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Monday, June 11, 2012

Risk Categorization

As explained in the previous chapter, the distinction between risk categories and risk types is pretty blurred. The distinction you find in this blog is what the majority of the project management world goes with. However, don’t be surprised if your organization goes by a different yardstick when it comes to classifying or categorizing risks.

There are way too many categories of risks and as I said before, every company uses its own risk categorization standards. As per the PMBOK guide the term Risk Category refers to “A Group of Potential Causes of Risk”.

Why do Risk Categorization?

Did you think of this? Why go through the pain of categorizing these risks when we are anyways going to list them all down in the Risk Register and handle them?

The whole purpose of Risk Categorization is to systematically identify risks in a consistent manner and organize them so that they can be better managed. It also helps to identify the root causes of these risks in a better way. A Risk Breakdown Structure or RBS is a classic example of this Risk Categorization idea. The RBS splits risks into categories and then splits them further into sub-categories thereby making our lives (The life of a Risk Manager) easier.

The above is a sample RBS where we have classified the risks for a project into 3 broad categories:
a. Internal
b. External &
c. Project Management

Each of these categories has been further split into 3 sub-categories. A typical RBS can have as many categories & sub-categories as you want. The 3 above is just an example…

How to Proceed with Risk Categorization? – For New Project Managers:

If you are a new Project Manager or new to the Organization where you are managing your projects and are not too sure of how to proceed with this Risk Categorization exercise, don’t worry. Check out previous projects that were similar to yours from the archives and see how the categorization was done. Or you could check with commercial templates based on which industry you work on. Or even better, check with other PMs in your company and check how they completed this activity for their project. This way you will have enough information to proceed with and perform a good quality categorization…

Practically speaking, there is no master list of categories that you can use for your project. It changes from project to project, from industry to industry and most importantly as I have said numerous times before, from company to company. Nonetheless, to get you started in the right direction, below are some broad categories that can be used in a majority of the projects that you may encounter in your life. A word of caution here is that, the list below is not complete and only the starting point for you to improvise on…

1. Internal
2. External
3. Environmental
4. Economic
5. Political
6. Market
7. Process
8. Third-Party
9. Business
10. Operations
11. Organizational
12. Infrastructure
13. Culture
14. Technology
15. Human Resources
16. Legal
17. Financial
18. Project Management
19. Security
20. Etc.

Prev: Types of Risk

Next: Managing Uncertainty

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