Section Summary – Communicating Project Risks

In the previous few chapters in this section we learnt about project risk communication process. Let us now quickly summarize what we have learnt so far.

• After we identify risks, the next logical step is to communicate those identified risks to all stakeholders and this is the purpose of this communicate project risks process
• Though project communications management is not directly a part of project risk management knowledge area, communicating risks and regular updates to all key stakeholders is an integral part of risk management
• Psychological factors can influence peoples attitude towards risk which in turn can affect their risk tolerance
• Peoples risk attitudes can be broadly classified into 4: Risk Averse, Risk Tolerant, Risk Neutral and Risk Seeking
• People usually resist change (risks) when it threatens their level of comfort or control or if they are unfamiliar with the change
• Risk Tolerance is defined as the degree, amount or volume of risk an individual or organization will withstand
• The Stakeholder Register and Stakeholder Management Strategy can help us greatly in managing stakeholder expectations in terms of risk communications
• We cannot please or satisfy all stakeholders. So, a smart manager will classify stakeholders and identify the high influence/power category and keep them satisfied as much as possible
• Most stakeholders will require only high level information
• The information that we share with different categories of stakeholders will depend on their interest in the project, influence on the project and a variety of other factors. Simply put “Not everyone wants everything”
• Risk Management Plan usually contains templates and reporting formats that we must use for the different categories of stakeholders

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Communicating Risks to Stakeholders

So far, in the previous chapters, we learnt about risk attitudes and have analyzed the stakeholder risk tolerance. So, the next thing for us to do is “Start communicating” to keep our stakeholders informed of the project progress in terms of risk management.

The PMBOK guide defines a separate process that covers the topic of Managing Stakeholder Expectations. This topic was covered in our PMP prep series in a chapter with the same title Managing Stakeholder Expectations. If you check this process, you will see that the Communications Management Plan which is the output of the Planning Project Communication process is an input. This communications management plan is going to define how we are going to communicate with all our stakeholders.

If you are wondering how, then maybe you forgot about the contents of the communications management plan. I suggest you go back to the chapter on Planning Project Communication and revise the contents of the same. The communication management plan contains stakeholder communication requirements which we will be using along with the Stakeholder Management Strategy to effectively communicate about our project risks.

Most stakeholders will require only high level information regarding risks. They will be typically looking for information like:

a. How accurate the presented information is?
b. Whether there is a potential for gain or loss?
c. Can the risk be managed?
d. What are the recommended responses?
e. What is the impact?
f. Etc.

Along with the above mentioned information you must also be able to provide certain additional information like:

a. Who holds the responsibility for the risk and the related events if the risk were to occur?
b. How often will the risk event occur?
c. What alternates do we have?
d. Etc.

But, as with every communication, there is a problem here. Not everyone wants everything. This is where the Stakeholder Management Strategy and the Communications Management Plan come to our rescue. In these documents we contain details like “Who needs what information” and using that we can try to cater to the varying needs of the different stakeholders in our project.

One last thing about communicating project risks is that, the Risk Management Plan usually contains templates and reporting formats that we must use for the different categories of stakeholders. So, we need to take that into account and ensure that the right reports are sent to the right target audience.

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Next: Section Summary

Stakeholder Risk Tolerance

In the previous chapter we learnt that psychological factors can affect an individual’s attitude towards risk. This attitude directly influences their risk tolerance and as part of managing our project risks, we need to understand stakeholder risk tolerances effectively in order to do our jobs well.

According to the PMBOK guide

Risk Tolerance is defined as the degree, amount or volume of risk an individual or organization will withstand

Simply put, the more risk tolerant you are, the more risks you will take. You can understand this concept of risk tolerance with a real life example. Let’s say that you and I are planning to invest 10,000 dollars each in some stock. The world renowned billionaire Warren Buffet too plans on investing 10 million dollars on the same stock. After a month we see that the stock price has tanked by over 50% and our investment is worth less than 5000 dollars. Can we afford this loss? Probably not because we don’t have millions of dollars of cash in our vault and this 5000 dollars is a lot of money for us. Whereas, Warren Buffet can afford to lose this 10 million dollars probably a 100 times even before he starts to feel money missing in his cash pile… So, we have a much lower financial risk tolerance than Mr. Buffet. Similar to this, every individual has a different level of tolerance when it comes to project risks as well.

