Here's How to Effectively Manage Risks in Your Next Project

As a project manager, balancing many different skills is imperative, and risk management is one of the most critical. This subtle art entails anticipating potential hurdles and adeptly addressing their repercussions.

In this article, we'll examine the diverse types of project risks, emphasize the importance of strategic risk management, and offer practical guidance to ensure you effectively manage risks in your upcoming projects.

Ready to establish yourself as a project manager with the foresight and expertise to tackle future challenges head-on? Let's begin!

What are the types of project risks?

Project risks are potential obstacles that could negatively impact project success. Although they might only sometimes come to pass, their occurrence can create significant challenges for the project, project manager, and organization.

Here are 10 common types of individual project risks in project management:

1. Scope creep: When a project's scope expands beyond the initially agreed parameters, leading to delays in the timeline and increased costs.
2. Budget overrun: When the project's expenses surpass the approved budget, potentially straining financial resources.
3. Timeline delays: When a project or its phases take longer than anticipated, causing ripple effects on other project or program timelines.
4. People constraints: When a lack of available personnel or missing skillsets hinders the project's completion within the desired timeframe or quality level.
5. Resource constraints: These constraints or insufficient resources, such as equipment, tools, and materials, prevent a project from staying on track and maintaining acceptable quality levels.
6. Communication issues: When communication breakdowns between people or teams involved in a project lead to confusion and errors.
7. Technical issues: When problems with the technology required for or supporting a project cause delays and quality concerns.
8. Performance issues: When a completed project fails to yield the intended or necessary results despite staying within the scope and on time and budget.
9. Legal and regulatory issues: When new or changing laws, regulations, or policies directly affect a project's ability to stay on track.
10. External factors: When factors beyond the project manager's or organization's control, such as natural disasters, impact a project's scope, timeline, or budget.

While a project manager is responsible for identifying all these project risk types during the project planning process, they must also be aware of their organization’s strategic risks when working on any project.

The importance of strategic risk management

Strategic risks operate at the organizational level and can have severe long-term consequences. These risks are typically identified and managed at the board level, but project managers must also be familiar with them.

By understanding strategic risks, you can identify any connections between your projects and these risks. For instance, a project may involve risks that, if not managed effectively, could result in a strategic risk.

This is where strategic risk management comes into play.

In their April 2011 paper “What Is Strategic Risk Management?,” Mark L. Frigo and Richard J. Anderson define strategic risk management as:

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<quote>“...a process for identifying, assessing and managing risks and uncertainties, affected by internal and external events or scenarios, that could inhibit an organization’s ability to achieve its strategy and strategic objectives with the ultimate goal of creating and protecting shareholder and stakeholder value.”</quote>

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While this definition may seem complex, it effectively captures the critical elements of strategic risk management.

So, to become a strategic partner and advisor in terms of risk, make sure you:

• Familiarize yourself with all strategic risks and understand how they’re connected to project risks. This will enable you to contribute to strategic risk management, which typically involves frequent communication and agreements with senior stakeholders.
  
• Address a project risk that’s linked to a strategic threat from the outset. Define the risk management plan (including a mitigation plan) and ensure the project team is acutely aware of the risk's importance to the organization. Heightened awareness ideally leads to increased vigilance, attention to detail, higher quality levels, and early identification if a risk grows in likelihood.
  
• Ensure that senior stakeholders are fully informed. Mainly, they should be fully aware of projects with risks linked to the organization's strategic risks and keep them regularly updated on the status of those risks. Failure to do so may result in organizational leadership being unaware of current threats to their operations, causing your risk mitigation plan to become outdated and introducing additional risk.

Eight steps for managing project risk more effectively

Still, you need to pay close attention to project-based risks and conduct risk analysis early on in each project. Let's look at steps project managers can use to manage risk effectively.

1. Identify

The first step in managing risk is risk identification—the process of identifying all potential hazards.

Instead of attempting to identify risks alone, a project manager should involve as many project stakeholders as possible. Conduct one or several risk workshops with the project sponsor, key stakeholders, people with historical knowledge of similar projects, and project team members.

