Risk management is a systematic process to identify, evaluate, prioritize, and respond to risk associated with a project. A risk management strategy, on the other hand, outlines the approach to effectively manage potential risks. An efficiently charted risk management approach includes –
- Risk Identification: This includes recognizing factors that may jeopardize the project, either internally or externally.
- Risk Analysis: Risk analysis helps in evaluating the potential implication of each risk, based on severity and likelihood.
- Risk Evaluation: Through risk evaluation, the team defines the nature of risk(s) and decides which risks necessitate immediate action.
- Risk Responses: The team strategically prepares responses for risks that are accepted and not abandoned, transferred, or mitigated.
- Risk Monitoring: Monitor and control risks at appropriate stages of the project’s lifecycle, adjusting strategies if need be.
Developing a Risk Management Strategy
Developing a risk management strategy requires a keen understanding of the business environment, project scope, available resources, and potential uncertainties.
1. Recognize Risk:
To effectively manage risks, the first step is identifying potential risks. Use all the resources at your disposal, from the project team to stakeholders, to create a comprehensive risk list.
2. Prioritize Risks:
The second phase is categorizing risks based on their potential impact and the likelihood of occurrence. Risks are typically prioritized into –
- High-Level Risks: Severe impact on the project, having a high chance of occurrence.
- Medium-Level Risks: Moderate impact, requiring attention.
- Low-Level Risks: Minimal effect, can be managed easily.
Such ranking enables the project team to focus their efforts on addressing higher-priority risks first.
Example
| Risk | Impact Level | Likelihood | Priority |
|---|---|---|---|
| Budget Overrun | High | High | High |
| Delay in Deliverable | High | Moderate | Medium |
| Team Conflict | Low | Low | Low |
3. Mitigate Risks:
Now that we have identified and ranked the risks, it’s time to develop mitigation strategies. For high-priority risks, mitigation plans might be extensive, while low-priority risks might only require a contingency plan.
4. Monitor Risks:
Monitoring risks involves tracking identified risks, overseeing residual risks, identifying new risks, and evaluating the efficiency of the risk process throughout the project’s lifecycle.
Implementing Risk Management Strategy
To implement a risk management strategy, it is essential to have a dedicated risk management team who understands the nature and implications of risks, and who can effectively manage risk at every project stage.
A risk breakdown structure (RBS) is an effective tool for implementing a risk management strategy. It is a hierarchical representation of risks, starting from the highest level risks and branching down to detailed risk categories.
Regular risk reviews should also be scheduled to assess and manage risks continually throughout the project lifecycle. These reviews can be scheduled weekly, monthly, or at any significant milestone, depending on the project requirement.
Remember, risk management is a continuous process, not a one-off task. Every change that occurs during a project could potentially introduce new risks, so it’s vital to revisit the risk management strategy regularly to ensure it remains relevant and efficient.
Importance of a Risk Management Strategy for PMI-RMP
The PMI-RMP exam focuses heavily on the applicant’s understanding, planning and managing project risks, risk responses plan, and risk governance to enhance project success. Therefore, establishing an effective risk management strategy is at the core of PMI-RMP exam preparation.
Establishing a risk management strategy ensures that potential risks are identified and addressed before they develop into problems that cannot be managed. In this context, PMI-RMP exam demands a deep-rooted knowledge of the lifecycle of risk management.
By mastering understanding and application of risk management strategy, you can ensure that the chances of project success are significantly elevated and that you’re absolutely ready to ace the PMI-RMP exam.
Practice Test
The first step in the process of risk management is to establish a risk management strategy.
- a) True
- b) False
Answer: b) False
Explanation: The first step in risk management is to identify potential risks, not to establish a risk management strategy.
A risk management plan is the same as a risk management strategy.
- a) True
- b) False
Answer: b) False
Explanation: A risk management plan is a document that outlines the risk management procedures, methods, and processes, while a risk management strategy establishes the overall approach to risk management.
The risk management strategy should be catered to each project.
- a) True
- b) False
Answer: a) True
Explanation: Each project has different objectives, stakeholders, resources, and potential risks. Therefore, the risk management strategy should be catered towards each project.
A risk management strategy includes a risk identification strategy.
- a) True
- b) False
Answer: a) True
Explanation: A risk management strategy should include a risk identification strategy, as well as strategies for risk analysis, response, monitoring, and control.
Which among these should not be included as a part of the risk management strategy?
- a) Risk identification
- b) Risk analysis
- c) Prioritizing resources
- d) Risk response
Answer: c) Prioritizing resources
Explanation: Prioritizing resources is more of an element of project management rather than a risk management strategy.
Risk management strategy only focuses on negative risks.
