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Risks are a part of our everyday life. They're all over the place. When you drive, cycle, play a sport, invest in shares and nurture a relationship risks are involved. Though risks usually have a negative connotation they can also be positive. However, they need to be identified beforehand so you'll know how to react to them when the time comes. Otherwise, your path towards the objective will most definitely be hampered. You might even have to abandon the journey. To avoid this, you'll need to first understand risk identification and assessment. You can then apply the principles not only to project management, but to other activities in your daily life.
In this article, let's start by describing risk identification.
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What is Risk Identification?
As the name suggests, risk identification is the act of identifying negative and positive risks that impact an objective. For example, suppose you are planning a holiday in the Bahamas. After spending several thousand dollars, you've bought the tickets and booked your rooms in a luxury resort. A couple days before taking the flight, a hurricane hit the Bahamas and all resorts are closed. Your holiday is cancelled and now you're looking for refunds and an alternative holiday location. This situation could have been avoided if you knew when hurricane season was. So, in this case:
Risk Identified: Hurricanes
Not identifying risks can have drastic, costly, and even deadly consequences. Here is another example that illustrates the severity of not taking risk identification seriously.
1Recently, there was an oil spill in the gulf of Mexico, off the coast of Louisiana. The company responsible was British Petroleum (BP). One of the reasons why the spill happened was because of a casing. From several casing options, BP chose to use a riskier casing, probably for financial reasons. In the long-term and as we all know now, the cost savings by using this casing weren't justified. BP lost billions of dollars trying to stop the spill and paying for other damages, such as environment and local fishermen losses.
RIsk Identified: Oil Spill Due to Casing
Although there is no way you can identify all the risks impacting a project, brainstorming techniques may help you to identify the most important.
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What is Risk Assessment?
After a risk has been identified, it needs to be assessed both qualitatively and quantitatively. Risk assessment is when you gauge the consequence of the risk. In simple terms, the probability and impact of the risk is taken into account. Let's go back to the Bahamas vacation example. In this case, the probability of hurricanes hitting the island is dictated by the season. If you go during hurricane season, the risk assessment will indicate a high probability. The impact on the vacation after a hurricane has hit would be constant for both hurricane and non-hurricane seasons. In this case, the impact is abandoning the vacation. That's terrible isn't it? Well you can avoid this consequence by having an appropriate risk mitigation strategy in place.
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What's the Difference?
The key difference is that risk identification takes place before risk assessment. This is logical because for you to assess anything, you first need to identify it. Risk Identification tells you what the risk is, while risk assessment tells you how the risk will affect your objective. The tools and techniques used to identify risk and assess risks are not the same. To learn more about managing risks, refer to this Project Risk Management article.
- 1) Crude Awakening, PM Network, August 2010
- Image Credit: SXC