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Sunday, July 8, 2012

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.


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.

Prev: Psychological Factors that affect Risk Communication

Next: Communicating Risks to Stakeholders

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