As aspirants studying for the Project Management Institute Risk Management Professional (PMI-RMP) exam, there are several key concepts about risks that you will need to understand. One of these crucial topics is the concept of risk origins and ownership, particularly with regards to whether risks are internal or external.
Essentially, risks could emanate from various sources, both within and outside an organization during the lifecycle of a project. To adopt a proactive approach in risk management, project managers have to assess, monitor, prioritize, and respond effectively to all potential risks.
Risk Origin: Internal vs. External
Internal risks are those that come from within an organization and are generally under its control. These risks could stem from various sources, including a lack of technical expertise, organizational culture, or miscommunication. For instance, if there is a significant turnover rate among employees in the middle of a project, this could disrupt the project timeline, leading to increased costs and delays.
On the other hand, external risks are those that an organization has little to no control over. These may arise from factors such as fluctuating market conditions, regulatory changes, or natural disasters. As an example, consider a software company developing a new application. The launch might coincide with an unexpected policy shift that changes the legal landscape for their product, shifting production timelines and possibly even blocking release.
| Internal Risks | External Risks |
|---|---|
| Employee turnover | Regulatory changes |
| Technical difficulties | Market fluctuations |
| Miscommunication | Natural disasters |
| Organizational culture | Political instability |
| Budget overruns | Technological changes |
Risk Ownership
Risk ownership signifies the individual or group that will be in charge of managing a specific risk if it occurs. This person or group, known as the Risk Owner, is primarily responsible for:
- Identifying the risk
- Developing the risk response
- Monitoring the risk
For instance, in a construction project, the risk of an accident at the site can be assigned to the Site Manager who is already responsible for safety and thus, best suited to manage this risk. They can plan appropriate measures like safety guidelines, regular inspection, and safety gear to mitigate the risk.
Knowing who owns a risk allows for efficient risk response and creates accountability. Risk owners are usually chosen based on their expertise related to the risk, their ability to influence the outcomes, or their position in the organization.
Conclusion
Understanding the origins of risks and designating the right owners are crucial steps in project risk management. It provides an in-depth understanding of where risks may arise and who has the capability to mitigate them effectively.
As PMI-RMP aspirants, a strong command over these concepts can not only aid in your exam preparation but also provide valuable insights when facing real-world risk scenarios in your professional career.
Practice Test
True or False: The process of identifying risk origins is crucial for effective risk management.
- True
- False
Answer: True.
Explanation: Identifying the origins of risk provides a foundation to understand the root causes of risks and develop effective risk management strategies.
Multiple select: Who can own a risk in a project?
- (a) Project Manager
- (b) Project Team Members
- (c) Stakeholders
- (d) All of the above
Answer: (d) All of the above.
Explanation: Risk can be owned by any individual or group involved in the project who has the capability to manage the risk.
True or False: External risks are easier to control than internal risks.
- True
- False
Answer: False.
Explanation: External risks, such as changes in government policy or market instability, are often beyond the control of the project team.
Single select: Internal risks arise from _.
- (a) Natural phenomena
- (b) Organizational structure
- (c) Political instability
Answer: (b) Organizational structure
Explanation: Internal risks are associated with the organization’s processes, people, or systems, like organizational structure.
Multiple select: Which of the following are examples of internal risks?
- (a) Earthquake
- (b) Inadequate training
- (c) Faulty equipment
- (d) Government policy changes
Answer: (b) Inadequate training, (c) Faulty equipment
Explanation: Both inadequate training and faulty equipment are examples of internal risks because they are within the organization’s control and arise from its operations.
True or False: Risk owners are always on the project team.
- True
- False
Answer: False.
Explanation: While often the case, risk owners could also include stakeholders, sponsors, or any other individual or group who can manage the risk.
Single select: Which kind of risk is most directly related to operational capabilities?
- (a) Technical risk
- (b) Market risk
- (c) Strategic risk
Answer: (a) Technical risk
Explanation: Technical risks are related to operational issues such as equipment failure, process inefficiency, etc.
