Different authors propose various ideas on their understanding on the general concept of risk and its management process. Creemers et al. (2014) define risk as a threat of damage or probability of injury, loss, liability, or any negative occurrence that results from an internal vulnerability or external occurrence and that can be prevented through preventive action. According to the study, effective risk management is essential to enable an individual identify the opportunities, threats, weaknesses, and strength of a project. In other words, planning for unexpected events puts an individual or organization in a position to immediately respond to any rise of the risk in the process of the project. In a systematic review, Haz?r (2015) denotes that it is essential to define how one can handle the potential risks to enable the mitigation, identification, and avoidance of the impacts that come with the risks. The same study denotes that successful managers in the line of a project are aware that risk management is essential as achieving project goals is based on preparation, planning, evaluation, and results that finally contributes to achieving the strategic goals.
Compass Group Limited is one of the world leading companies in Australia in the hospitality industry operating in around 50 countries. The company offers catering services to consumer retail outlets as well as their vending solutions. In Australia, the company operates across a number of sectors including defense, education, facilities management, healthcare and Age care as well as other industries in providing food and support services (Kramar, 2014). Due to its large-scale operations, the company has managed to employ over 500000 people and has been reported to serve at least 4 billion people in a year.
The company needs to adopt a risk evaluation process by using best time practices on various projects while assessing the impacts of every activity required for the mitigation of exposure to problems. The evaluation process will as well help in exploitation of opportunities that can capitalize on the strengths of the company. For instance, the project will push the development and delivery of a training program with the aim of creating awareness on internet security such as identity theft, viruses, phishing, and help desk calls received from clients concerning the mentioned risks. In case the go down, it can reasonably be assumed that the risks management initiatives adopted have led to the success of the project.
Plans adopted for risk management helps in contributing to project success as it helps in the establishment of the both internal and external risks that are likely to be experienced in the project. The plan will typically include the probability of the risk occurrence, proposed actions, potential impacts, as well as the probability of occurrence. According to Green (2015), low risks events often have little or no impact on the schedule, performance, and cost of a project. Moderate risks leads to an increase in the disruption of project schedule, degrades performance, and increases costs. High risk events lead to a significant increase in the disruption and budget as well as leads to performance challenges. Defining risk management processes adopted in the company will help in the minimization or elimination of negative risks to allow for a timely completion of a project. It is hence necessary in allowing the company to minimize expenses on project aspects that are not beneficial and maximize profits on project activities that can produce huge returns to the organization.
There has been various empirical studies with the aim of finding support for different theories on project risk management as pointed out by Tang (2006, p. 451). The same study denotes that subsequent research papers failed in determining which theories are supported by project data and the ones that are not. Consequently, both theoretical design and research reports of applied project risk management methods are dependent on the inability of deciding the best theoretical concepts to adopt in project risk management. Stanleigh (2015) denotes that a spate of new research in risk management resulted into more understanding of the methodology issues surrounding project risks, where the endogeneity of the problem, assumptions on the purpose of the derivatives, non-derivative hedging have been identified. As a result, more studies are underway with the aim of understanding the clear application of the theoretical concepts and applications of risk management models. In a systematic study, Haz?r (2015) denotes that financial economies theory or approach to project risk management is the most prolific when it comes to empirical and theoretical research. According to this theory, hedging can lead to lower volatility of project financial flow and lowering the volatility of the project value. Hussain et al. (2013) denotes that rationales for project risk management such as high debt capacity, internal financing securing process, corporative advantage, and progressive tax rates should be monitored to ensure a hedging premium results to be beneficial to the project process.
The year 2008 was one of the most challenging periods in the global economy. Many firms experienced the wrath of the financial crisis, which was found in the heightened corporate risk. The Japanese firms suffered the most from the events. For instance, the recall rate of Toyota Corporation in the United States was averaged at 0.8 percent (Gorzelany 2014). By 2010, the recall rate was worsening and thus increasing the urgency of reexamining the practices that were set in the management of risk in Japanese firms. The problem was alarming, hence had the potential to destroy almost all the organization in the market (Gorzelany 2014). The life of a project, which includes phases like the conception, construction and the commissioning, are accompanied by different risks. The role of the risk management is to identify, assess and also manage all the potential risks. Failure to induce a competent plan for the risks, they could affect the time of completion and also heighten the set budget of the project. A risk manager may induce a plan to avoid the risks or to control them. For example, most of the companies do not invest in places such as Southern Sudan and Niger-Delta basin in Nigeria because of the heightened level of risks (BBC News 2008).The attacks by the militants subject the firms into risks of incurring more costs with the security.
