Importance of Risk Analysis
Risk analysis is an important and vital part of project management. A good risk analysis takes place during the project planning phase. These are things we know. What sometimes isn’t clear is exactly how that risk analysis should take place. Sometimes the hardest part of undertaking a project is getting things started. In this article, I hope to take you through the steps of risk analysis in a salient way. For our risk analysis example, we will be using the example of remodeling an unused office to become a break room for employees. Through working through the risk analysis with a simple example, you can become familiar with the process before you need to use it in a project.
Step One – Identifying Project Steps
Many guides on risk analysis will start by having you jump into the risk analysis process by having you identify project risks. I want you to stop before you do this and first identify important project steps. The reason you want to make sure you’ve already performed decomposition and come up with a rough work breakdown structure is that you will know the steps that are involved in your project. In our example, there might be the following project steps:
- Remove current office furniture, wall furnishings, etc.
- Hire a contractor to insert a sink (let’s say the office was next to a restroom) and some cabinets
- Upgrade flooring
- Purchase refrigerator
- Purchase microwave
- Purchase tables and chairs
- Purchase bookshelves (in case you have literary employees, it is nice to have reading material in the break room)
Complete this list on your own. Imagine that you are able to construct the ultimate employee break room. What features would you want? Don’t move on to step two until you’ve compiled your list of possible project steps, but don’t take too long compiling this list either.
Step Two – Identifying Potential Threats
Now that you have a rudimentary list of action items for your remodeling project, it is time to identify potential threats. According to a MindTools article covering project risk analysis, there are many types of threats to a project, including:
- Human – These are risks stemming from risk to individuals. Perhaps you remodel the break room and the employees don’t like it, or the new carpeting causes some employees to become ill.
- Operational – These are risks that have to do with distribution, obtaining supplies necessary, etc. In the remodeling example, perhaps there is no possibility of installing a sink, or the sink installation winds up being a larger chore than necessary.
- Reputational – Loss of confidence from employees or a damage to the reputation of the company. Perhaps remodeling takes longer than expected and thus the employees lose faith in the fact that the break room will ever be finished. Alternatively, it could be that the public thinks the funds are being mis-spent.
- Procedural – These are risks associated with fraud, loss of productivity,etc. The remodeling may cause a disruption in work due to the noise level generated by the contractors.
- Project – Project risks have to do with over-runs, jobs taking too long, etc. When remodeling, as we know from remodeling homes, often the project takes much longer than estimated.
- Financial – Anything that has to do with the financial health of the project and company. The break room may wind up costing much more than budgeted for.
- Technical – This has to do with failed technology. What might go wrong with the break room example that is technical?
- Natural – Threats from weather, disease, etc. Perhaps while remodeling, there is an earthquake that destroys the progress made. What other natural risks might occur in a remodeling project?
- Political – Changes in government policy, taxes, etc. Perhaps local policy will change governing the requirements for employee breakrooms.
- Others – You get the idea. Come up with your own list of potential threats based upon the list you created. Don’t continue to the next page until you’ve identified potential threats for the break room example.
Step Three – Estimate the Level of Risk
Here is where risk analysis begins to get tricky. You’ve thought out the steps of the project, and you’ve even identified potential threats to the project. Now you need to estimate how likely each of those threats are to occur. For example, it is much more likely that the remodeling project will run overtime than it is that a tsunami will hit your office (unless, of course, your office is in a tsunami zone!). Nonetheless, it’s time to take that list you made of potential threats. First you will go through each threat and give it a number between one and ten, with one being highly unlikely and ten being most likely. Your list might look like this:
- Remodeling takes longer than expected – 10
- Remodeling goes over budget – 10
- Tsunami hits building making remodel obsolete – 1
- Earthquake strikes – 2
- Contractors cannot get sink installed – 7
Once you have assigned a number to each of your potential risks, go back through the items. Now, you will assign a cost to each of those risks. The cost you will assign is the amount of money it would take in order to fix whatever went wrong. For example, perhaps someone drops the microwave on the way up the stairs to the office and it breaks. It might cost $100 to repair this. Continue to assign a value to each of the items until all values have been assigned. Finally, before moving to the next step of completing a risk analysis, multiply the likelihood of an event occurring by the amount of money that event would set you back. This will give you the value of each risk.
Putting it All Together…The Risk Management Plan
Once you have performed your risk analysis, you will want to create a risk management plan that takes into account all potential risks. To do this, you will need to come up with a plan for each risk, should the event occur. If the remodeling takes longer than expected, what will you do? If contractors cannot install a sink what will you do? There should be a "Plan B" and even a "Plan C" for each action on your list should it involve some level of risk. For example, if it turns out your employees are allergic to a brand of carpet, you will need to procure a different type of carpet for your break room. Go ahead and come up with a plan for managing risk in our project.
After you have come up with how each of the risks will be addressed (the final step of your risk analysis) you will want to write it up in a formal plan. Other items to include in a risk management plan would include a communication plan – should something go wrong who should be notified, an allocation plan – should something go wrong who’s in charge of fixing it, and a risk reserve plan. By taking time to perform a careful risk analysis, you can help boost the chances of success for your project.