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Monday, June 11, 2012

Types of Risks

Risks come in various types and categories. In many cases, the distinction between Risk Types and risk Categories is not very clear-cut. What some people may consider as a type others may consider that a category and vice versa. The important point here is that, in order to do our jobs well, we need to understand our organizations distinction between the Risk Types & Risk Categories. Nonetheless, we must understand all these classifications and must be able to apply them on the job.

In this blog, we will consider Risk Types & Risk Categories as two distinct entities based on my understanding of these topics.

Types of Risk:
Risks can be classified as follows:

1. Business Risks
2. Pure Risk
3. Known Risks
4. Known Unknown Risks
5. Unknown Unknown Risks
6. Risk Classification based on Impact to the Project Objectives

Business Risks

A Business Risk refers to a possibility of a gain or loss that may affect our project/business. This means it can either be a threat or an opportunity.

Pure Risks

Pure Risks are those risks that cause only losses. Typically, most of these Pure Risks are Insurable. They can be further sub-classified as:
a. Direct Property Damage Risks – Risks that arise out of property damage due to natural calamities like floods, fire etc
b. Indirect Property Damage or Losses. Ex: Business Operations are disrupted, Removal of Debris due to a direct property damage, inability to finance expenses etc
c. Legal Liabilities – Lawsuits for injury to people or damages claimed due to faulty design etc
d. Personnel Related – Injury and liability due to injury to employees which includes medical treatment, maintenance as well as replacement labor cost

Known Risks

Known Risks are those risks where the Risk is Clear and there is no unknown information about the risk. In other words No Uncertainty Exists

Known Unknown Risks

Known Unknowns are those risks where we are well aware of the risk but we do not know when it will occur or what the impact will be. For ex: When we buy a car, we know that it needs to be serviced regularly otherwise it will breakdown. This is a known risk. Just exactly when the car will breakdown is the unknown part of this risk. Isn’t it?

Unknown Unknown Risks

Unknown Unknowns are those where we are practically clueless about either the risk or its impact or its timeliness. What would happen if a Tsunami were to strike the coast tomorrow morning while we are jogging? Is this something we can plan or foresee?

Apart from the above types of Risks, we can also classify risks based on the Project Objective a risk would impact. They are:
a. Scope Risks – Risks that are related to changes to the Project Scope (Ex: Scope Creep)
b. Quality Risks – Risks that are related to the Projects Quality Standards (Ex: Missing Quality checks)
c. Schedule Risks – Risks that are related to the Projects Schedule (Ex: Missed Delivery dates)
d. Cost Risks – Risks that are related to the Projects cost (Ex: Budget Overruns)

Prev: Risk Definitions

Next: Risk Categorization

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