While working on a project the first thought that crosses the mind of any individual is ‘how could this go wrong?’ and as much as demotivating and negative this statement sounds, individuals have to keep in mind that despite all their efforts there might be chances that the outcome may not turn out as planned. To avoid such circumstances individuals, as well as entrepreneurs, need to have a contingency plan or preventive strategies in action when required.
Risk management is the process of reducing any potential damages that an individual might encounter which leads to delays in the project’s ending time. This process requires identifying, categorizing, and analyzing the risk factors and drafting preventive measures to avoid the risks altogether. Several risks could delay your project’s timetable, these include shortage of raw materials, any fault in the technology being used, shortage of labor, and several other factors.
These risks could be further categorized in terms of cost, timetable, and performance. Other types of risks include governance risks, strategic risks, operational risks, market risks, legal risks, and external hazards, these risks are the risks that are beyond the control of the individual or company and risks that are prevailing in the market. These risks are unexpected and out of control for the company, and if in case they do occur it can completely ruin the project’s course of action and its completion time. All the risks mentioned above are enlisted below:
Cost: This type of risk involves any errors that occur while assigning budgets or associating costs. Any overestimation or underestimation of cost or budget will not only waste resources but will also lead to high cost putting the entire project in jeopardy.
Timetable: This occurs when there is any glitch or delays in the schedule, such as delays in the production process due to machine breakdown or faulty products. This will disrupt the entire process because if one task is delayed, it will also affect the other tasks simultaneously that are dependent on it.
Performance: These are the factors that occur when the results are not following the pre-set targets.
Other factors
Strategic risks: These are the risks that occur as a result of poor strategy formulation such as working on a project that requires highly qualified machinery but the company choosing to work on faulty machinery so if in case the machine breaks down, there will be project delays.
Operational risks: These types of risks occur as a result of poor operations plans. This might involve poor planning in procurement, production, and distribution of goods or services that are being produced. Delays in raw materials, poor quality or damaged products, poor transportation services, etc.
Market Risks: These are the risks that are prevailing in the market but will directly affect your project performance. These risks might include factors like your current competitors, exchange rate, interest rate, rate of inflation, market share, as well as credit risks.
Legal Risks: Legal risks might include any rules or regulations set forth by the government that the company has to follow. If in case the company does not follow these rules it may result in a lawsuit against the company and not only will it cost huge amounts of money but will also greatly damage its reputation along with delays in the project.
External risks: External risks generally include environmental factors like natural disasters including thunderstorms, floods, or earthquakes. Other factors include labor strikes or terrorism prevailing in the country.
Risk Management Process
To avoid risks and complete the project within the given time, individuals must follow a series of steps to ensure that. Entrepreneurs must respond to the changing environmental dynamics as well as the prevailing threats and opportunities that could hinder their project. The risk management process has six steps that are as follows:
Identifying the risk: The most basic part of the risk management process requires identifying the risk because you cannot solve a problem unless you know what it is. There are several ways to identify the root causes, you can hold interviews with people of relevant experience or brainstorm with your team members or use past information and data and use it to prevent future risks.
Analyzing the risk: The next step is to analyze the risk, which is generally the hard part because you need to have enough information and authentic methods to analyze it. Risk analysis can be done using both qualitative and quantitative methods. The risks are subdivided into two categories depending on the probability of their occurrence, and how severe will be the consequences if they occur. Both of them are given a value ranging from high, medium, and low.
Evaluating the risk: The third step is to evaluate the risk. Different risks are analyzed based on the severity of the impact and consequences they might have. Any risk that might result in a huge amount of loss is given the highest priority and attention. This is the reason why risks are categorized using a scale because it gives the individuals and entrepreneurs a clear idea of what their main focus should be.
Treating the risk: The next step requires the individual or entrepreneur to treat the risk and eliminate the damage it might cause. In this step, expert views are taken into consideration who have hands-on experience with the chosen risks, this usually includes conducting meetings. However, cooperation and effective communication are nearly impossible to achieve in these meetings. It is difficult to involve all the stakeholders and the management in these meetings.
Monitor the risk: The final step of the risk management process is monitoring the risk, this requires keeping a close eye on the risk factors. However, it is to be noted that not all risks can be eliminated or are to be dealt with because removing them is nearly impossible. Like for instant external factors related to the economy such as economic recession or environmental factors such as an earthquake.
The story is produced by Ayesha Saeed, one of the contributors to the SOL Community.