scheduling, proactive workforce management, pursuing of aggressive test program, building customer relationship and incorporate improved technology.

Conclusion

The report ends with a critical analysis of project risk and procurement management for complex projects. Here the report discusses how complex projects have higher risk due to uncertainty. The report also deals with a section where the knowledge of the project risk and procurement management used for developing insight and solving current problems. The report also discusses about theory versus practice of project risk and procurement management. Further, there is discussion about the appropriate practices adopted for minimizing the project risk. There is also discussion about the effective risk management along with an explanation of the concept of risk, ways for measurement of risk and strategies for project risk management

Benefits of Risk Management for Businesses

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