Although risks are not static, they experience changes alongside the dynamics of the organization. However, risks are grouped into external and internal risks. The external risks are controlled by the external environment and thus they relate to business infrastructural and even economic context, and political, cultural and social contexts. Also, some trends that might risk the company are categorized as external risks. On the other hand, the internal context comprises of the structure, core value, objectives, strategy, processes and policies of an organization. It is, however, essential to apprehend each risk on the basis of its context. Risk management is one of the departments within an entity that should be connected to all personnel and sectors. Its responsibility should be shared by all parties in the project. They include the top management, the middle management and the operational personnel. Primarily, the risk management team reports the possible risks to the top management, which uses the existing communication channel to share the risk ideology with the involved parties (Elahi 2012). Each risk is identified and directed to the personnel with the responsibility of addressing it. Besides, the effective execution plan is shared with the relevant parties to ensure that there is a successful plan.
The uncertain events that may emerge in the future connect directly with risks. Precisely, a project is form of change; hence it aims at introducing something unique and moving with it until it becomes a success. In all life contexts, transition creates uncertainty, which further introduces risk. For projects to create desirable change, risk management must identify, analyze and also control the uncertainty (World Economic Forum 2010). The project risk management plan has the highest potential to curb the risks before they destroy the progress of a project (Kendrick 2015). However, it must be created at the beginning of the project and sustained throughout the lifecycle of the project.
Taking decisions, which is an aspect of the project management process, mirrors the risk management. It also converges with the evaluation of various options, which are designed on the basis of multiple approaches including personal/corporate wealth, risk taker/risk averse and also lessons learned or previous experience (Williams, et al. 2011). Organizational choice can be influenced by both emotions and politics. In such case, organizational decision making presents a lot of tension, which calls for the project managers to apprehend their organizational tolerance, culture and also attitude towards risk. The project managers should be able to identify their position on the spectrum that ranges from risk-averse to the actively risk-seeking.
Figure 1.1: A spectrum showing the attitude of an organization towards risk ranging from risk-averse to the actively risk-seeking
It is essential to note that most of the companies strive to avoid risk at all cost, hence they holding risk-averse attitude. On the other hand, companies, which consider projects as their primary way of making a high return on investment like seizing opportunities in areas that, portray high risks. For instance, they venture in war zone environments. However, there is a huge controversy underlying the organizations with risk-averse attitude. They at some point fail to comprehend the exact role of project managers. For example, they expect project managers to eliminate risk and thus forget that managing risk and eradicating it are not only two different practices, but they also requiring distinct levels of experience.
Firstly, risk management strategy encompasses a high level plan that shows the ways in which the project risks will be controlled and managed towards the completion of the project (Green 2015). The primary focus of the plan is to increase the possibility of having positive events and reducing or even eliminating the chances of yielding negative events. Nonetheless, as an iterative process, the plan starts with the project and ends with it. Also, for the risk management strategies to be successfully created, the processes and policies of a company should be prioritized. Policies, for instance, elaborate the ways in which risk management will be incorporated while also reinforcing the goals and objectives of the firm. The risk management processes, on the other hand, shows the phases necessary to implement the set policies. The progressive nature of projects subjects them to high levels of uncertainty (Green 2015). Hence, project managers must work with a well-versed team to set competent risk management strategies. The plan should not only be formulated well at the beginning of the project, but it should also be advanced throughout the process. More efficient details should be incorporated in the plan during the progress to ensure that the potential risks are not only identified, but also a clear strategy of eliminating and reducing them is laid out. In such case, various factors are examined by the risk management strategies. The first one is the risk areas and in particular ones with reduced thresholds and tolerance. Secondly, the strategies address the decision makers in the risk management. Further, an effective process set to manage risk is evaluated. Lastly, the strategies address the objectives of risk management and the possible areas of risk that is connected to the completion of the project. Lots of advantages accompany the creation of a precise risk management strategy in the project’s kick off (Tang 2006).The most obvious benefit is that the approach heightens the chances of yielding the highest performance while also meeting the objectives of the organization.