Depending on the risk tolerance of our key stakeholders and the risk tolerance of our organization, as project managers we can decide on the level of risks/threats we take in our project. Existing information about stakeholder and organizational risk tolerance can be found in the following places:

1. Enterprise Environmental Factors – Org standards and strategies can give us a fair idea of our organizations risk tolerance
2. Organizational Process Assets – Documents from previous projects like the Lessons learned document or the Risk Management Plan or the Risk Register of a previous project can give you a very good idea of the risk tolerance of both the organization as well as certain key stakeholders

It is important that we understand the stakeholders risk tolerance well because of the following reasons:

1. It helps to correctly assess risks
2. It helps to correctly determine the priority levels of risks
3. It helps to develop contingency plans & reserves
4. It helps to quantify the cost & time contingency reserves
5. It helps to develop acceptable risk response plans
6. It helps monitor risks

So, by now you have got a good understanding of the fact that knowing stakeholder risk tolerance is vitally important in managing our projects risks. So, the next question that must arise in our mind is “How will we assess stakeholder risk tolerance?”

A part of the answer was covered in just the previous paragraph. Enterprise Environmental factors and Organizational Process Assets can help give you a fair idea of the risk tolerances of the key stakeholders and your organization as well. But, where can we find the comprehensive information on this subject?

The full answer is as follows:

During the Project Initiation Phase, we did some activities that fall under the “Project Communication Management” knowledge area which created two important artifacts that will contain extensive information about all stakeholders and their risk tolerance. Those documents are:
a. Stakeholder Register and
b. Stakeholder Management Strategy

The processes that helped us create these documents are:

1. Identifying the Project Stakeholders
2. Stakeholder Analysis and
3. Stakeholder Management Strategy

To Summarize:

The stakeholder register contains the following information about all stakeholders:

1. Identification Information – Things like name, designation, project role etc.
2. Assessment Information – Their primary expectations, requirements, influence levels, what they want, who they are etc.
3. Stakeholder Classification – Classification based on whether they are Internal or External to the Organization/project. Or based on their support level of the project etc.

The Identifying the Project Stakeholders process is going to create this document that will contain the list of all possible stakeholders in our project.

“YOU CANNOT PLEASE OR SATISFY EVERYONE”

Don’t forget the above saying. It is just a general saying but it is 100% true from a Project perspective as well. The everyone in the above statement refers to the project stakeholders. So, essentially we mean here that, we cannot possibly please or satisfy all our stakeholders. But, our aim should be to please as many of them as possible starting with the most influential ones. If you were had to choose between pleasing either your team lead or the Program Manager of your organization who would you choose? Don’t worry, I already know the answer. The Program Manager wins hands down because he is the boss of your project manager who in turn is your team leads boss. So, you tried to please the more influential/powerful stakeholder. This is exactly what we try to do during our project as well. But, how will we know which stakeholder is more powerful or influential?

The Stakeholder Analysis process helps us with that. Based on the outcomes of our analysis we will create the Stakeholder Management Strategy which is going to contain the strategy of how we should go ahead and handle the various stakeholders in our project.

This strategy is vital for the Risk Communication process because, you cannot share everything with everyone. Every stakeholder has a certain information requirement and you can’t be sending out insignificant emails to senior management. The stakeholder management strategy is going to help us with this so that we share only what is required and asked for by each stakeholder.

Last but not least, understanding stakeholder requirements is critical to the success of the Project. So, don’t overlook this activity.

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Next: Communicating Risks to Stakeholders

Factors that Influence Risk Communication

Before we actually start communicating about risks to our stakeholders we need to first understand the factors that can influence this whole activity of Risk Communication. They are:
a. Risk Attitudes and
b. Psychological Factors

Let us take a look at each of these one by one.

Risk Attitudes

Risk Attitudes refer to the individual’s attitude towards risk. The term risk here not only refers to project risks but also those daily risks that we may face in real-life. The whole idea here is to correlate an individual’s attitude towards risk and the influence it will have on the risk communication activity.

In General:
a. A Majority of the people resist change and
b. People usually over-estimate an unfamiliar risk

Given these two facts, it becomes extremely important that, as project/risk managers we factor in these considerations before we actually start managing risks in our project.