As each risk is identified, add it to a risk register, ensuring that it captures all the necessary information.

2. Assess

Once the risks are identified, the workshop attendees should evaluate the likelihood and impact of each risk using a scoring system—what we call project risk assessment.

Determine a simple overall risk score using the formula:

Risk score = impact x probability

Number ranges can help to estimate the probability of a risk, e.g.:  

• Score 5 - Highly likely - 91% chance of the risk becoming an issue
• Score 4 - Likely - 60-90%
• Score 3 - Possible - 41-60%
• Score 2 - Unlikely - 11-40%
• Score 1 - Highly unlikely - 0-10%

Remember that these risk scores are estimations based on the available knowledge at that time and should be regularly revisited and updated.

3. Prioritize

Determine each risk's overall severity or priority using the combination of likelihood and impact. By prioritizing risks this way, project managers can focus their energy on high-severity risks while paying less attention to low-severity risks.

During this stage, it's essential to consider the project stakeholders' risk appetite, as their perspective might influence the prioritization of risks.

4. Mitigate

With risks identified and assessed, it's time to explore strategies for risk mitigation and risk response. The purpose of this process is to reduce the likelihood of them materializing and becoming issues.  

Typically, there are four ways to go about a mitigation strategy, and this could also be added as a column to your risk register:

1. Avoid: When you bypass the activity area to reduce a risk/threat to zero.
2. Reduce: When you can't or don't want to avoid the activity area, you can look at ways to reduce the likelihood of a risk becoming an issue, e.g., increased testing, allocating more people to a task or phase, or tightening up processes.
3. Transfer: When you give ownership of a potential risk to a third-party company to manage it. This will require funding that you have not planned for.
4. Accept: When a risk is deemed worth considering the benefits the associated activity could bring to the project and organization.

Collaboration with stakeholders is crucial in this step, as stakeholders' risk appetite may influence the chosen risk management process.

5. Create contingency

Develop a contingency plan for each risk, outlining specific action steps and who should be involved if a risk becomes an issue.

Allocate more time and effort to higher-priority risks, as there is less value in creating detailed contingency plans for low-priority risks. Each objective should be clear, concise, and actionable.

6. Assign responsibilities

Assign individual owners to each risk, ensuring they are clear about their role in risk management. The owner is responsible for monitoring, assessing, and managing each risk with the project manager's support.

It's crucial to avoid complacency and ensure that the risk register and each owner's responsibilities are always in focus.

7. Monitor

Continuously monitor the risk register and facilitate review sessions with owners, ensuring risks are regularly updated.

This is where most risk management plans fall down. A risk register is created at the start of a project and forgotten about. This is a big mistake.

Remember that a risk register should be a living document, with the project manager making sure risks are always on everyone's mind.

8. Communicate

Communication is perhaps the most important of all risk management practices. Regularly communicate risks and their status to the project team and stakeholders.

Effective communication includes sharing information about the likelihood, impact, priority, mitigation, owners, and contingency plans for individual risks.

In an ideal world, the stakeholders would have been involved in the initial risk workshops, but often, they don't attend. Either way, once the initial risks have been identified and assessed, they should be sent out to both the project team and stakeholders so all can see the likelihood, impact, priority, mitigation, owners, and contingency plans.

Always ensure everyone is aware of the overall project risk status, and keep stakeholders engaged throughout the project lifecycle.

➡️ Steal our project status report templates to ensure you include everything important in your status reports.

Embrace and master the risk

Conquering project risk management is a non-negotiable skill for any project management professional, as it dramatically increases the likelihood of a flawless project journey. Why is this so vital?

Because even with the most precise planning, all projects are bound to encounter hurdles. A top-notch project manager will foresee these potential curveballs, devise a custom strategy for each, and implement those plans skillfully.

By keeping stakeholders in the loop and actively engaged, you can nimbly navigate things back on course with minimal disruption, paving the way for a successful project.