- a) True
- b) False
Answer: b) False
Explanation: Risk management strategy should focus on both threats (negative risks) and opportunities (positive risks).
The tolerable risk level, decided in the risk management strategy, remains the same throughout the project.
- a) True
- b) False
Answer: b) False
Explanation: The tolerable risk level can change as the project progresses and as more information comes to light.
The higher the risk, the higher the need to focus resources on it.
- a) True
- b) False
Answer: a) True
Explanation: Resources should be allocated based on the impact and probability of the risk.
The risk management strategy should be linked to the company’s overall business strategy.
- a) True
- b) False
Answer: a) True
Explanation: The risk management strategy should align with the company’s business objectives and strategy.
Establishing a risk management strategy includes setting up effective communication channels.
- a) True
- b) False
Answer: a) True
Explanation: Effective communication is crucial for risk management as it helps in identifying, assessing and controlling risks.
Risk responses are designed after a risk event occurs.
- a) True
- b) False
Answer: b) False
Explanation: Risk responses should be planned and designed as part of the risk management strategy before a risk event occurs.
During the Monitoring Risks process, risk responses are executed as designed.
- a) True
- b) False
Answer: a) True
Explanation: The risk responses are executed as designed during the Monitoring Risks process and their effectiveness is tracked.
Who should be involved in the establishment of a risk management strategy?
- a) Risk manager
- b) Project manager
- c) Project team
- d) All of the above
Answer: d) All of the above
Explanation: Risk management strategy should be a collective effort of Risk manager, Project manager and Project team.
Risk management strategy only focuses on identifying risks.
- a) True
- b) False
Answer: b) False
Explanation: Risk management strategy covers the entire lifecycle of risk, from identification, analysis, response, to monitoring and control.
Qualitative risk analysis is a part of risk management strategy.
- a) True
- b) False
Answer: a) True
Explanation: Risk management strategy includes risk analysis, both qualitative and quantitative.
Interview Questions
What is the primary objective of establishing a risk management strategy in project management?
The primary objective of establishing a risk management strategy in project management is to identify, analyze, assess, and control risks that might affect the successful completion of the project.
Which factor plays a crucial role in defining a risk management strategy in project management?
The context and complexity of the project plays a crucial role in defining a risk management strategy for the project.
Can a risk management strategy be static throughout the project lifecycle in project management?
No, a risk management strategy should be dynamic and flexible enough to adapt to the changes occurring during the project lifecycle.
What are the main components of a risk management strategy?
The main components of a risk management strategy include risk identification, risk analysis, risk response planning, and risk monitoring and control.
What is the role of risk appetite in establishing a risk management strategy?
Risk appetite dictates the level of risk a project or an organization is willing to accept. It influences the decisions related to risk response strategies – whether to mitigate, avoid, transfer, or accept the risk.
What is the purpose of risk identification in a risk management strategy?
The purpose of risk identification is to detect and document the risks that might affect the objectives of the project.
Can risk attitude influence the risk management strategy of a project?
Yes, risk attitude of stakeholders can significantly influence the risk management strategy of a project, as it determines how risks are perceived and dealt with.
What are the tools that can be used for risk identification during risk management strategy development?
Tools used for risk identification may include SWOT analysis, PESTLE analysis, brainstorming, interview techniques, scenario analysis, and expert judgment.
What role does risk assessment play in a risk management strategy?
Risk assessment helps in understanding the overall exposure of the project to risk. It involves evaluating each risk’s probability of occurrence, impact if it materializes, and its urgency for attention.
What are the main risk response strategies used in project management?
The main risk response strategies used in project management are: Risk Avoidance, Risk Transfer, Risk Mitigation, and Risk Acceptance.
How does risk monitoring and control contribute to the risk management strategy?
Risk monitoring and control manage the lifecycle of risks. They track identified risks, identify new risks, execute risk responses, and evaluate their effectiveness throughout the project lifecycle.
What is a risk register in the context of a risk management strategy?
A risk register is a document used in project management to identify potential risks, analyse them and plan responses. It serves as a central repository for all information related to risks.
How does communication play a role in risk management strategy?
Effective communication ensures that all stakeholders are informed about the risk management policies, procedures, and their individual responsibilities. It also ensures transparency and promotes a culture of risk awareness.
Why is it essential to review and update the risk management strategy periodically?
It’s essential to review and update the risk management strategy periodically because new risks may emerge, previously identified risks may change, and the effectiveness of risk responses may vary over time.
What is risk tolerance in the context of risk management strategy and how does it affect the strategy?
Risk tolerance is the extent to which an organization or individual is willing to tolerate risk. It influences the risk response strategies as higher risk tolerance may lead to “Accept” strategy whereas lower risk tolerance leads to “Avoidance” or “Mitigation” strategies.
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