You may be wondering why we are worrying so much about people’s risk attitudes. Are you? If so you will be surprised to know that “Risk Attitudes are directly intertwined with Stakeholder Risk Tolerance” and this is exactly why we are talking about risk attitudes. Effective Risk Management involves dealing with stakeholder risk tolerances which means that that you should understand and know the needs of your stakeholders and influence them accordingly.

People’s risk attitudes can be broadly classified into 4 categories. They are:

1. Risk Averse – These are people that are uncomfortable with any form of risk and try to stay away from risks as much as possible
2. Risk Tolerant – These people are generally not concerned about risks and they don’t allow risks to influence their decision. But, they become surprised when the risk becomes an issue. (Remember the term issue we introduced in the chapter on Important Risk Related Definitions)
3. Risk Neutral – These people embrace risks and look at them as potential opportunities if they have something to gain out of the risk situation
4. Risk Seeking – These people view risks as a challenge and actively look forward to taking risks. These people are the total opposite of the Risk Averse category.

The stakeholders in your project could fall under either of the above 4 categories and as you must have guessed by now, a strategy you can use to satisfy a risk seeking stakeholder will totally back-fire if you try the same on a risk averse stakeholder. So, as the risk managers of the project, it is our responsibility to carefully classify our stakeholders and communicate with them as required. Remember “One Universal Communication Idea” will never work when your stakeholders fall have varying levels of risk tolerance.

Psychological Factors:

Psychological factors are actually the factors that influence how people view or react to risks. In other words, the psychological factors directly influence peoples risk attitudes. Unfortunately this information is not readily available. But, in order to be successful in our job we need to try to gauge the risk attitude of at least the important and most influential stakeholders.

Some psychological factors that might influence people and their risk attitudes are:

• People usually resist change when it threatens their level of comfort
• People usually resist change when they feel they are entering unfamiliar territory
• People are influenced by whether this risk may affect their level of control
• People are influenced emotionally when something brings about a feeling of dread or uncertainty (even if they are misguided)

Different people react differently under the same scenario. Especially when there is loss of control or unfamiliar territory involved. In some cases people’s behavior may be because of a misguided understanding of the risk which has caused an incorrect or unwarranted fear. We need to try to build trust with stakeholders. If we improve their level of trust on us and increase their level of familiarity on the project, it would be easy to explain the various scenarios you may encounter in your project. After all, a well-informed stakeholder who understands the project well and trusts the project manager can always tolerate more risks than one that doesn’t have a clue on what is happening in the project and doesn’t know much about the PM as well.

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Next: Stakeholder Risk Tolerance

Overview of Communicating Project Risks

In the previous section we covered the “Risk Identification” process in our Risk Management Framework. So, you have identified all the risks that can impact your project. What would you do next?

Take a moment and think logically before you read on…

After we identify all possible risks that may affect our project, the next logical step would be communicate to all people involved in our project that we have identified risks and here they are. Isn’t it?

This is exactly what we are going to cover in this section which deals with “Communicating Project Risks”.

Do you remember that we spoke about Risk Tolerance in one of our earlier chapters? If a project or organization is tolerant to risks, then they tend to take up high-risk activities whereas if the tolerance is low, only guaranteed outcome activities are taken up. Part of being an effect project manager as well as a risk manager is, understanding the stakeholder risk tolerance and the organizational risk tolerance. Though stakeholder risk tolerance and organizational risk tolerance can have a great deal of impact on your day to day decisions, do you think that your own risk tolerance will not play any part in those decisions? Well, if you thought so, am sorry to say that you are sadly mistaken. No matter how hard we try to concentrate on the stakeholder or organizational risk tolerance, unconsciously we will let our own tolerance levels to influence our decisions at least to a slight level. So, it is important that we gauge our own tolerance levels up front to avoid any surprises…

Trivia:

Analyzing our own risk tolerance is not part of the RMP Exam syllabus and nor is it covered in this blog. It is just something I thought you should know because it plays a decent role in our decisions and is something many people overlook as a non-existent factor.

Factors that Impact Risk Communication

Risk Communication is a fairly complicated topic because there is no set baseline as to what is or is not part of communication. One of the senior managers in my company once told me “The job of a PM is 80% communicating and 20% everything else”. Something that is so critical always has factors that impact it and risk communication is no different. The factors that can impact the communication of risks are:
a. Risk Attitudes and
b. Psychological Factors

Before we can go any further, I want to quickly provide a few pointers about the Communications Management knowledge area.

