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Shagirova Z. Z.
Suleyman Demirel University, Kazakhstan
Overview of risk management
One of the most
popular area among researchers and practitioners of project management is the
risk management. Risk management has become essential section of the project
management. There are many examples for this. For example, risk management is
one of the main parts of Project Management Body of Knowledge (PMBOK). In
addition to this, risk management is considered as major area in official
publications of such institutions as Office of Government Commerce, UK
Association of Project Management, British Standard Institute and etc.
The importance of
risk management is increasing every year. When it became crucial to sell products
to different customers in various locations, top managers mostly came from
marketing sphere. Due to the reason that in the last few years financing issue
became crucial to the companies, top managers were from finance specialists. In
the nearest future, most of the executives will rise from risk specialists due
to the fact that risk management becomes very important for business continuity
of every company.
According to the
survey among construction project managers the main reasons for using risk management
is following: to control risks in order to increase profit, to decrease number
of unsatisfactory projects, to quantify potential risk exposure, to make sure
that reputation will not be harmed. The first industries, that recognized
importance of the risk identification and risk assessment, were construction
and military industries.
The main
objective of risk management is providing sustainability to the whole
organization. By identifying and analyzing all possible threats and
opportunities risk management helps to achieve good results and avoid losses.
Risk management should be dynamic process. It should consider vision, culture
and other important aspects of the organization.
However, not all
project managers believe that risk management is an important area. Many
project managers fully believe that risk management is a waste of time and
money. One of the main reasons for not using risk management procedures is that
such project managers think that it is impossible to identify and control all
possible risks of the project.
Some of the
practitioners see risk analysis as partially gambling and partially
mathematics. While, good risk analysis is only good support tool for decision
making. Risk analysis is a structured way of collecting information for further
decision making.
Each project
should have different risk analysis strategies, tools, techniques and etc. Risk
analysis methods and strategy should be chosen based on importance of the
project, complexity of the project and data reliability.
Economist
Intelligence Unit (2007) identified main internal and external drivers of risk
management. According to their survey main internal driver of risk management
is commitment from board of directors. So, effective risk management should be
motivated from the top. Other important internal drivers are greater complexity
of value chain, latest risk event, such as fraud, crash or product recall.
The main external
driver of risk management is regulator. Close attention of regulators can
significantly increase performance of risk management in the company. One of
the reasons for increasing popularity of risk management is increased focus of
regulators in recent time. Another important driver that can strengthen risk
management is demand from investors for greater disclosure. Macroeconomic
volatility, pressure from customers, political instability can be effective
drivers of risk management too.
Understanding
about risk and risk management is known from ancient times. However,
researchers do not know exact history of appearing the word “risk”. Giddens
stated that it is a Spanish word, which means “rock”. Almost the same was
stated by another researcher, who said that it is a Latin word, which means
“the challenge posed to a sailor by a barrier reef”. Fishburn stated that “risk” means “bad event”. Practically the
same definition was said by Statman and Tjebjee. They said that it is “a high
probability of failure”.
Risk – possibility
of meeting danger, suffering loss, etc. Peeger described risk as: “Risks are an unwanted events/ factors/
threats that have negative consequences”. Delivering project on time and within
the budget is directly depends on the ability to manage risks. Because of this,
the main aim of risk management is identification and management of project risks.
Nowadays, more and
more people tend to say that risk has a neutral meaning, which means it can
have positive and negative meanings. According to some of the literature risk
had a neutral meaning in the past. For example, Wharton stated that this is a
Arabic word, which means “something from which you draw a profit”.
Furthermore, every
person has different understanding of the word risk, based on his experience,
character, education. A lot of researchers stated that the word “risk” is very
broad. For instance, Das and Teng assumed: “The term “risk” seemed to be one of
the most commonly abused concepts in social science”.
There are a lot of
debates about when to use risk management procedures, earlier or later in the
project life cycle. It is very difficult to introduce risk management at the
early stages of project life cycle, due to high uncertainties. Objectives and
deliverables are not accurately stated at that stage. Project is more flexible
at that stage. Usually it is proper to use such techniques which are more
qualitative, informal and creative.
Project risk
management has various stages. For example, Boehm stated that project risk
management has two main stages, risk assessment and risk control. Risk
assessment contains such sub-stages as risk identification, risk analysis, risk
prioritization. And risk control contains following sub-stages: planning,
tracking, corrective actions. Another researcher divided PRM into following
processes: identification, assessment, development mitigation strategy,
monitor, contingency plan, crisis management and recovery. Software Engineering
Institute identified five stages of PRM, which are identification, analysis,
response planning, tracking, and control.
Even if there are
a lot of different classifications of project risk management phases, all of
them contain the same processes. Generally there are main five phases of PRM:
planning, identification, analysis, response and control. Initially, it is
necessary to plan your risk management strategy, appetite. Then, it is needed
to identify all possible risks. Relevant risks should be analyzed using
different risk management tools and techniques. There is a need in proper
response for previously analyzed risks. And finally, it is necessary to monitor
and control the risk management activities.
Currently risk
management has become essential part of project management. Role of the project
risk management has significantly risen during current global economic
downturn. Finally, considerably more work will need to be done to analyze risk
identification tools that are suitable for identification of positive risks.
More research is needed for better understanding about those issues.
References:
1. Akintoye, A. and MacLeod, M., 1997. Risk analysis and management in construction.
International Journal of Project Management, 15, pp.31-38
2. Kaplan, R. et al., 2009. Managing risk in the new world. Harvard Business
Review, October 2009, pp.69-75
3. Kasap, D. and Kaymak, M., 2007. Risk identification step of the project
risk management. In: Portland International Center for Management of
Engineering and Technology, PICMET’ 07:
Management of Converging Technologies. Oregon, USA 5-9 August 2007.
Portland: PICMET.
4. Kindinger, J. and Darby, J., 2000. Risk factor analysis – a new qualitative
risk management tool. Project Management Institute Annual Seminars and
Symposium. Houston, USA 7-16 September 2000. Los Alamos National Laboratory:
Los Alamos.
5. Kutsch, E. and Hall, M., 2010. Deliberate ignorance in project risk
management. International Journal of Project Management, 28, pp.245-255
6. Lucidus Consulting, 2008. Always look on the bright side of life? Project
Management Today, june, pp.20.
7. Peeger, S., 2000. Risky Business: What we have yet to learn about risk
management. The Journal of Systems and Software, 53, pp.265-273
8. Raz, T. and Michael, E., 2001. Use and benefits of tools for project risk
management. International Journal of Project Management, 19, pp.9-17
9. Taylor-Gooby, P. and Zinn, J., 2006. Risk in social science. New York:
Oxford University Press Inc.