True or False: Risk ownership is the sole responsibility of the risk management team.
- True
- False
Answer: False.
Explanation: Risk ownership may be assigned to any individual or group who has the ability to manage that risk, not just the risk management team.
Multiple select: What are key factors in establishing risk ownership?
- (a) Level of risk
- (b) Skills and resources to manage the risk
- (c) Budget constraints
- (d) All of the above
Answer: (d) All of the above
Explanation: Various factors like risk level, resources, and budget constraints influence who is best suited to own and manage a particular risk.
True or False: Internal risks can be predicted with complete accuracy.
- True
- False
Answer: False.
Explanation: Although internal risks are often within an organization’s control, they cannot be predicted with complete accuracy due to the inherent uncertainty in risk forecasting.
True or False: An identified risk owner has the responsibility to monitor and control the risk.
- True
- False
Answer: True.
Explanation: A risk owner is accountable for managing, monitoring, and controlling the identified risk effectively.
Single select: Could changes in legal regulations be considered as external risks?
- (a) Yes
- (b) No
Answer: (a) Yes.
Explanation: Legal regulations are beyond the control of an organization and are, therefore, considered external risks.
Multiple select: What are elements of risk origin?
- (a) Cost
- (b) Schedule
- (c) Scope
- (d) Quality
Answer: (a) Cost, (b) Schedule, (c) Scope, (d) Quality
Explanation: Any change in cost, schedule, scope and quality can be an origin of a risk.
Single select: Does regularly updating the risk register help in effective risk management?
- (a) Yes
- (b) No
Answer: (a) Yes
Explanation: Regularly updating the risk register keeps track of the risk origin, risk owner and risk response, thus helping in effective risk management.
Interview Questions
What are the two main categories for identifying the origin of risks in a project?
The two main categories for identifying the origin of risks are internal and external.
What is an internal risk?
An internal risk is a risk that arises from within the project and can be controlled and managed by the project team.
What is an external risk?
An external risk is a risk that originates outside the project. These are outside the control of the project team and need to be managed or mitigated by external persons or organizations.
Which risk type can be controlled by the project manager?
The project manager can control internal risks.
Who takes ownership for an external risk?
Typically, the stakeholder who has the necessary capability and influence over the external environment may take ownership for an external risk.
Can a single risk have multiple owners?
Yes, a single risk can indeed have multiple owners. Ownership may be shared among multiple stakeholders based on their involvement or impact on the risk or its outcome.
What is meant by risk ownership?
Risk ownership is the assignment of a person or organization as a risk owner. A risk owner is responsible for responding to the risk and managing it through its lifecycle.
How can risks be identified in a project?
Risks can be identified through various methods like SWOT analysis, brainstorming sessions, Delphi technique, using checklists, and conducting interviews among other techniques.
Why is it crucial to establish risk origin and ownership in risk management?
Establishing risk origin and ownership is crucial because it helps to ensure that the right resources are allocated to manage each risk, and that each risk is managed by someone with the appropriate authority and influence.
Can risk ownership be transferred?
Yes, risk ownership can be transferred. However, the transfer should be formally documented and communicated to ensure that the new owner understands their responsibility.
Can internal risks turn into external risks or vice versa?
Yes, changes in project conditions, environment or scope can lead to internal risks becoming external and vice versa.
What happens if a risk owner cannot be committed for an internal risk?
If a risk owner cannot be committed for an internal risk, an alternative risk owner with sufficient authority and knowledge should be assigned.
Is it possible for an external risk to be unmanaged?
Yes, an external risk may be unmanaged if its ownership is not assigned or if it’s beyond the control of the project. In such cases, contingent plans need to be in place.
What is the role of the project manager in managing external risks?
The project manager plays a key role in coordinating with the external owners of these risks and incorporating their risk response plans into the overall project risk management plan.
Are project risks always negative or can they be positive as well?
Risks can be both negative (threats) and positive (opportunities). Both types of risks must be identified and managed effectively in every project.
extutorials.com