Though Project Communications Management is not directly part of the Risk Management knowledge area, communicating risks and regular updates to stakeholders is an integral part of risk management. So, it is extremely important that we have a good understanding of the communications management knowledge area. So, I suggest you go through all the topics related to project communications management in the PMBOK at least once before you finish your RMP Exam preparation. You can also revisit the chapters that were focusing on communications management during our series on the PMP Exam preparation. They are:

1. Project Communication
2. Planning Project Communication
3. Project Communications Management as part of Project Initiation
4. Communications Management as part of Project Planning
5. Communications Management During Project Execution
6. Communications Management during Monitoring & Controlling the Project

Armed with all this information, let us now dive into the factors that affect risk communications one by one.

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Section Summary – Identify Risks

In this section we took a detailed look at one of the key activities in project risk management which is “Risk Identification”. Let us quickly summarize what we have learnt so far:

• The purpose of the risk identification process is to identify all possible risks that can affect our project
• The outcome of this step is the Risk Register
• Documents and artifacts that contain details reg. the project are one of the key inputs to this process along with the Risk Management Plan which outlines how we are going to conduct this activity
• Uncertainties are sources of risks and in this step we are going to analyze every aspect of the project to uncover those uncertainties
• There are 7 different tools & techniques that we can use in this risk identification process. They are:

o Documentation Review
o Information Gathering Techniques
o Checklist Analysis
o Assumptions Analysis
o Diagramming Techniques
o SWOT Analysis and
o Expert Judgment

• Information Gathering Techniques include – Brainstorming, Delphi technique, Interviewing and Root cause analysis
• Diagramming Techniques include – Cause & Effect diagrams, flowcharts, influence diagrams etc.
• SWOT Analysis intends on analyzing our project from the different perspectives like Strengths, Weaknesses, Opportunities and Threats to widen the reach of risk identification
• The 7 basic tools of quality are not directly part of the PBMOKs list of tools that we can use in risk identification but they are very relevant both from proper risk management perspective as well as the RMP Examination perspective
• These 7 basic tools of quality are:

1. Cause & Effect Diagrams
2. Control Charts
3. Flow Charts
4. Histograms
5. Pareto Charts
6. Run Charts and
7. Scatter Diagrams

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Other Tools & Techniques we can use in Risk Identification

In this section we set out with the idea of looking into the Risk Identification process. We saw all the inputs used in this process and then on the chapter on tools and techniques we saw that 7 different tools will be used and we covered them all one by one. At this point in time, you must be wondering that, we listed down 7 tools and we covered them all. So what is the purpose of this chapter?

Do you remember that I used the term “7 basic tools of quality” a few chapters ago? We use these tools in the “Perform Quality Control” process of the PMBOK guide and we covered them in the chapter on Controlling Quality in our PMP Exam Prep series. All of these 7 tools, though primarily used in quality control can also help us in Risk Identification as well as Risk Management. That is exactly why we have this chapter. These 7 basic tools of quality are:

1. Cause & Effect Diagrams
2. Control Charts
3. Flow Charts
4. Histograms
5. Pareto Charts
6. Run Charts and
7. Scatter Diagrams

I repeat – these are called the 7 basic tools of quality and are featured here because they are relevant from both an overall understanding of risk management perspective as well as from the RMP Exam perspective. We have already seen the cause & effect diagrams and flowcharts. So, let us quickly cover the basics of the rest of these tools.

Control charts

Control charts gather data to show when a process experiences an out of control condition. These are called “Special Cause Variations”. Basically we will use the control chart to determine whether a process is stable with predictable performance or not. It helps us understand how a process performs/behaves over time. Ideally we would expect a process to be stable and consistent and the control chart can help us confirm the same.

A typical control chart has 3 lines:
a. The Mean or Median line
b. The Upper Control Limit or UCL
c. The Lower Control Limit or LCL

Data points are gathered and plotted within these 3 lines. If all your data points lie between the UCL and the LCL then you can safely assume that your process is “In Control”. Every process will always have some variance and it is inevitable but, as long as all our data points lie within the control limits then we are good. If you see no variance and all points lie on the median, then either the data collection was wrong or something else is majorly wrong which is yet to be identified. There is no way that all data points lie on the median line.