Stanleigh (2015) defines risk management as the process of identifying, analyzing, and also reacting to all risk factors that might alter the progress of a project in its entire lifecycle. He also holds that risk management should operate in the interests of the project and the organization at large. Investopedia (2015) also considers risk management as the process in which losses are assessed, managed and even mitigated. Risk management has diverse definitions and all focus on presenting the same message. Expert(2015) holds risk management as the practice of assessing the risks that originate from a hazard while considering the adequacy of all the existing controls and making an informed decision as to whether or not to accept the risk. Irrespective of the size of a company a competent process must be initiated to recognize, evaluate, control, and also manage risks. Such measures guarantee the completion of a project with reduced cost, injuries and losses. Risks can be severe,hence the whole idea of identifying them is to offer a system that gives the project and the company a chance to eradicate and reduce their impacts.
Meanwhile, risk management follows different phases. They include risk identification, risk analysis, risk response and risk monitoring and control (Salford, 2015).
The process of managing risk starts with identifying the risk. It is the responsibility of the risk managers, project team and other professionals who are well-versed in the sector to identify and present potential risks that might alter the successful completion of the project (Hussain, et al. 2013). However, there are 10 Ps that tend to oversee the process of identifying risks. The first set comprise of physical properties, hence includes product, premises and purchasing supplies. People elements, which form the second set, comprise of people, protection and the procedures followed. The third set is the processes or actions and includes performance and processes (Jeynes 2012). The last set is the management issues. It encompasses policy as well as strategy and planning as well as organizing. Each set of Ps represent an aspect of the project.
The announcement by Microsoft regarding the ending of technical support for windows XP is good example of risk identification. The announcement was made two years before the action was taken to give users a chance to make and implement their decisions. Most of the organizations that used windows XP responded to the report by upgrading their systems to the latest versions. However, most of the firms held that some of their programs like the JD Edwards Oracle system, which was previously blended with the XP, did not work efficiently with the latest version; hence they had to upgrade it too. The project of upgrading the different systems involves a wide range of possible risks. Some of them include the compatibility of all the newly installed systems, loss of the data base, delays in the upgrading processes, increased cost of hiring more skilled IT experts to fasten the process, training of the staff regarding the usage of newly installed systems, failures of the system upgrade and lastly, the availability of electricity backups in case of power loss.
The analysis of risk follows their successful identification. The project team and risk professionals must present all the possible uncertainty for the analysis to be initiated. The attitude of the persons responsible for the assessment matters the most in this phase. His or values and culture can reflect the potential steps that the persons will take to against the presented risks. For instance, the risk takers would like to continue with the project. They assume that irrespective of the risks, there is a higher possibility of becoming successful. Entrepreneurs aspiring to start new ventures tend to fall in the category of risk takers. The next category is the risk avoiders (risk adverse). They tend to avoid the risks and at such point, they may pull out of the project if it proves to have high risks. Lastly, there are project managers who seek a balance (risk neutral) (Salford 2015). They tend to go on with a project it balances the risks and the rewards. Such individuals will do all to ensure that they get profits.
Nevertheless, verification of the risk analysis can be achieved by the use of two techniques. They include the qualitative and quantitative analysis (Salford 2015). Firstly, qualitative analysis is more focused on identifying the possibility of risk occurrence and the potential outcomes in case it occurs. The analysis employs a pre-defined rating scale to prioritize the recognized project risks. Multiple measures are also taken to identify both the probability and the impact of risk. They include expert judgment, historical data and also, brainstorming. The risk matrix, for instance, views the identified risks in the perspective of probability, hence the chances of risk occurring and its potential consequences (Salford 2015). It is the responsibility of the project team to analyze each risk and categorize it possibility as high (H), medium (M) and low (L). The same should be done on their impacts. For instance, considering the case of Microsoft and the eradication of technical support for windows XP, the potential risks can be analyzed in the following way using the risk matrix.
Table 1.1: Category Risk Matrix
The rankings shown in the table below should be used by the project team to prioritize risks. In such case, they can identify the ones that are more likely to reduce the project return on investment.
