Every project or enterprise contains an element of chance. To ensure the best chances of success, project teams and planners need to conduct a risk analysis, considering the possible impediments to the project, the likelihood they will occur, the kind of impact they would have, and how to avoid them. By doing a thorough risk analysis, project teams can go forward knowing what could derail their efforts.
What is project risk analysis?
Risk analysis is about understanding what could go wrong with a project and then evaluating the probability of each risk occurring. Risk analysis is an essential component of project risk management, which is the overall process employed by project managers to lessen the impacts and deal with risk. It includes risk identification, assessment, response development, and response control.
Risk analysis tries to determine how likely a risk is to happen and how it might affect the budget, timeline, and quality of a project if it happens. Quantitative and qualitative are the two chief methods of analyzing risk.
Types of project risks can include:
- Known risks: These are apparent to everyone on the project during the planning stage, allowing for considered responses to avoid or minimize their impact.
- Unknown risks: These are risks not known at the planning stage and are apparent at first to only a few members of a team.
- Unknowable risks: These are risks that are nearly impossible to anticipate, such as sudden illness among team members, job site accidents, and system failures.
Teams can use risk analysis in several ways in project management, such as:
- Deciding whether to undertake a project
- Anticipating negative events to stop them from happening
- Improving workplace safety
- Preparing for events, such as natural disasters and equipment malfunction
- Planning for industry changes, including new compliance requirements and competitors
Reasons to analyze risk.
Project managers and their teams undertake risk analysis—calculating the likelihood of various undesirable outcomes affecting a project—to avoid or minimize their impacts. The process can help reduce exposure, time, and budget overruns and keep businesses in compliance.
By thoroughly understanding the risks and constraints involved, a project management team has a better idea of pitfalls to watch out for and how to respond if the risk comes to pass. Also, by understanding the probability of certain risks happening and the scope of their impact on the project, the team can better allocate their time and resources planning for, monitoring, and responding to these occurrences.
Other benefits of conducting a risk analysis include:
- Helps deliver a project on time and budget: Adjusting a project’s schedule and budget according to the risks defined helps you put contingencies in place that increase your chance of success.
- Reduces exposure: If the risk is about “exposure to uncertainty,” then risk analysis helps reduce dangerous exposure in processes and activities.
- Puts numbers on risk outcomes: To make the best planning decisions, project managers and teams need to put concrete numbers on risk outcomes—the likelihood they will occur and their cost to the project in terms of dollars and time.
- Creates a culture of risk awareness: Ongoing education about risk management at the team, management, and executive levels helps drive strategy, instill related practices, and create a commitment to managing risk effectively.
- Allows wise allocation of resources: By understanding the size of a threat to a project, a company can put together the necessary resources to address it. Without this commitment, a risk realized can delay or derail a project.
Methods of risk analysis: Quantitative and qualitative.
Risk assessment is not only done at the planning stages of a project. Teams also carry it out during a project’s progress to deal with or circumvent new challenges as they arise. The assessment can involve quantitative risk analysis, qualitative risk analysis, or both methods.
Quantitative risk analysis.
This risk analysis method involves taking identified risks and building a statistical model showing the possible effects on a project. The model considers various outcomes for the endeavor and how likely the team will meet project goals.
Using graphs, scenario planning, or sensitivity analysis, a project manager can better control risks and make the best decisions in key areas, considering costs, schedules, and work goals. They could generate a range of possible outcomes, ranked by likelihood and seriousness.
Qualitative risk analysis.
With the qualitative method, a project manager or risk manager analyzes possible risks by determining how likely each will occur and how much it would affect the project’s outcome. You do not rate them according to quantitative criteria and numbers.
Qualitative risk analysis often operates on a zero-to-one scale, so a risk of 0.5 means a 50% chance of it occurring during the project. A one-to-five impact scale also ranks source- and effect-based risks, with five being the most dramatic impact on a project.
Expert tips for risk analysis.
Being bold in project management and business enterprises is not about leaping blindly into an endeavor. It is a matter of understanding the possible dangers as best you can through risk analysis, so you can take the plunge with the best chance of succeeding. Here are some tips that will give you a better chance of navigating this sometimes-dangerous course.
Identify the most relevant risks.
A project can face all sorts of risks, so it is important to focus on the ones most relevant to what you are doing. Are the risks related to compliance issues, technical ones, business concerns, workplace safety, legal problems, or something else?
While putting together this assessment, it is a good practice to look at past projects and the challenges they faced because they may pop up again.
Take a high-level perspective.
A big project may have many interconnected parts, so it is easy to lose track of the project and priorities as a whole. Adopting systems thinking to a project enables different teams to stay on track with the overall goals. Since they have a clear view of how their work fits into the larger picture, they can better identify and deal with risks as they arise.
Do not consider risks in isolation.
A project may face all kinds of risks. You must understand each and analyze their likelihood of occurring and the severity of impact on cost, quality, or timetable. However, do not put the risk in a silo because this ignores how it interacts with other risks and causes new or more-pronounced problems.
For example, in manufacturing, a supply issue might stop the assembly line, leave the workers with their hourly wages idle, and cause missed delivery deadlines to clients. One problem can lead to another, so view them together to understand the cascade effect.
Assess risks on an ongoing basis.
Risk assessment is not a do-and-done proposition. Once you complete a risk assessment, follow it up with other assessments to ensure completion of the original evaluation, add new learning to the assessment, or catch new risks as they arise.
For example, a project team developing a software package may have assessed a risk that potential customers would reject their offering if not priced similarly to competing products. During the development process, industry intelligence could indicate that a competitor has a similar product in development with more features than yours.
Suddenly, functionality might become a bigger issue than price, forcing the development team to pivot their efforts, adding resources where they had to cut them before.
Put learning into practice.
The more complex a project is, the greater the potential severity of the risks. So, keep a documented register of risks, adding any new learning so that you can fully understand the risks. Then, share your updated findings with the teams and people most affected by them, where changing awareness and practices can help improve risk management.
The records produced should focus on controls, described in concrete, clear language. For example, the marketing risks of not understanding your target demographic’s changing priorities can come at a great cost. Providing directions on how to address specific audiences through marketing materials is essential.
Risk, reward, and uncertainty.
Risk analysis is all about probability, not certainty. Something unforeseen can happen on a project that threatens to derail it. But if you have a culture of risk assessment in your project management process, the unexpected will not throw you for a loop. You will pivot or regroup and find another way ahead.
True risk analysis is about facing unknown business danger, knowing you have the will and means to defeat it.