The difference between the UCL/LCL and the mean is called the sigma value of the project. In other words it signifies the level of quality in the project. Don’t worry too much about sigma right now. Just know that higher the quality the better it is. If you are really keen on understanding about Sigma values and better quality, to visit the blog on Lean Six Sigma quality improvements.

Spotting a process that is out of control (cases where the data points are either above the UCL or below the LCL) is critical. There could also be cases where all data points are within the UCL and LCL but still the process is out of control. Those cases are identified using the “Rule of 7” wherein if 7 consecutive points fall on the same side of the control chart then it suggests that something is wrong and needs to be investigated.

Look at the sample control chart above. There is a data point above the UCL and one below the LCL which signifies that this process id definitely out of control. By analyzing the control chart we can identify potential risk points. If a process is in control then practically speaking we need not do anything. But, if it is out of control then we definitely need to take remedial actions.

Histograms

A Histogram shows a distribution of variables in a bar-chart format. Each column represents an attribute or characteristic of an issue. The histogram usually shows a frequency of distribution for a set of measurements. Look at the sample histogram below:

As you can see, the frequency of occurrence of various issues is plotted in a bar-graph format. The frequency of occurrence is visible in the height of each of the bar. A sub-set of histograms known as the “Pareto Charts” are widely used in risk management which is what we are going to cover next.

Pareto Chart

A Pareto chart is a type of histogram where the bar-chart is ordered by the frequency of occurrence. It can easily help us identify those issues that have the highest frequency. Look at the sample Pareto chart below:

Here as you can see, the occurrences due to the “Slow Page Load” problem result in “Page Errors” the most number of times and then the other outcomes too are plotted based on the number of occurrences. So, if I were in-charge of quality or risk for this project I would probably concentrate on the first one or two problems which should help be address a bulk of the issues.

Trivia:

Pareto’s law is something that is commonly used in quality parlance. It is also called the 80-20 rule which says that 80% of the problems are because of 20% of the causes. So, if we address those 20% causes, we can eliminate 80% of the problems.

The idea behind Pareto Chart is similar. We want to concentrate on those issues that have the highest frequency so that we can nail those that can give us the most benefit.

Run Charts

A run chart shows a pattern or trends of variation over time. It also shows a history of declines and/or improvements within the process. The Run chart is nothing but a line graph that has data points plotted in the order of occurrence. It is used to monitor two main things:
1. Technical Performance – Ex: How many defects were identified & fixed in a time-period
2. Cost & Schedule Performance – Ex: Total no. of activities completed per time period without significant variances

Run charts are very useful in trend analysis which is a mathematical technique that is used to forecast the future outcome of the process based on historical information. These are extremely useful in risk analysis. Look at the sample run chart below:

Here we have plotted the number of times we had to perform an activity every month and seeing this we can safely say that trend here is improved performance and that the number of instances has steadily declined and is at a much lower level when compared to what it was at the beginning.

Scatter Diagrams

Scatter Diagrams show the pattern of relationship between two different variables. The purpose of these diagrams is to analyze the relationship between identified changes within the two variables. The dependent and independent variables are plotted on a graph with a diagonal line passing through. The closer the variables are to each other, the closer they are linked/related to one another. Look at the sample scatter diagram below:

Before we wrap up this chapter let me reiterate the fact that, you need not be an expert in these tools in order to pass the RMP examination. But, understanding them well is vital in being a good risk manager. So, take some time and understand them before proceeding further.


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SWOT Analysis

In the previous chapters we took a look at the various diagramming techniques we utilize to identify risks. In this chapter we are going to learn about a technique that is extremely common and crucial in identifying the Organization level risks that may affect our project along with project level risks.

SWOT stands for:

S – Strengths
W – Weaknesses
O – Opportunities
T – Threats

SWOT Analysis intends on analyzing your project and organization from each of these perspectives to widen the reach of risk identification. SWOT Analysis typically goes through the following steps:

1. Identify Org/Project Strengths and Weaknesses
2. Identify Opportunities that arise as a result of the strengths
3. Identify Threats that arise as a result of the weaknesses
4. Examine the degree to which the strengths can offset the weaknesses

Practically speaking, these steps are done using a brainstorming session but let me add a caution here that, this brainstorming session is totally different than the one that we saw a few chapters ago. The purpose of that session was to identify project risks alone. The purpose/scope of this analysis/brainstorming is far wider than that. The main difference is that SWOT analysis can help uncover those risks that are generated internally within the organization along with the other project risks you may uncover from other areas of risk analysis and identification.