Table 1.2: Number Risk Matrix
On the other hand, the quantitative risk analysisfocuses on the most elevated priority risks. In such case, a quantitative rating or even a numerical is assigned to create a probabilistic project analysis (Creemers, et al. 2014). Various approaches are involved in the quantitative analysis. The first one involves quantifying the potential project results. It also involves evaluating the chances of attaining certain goals of a project. Secondly, the analysis offers a quantitative approach that supports a competent decision making in cases of uncertainty. Lastly, a quantitative analysis develops a real as well as an attainable cost, plan, scope and schedule. Primarily, the analysis reflects a decision tree. It is a visual representation of the outcomes, probabilities and choices that face a project (Salford 2015). In most cases, quantitative risk analysis directs their attention to addressing low probability practices that hold severe outcomes to the project.
Figure 1.2: A simple Decision Tree Model
The action plan follows the successful completion of the identification and analysis. Once the risks are analyzed with regard to project execution, the project team proceeds to prepare an informed plan (Zhang & Fan 2014). Primarily, risk response follows a specific trend, which involves starting with the risk with the highest impact to the ones with low impact. Each potential risk is addressed regarding its might and urgency (Gallati 2003). In such case, risk responses are grouped into two including the threats, which are also known as the negative risks and the opportunities, which are also known as the positive risks. The risk responses for threats include avoidance, mitigate, share, transference, fallback, and acceptance. The responses for positive risks include risk reject, share, exploit and enhance (Gallati 2003). Depending on the level of risks, project team may decide not to start or even continue with the project, accept the risk to complete the project, eliminating the source of the risk, altering the likelihood of the risk, changing the results, engaging other parties through the sharing of risk and lastly, making informed decisions to retain the risk.
Jeynes (2012) holds risk control as any plan, action or device that intends to reduce, alleviate or even eliminate events that induce negative impacts in the success of a project and an organization. Risk response comprises of many approaches and one of them is risk monitoring as well as control. For example, the injury of workers in a construction is a threat. Thus, introducing a safety program is the best response to reduce and mitigate the injury (Haz?r 2015). However, a continuous induction of the program will later minimize the risk to the zero point.
An example of a risk monitoring and control scenario is my organization. During its initiation, the management introduced the HSE department. Its primary role is to identify all possible risks originating from all levels of the firm. The personnel in the department play different roles including reducing as well as controlling injury and loss in all construction-related projects. Over the years, the control has helped the organization turn the risk into opportunities. As a result, the company has created a record as it currently reached over 25 million hours without any case of loss or injury. Precisely, the achievement has ranked the firm among the safest organizations in the entire nation. Besides, risk response cannot be effective without risk monitoring and control. It is the only way in which organizations can yield the highest performance irrespective of the rising number of risks (Merrit & Smith 2004). Companies cannot keep on running from projects or investment, hence they need to implement measures that will allow them to monitor and control risks.
Nevertheless, the action plan that the project team develops regarding risk response should be reviewed and assessed before and after its implementation (Haz?r 2015). It is up to the project team to revise the plan while considering the potential risks. Besides, the process of risk management is continuous; hence the top ten risk tracking technique should be employed by the project team (Tusler 2004). It helps mainly in sustaining risk awareness throughout the project lifecycle. The preparation of a risk register should follow the designing of the top ten risk tracking technique. It has various entries including the outcomes of the RM processes, list of risk, their rankings, and also all information relating to the presented risks (Salford 2015). The table below shows the risk register of the risks identified in the case of Microsoft in the risk identification section.
Table 1.3: Risk Register
Conclusion
Project risk and procurement form a great section of the plan of executing a project. From the above analysis, it is clear that risk management is a vital process that is necessary for every organization as it helps in defining the objectives of the project. Defining objectives without having a consideration of the possible risks involved can put the organization into a dangerous position of losing the direction in case of occurrence of any of the risks. Therefore, it is essential for every organization to have a risk management committee or department with the role of identifying possible risks and planning on strategies that when adopted can guard against the risks. The department should be given the full responsibility of executing the identified strategies while motivating the employees to corporate in the projects. However, there is a need to understand that large organizations are often faced with bigger and more serious risks, an aspect that requires very sophisticated strategies. The risk management process will as well help in identifying the possible risks in the project and with the aim of determining the most critical issues that can have adverse effects on the business, which will then be given more priority.
References
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