Look at the sample SWOT Analysis result below:

The Organization has many strengths like an experienced top management, quick hiring capabilities and a good pay structure. So, as a result of these strengths an opportunity is that, whenever a new project is to be taken up in short notice, the organization can do it because they have the capability to hire people quickly…

On the downside, the organization follows a heavy workload working culture along with low bench strength. So, the threats here are “Attrition possibilities” which is very common in high-pressure working culture environments. If attrition happens in a high scale, the organization may have to increase their pay packages in order to attract lateral hires at a faster rate.

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Next: Other Tools & Techniques we can use in Risk Identification

Influence Diagrams

In the previous chapters we took a look at Cause and Effect diagrams as well as Flowcharts. In this chapter we are going to cover the third diagramming method which is “Influence Diagrams”

Influence diagrams are diagrams that show potential influences that elements or situations in our project can have on one another. An influence diagram can show:

a. Causal influences
b. Time ordering of events &
c. Other relationships among variables and outcomes

Within our existing project decisions, we can determine where uncertainties exist based on the potential scenarios. You can compare these influence diagrams to a decision tree but they are slightly different. Using influence diagrams we can look at a situation and how a decision can be arrived. It can be used to identify the uncertainty in the potential paths as well as to identify potential risks.

Look at the image below which is a sample influence diagram

There are multiple boxes with arrows going from-to one another. An arrow starting at Economy and ending at Education signifies the fact that economy has an impact on education. So, more number of arrows arriving at a box means that it is impacted/influenced by many factors. Similarly, more number of arrows starting from a box means that it impacts/influences many factors.

If there is a problem in the Economy it can impact almost every aspect in this influence diagram. So, a hiccup in the economy may cause uncertainties in every aspect of this situation which is a potential risk which we can identify based on this diagram.

An important point here is that, the example above is just a general one and does not deal with any specific project or its risk. The influence diagrams we may end up creating/using for our project will all be concerned with risk management only. After all, that is the whole purpose of this RMP certification isn’t it?

To Summarize – Influence Diagrams:

• Are diagrams that show potential influences that elements or situations can have on one another
• Reflect relationships among variables and their outcomes
• Can be used to view the order of potential events
• Help to spot uncertainty and therefore potential risks
• Are used to make decisions

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Next: SWOT Analysis

Process Flow Charts

In the previous chapter, we learned about the first diagramming technique that we can use in risk identification which was “Cause & Effect Diagrams”. In this chapter, we are going to look at the second diagramming technique that will be very useful in risk identification. It is called “System or Process flowcharts”

Just like the Cause & Effect diagram, the process flow chart too is part of the “7 basic tools of quality” that are covered in the “Perform Quality Control” chapter of the PMBOK. We had covered that process in the chapter on Controlling Quality in our PMP exam prep series. You can Click Here to visit that chapter.

A flow chart is a graphical representation of a process from the beginning to the end including order of processing, decision points etc. it shows us how the various items in a system are interrelated. Using this information we can analyze as to how a problem may have occurred. Once again, we are going in search of the problem causes as a way of resolving them along with preventing any such issues in future. The Risk Management team will take this flowchart and analyze it find out where a risk may occur and based on that information we try to figure out the root cause. Another important use of these flowcharts is that, they can also help us in identifying potential responses.

Let us look at a real life example as to how a process flow chart can help us nail a risk and its cause. Let’s say you are going to paint your house and the last two times you did, the paint started peeling off within months and by the end of 2 years it looked as though there was literally no paint on the wall. So, if you want to paint your walls again there is an imminent risk that the paint is going to peel off again. Isn’t it?

Let’s create a flowchart of the whole painting process. By analyzing the flowchart, we can pin-point two problem areas that might result in our risk which are highlighted by the red ovals around them.

As you can see, this paint peeling off can happen if we did not clean the painted surfaces properly or if we did not scrape off all the old paint. After we identify the cause we can even create a potential response that says that we must clean the paint surface and scrape off all old paint before beginning the paint-job.

Can you understand how useful this flowchart analysis can be now?

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