Section Summary - Understanding Risk Management

In this section we have learnt about the basics of Risk Management that will be useful on our journey towards the PMI’s Risk Management Professional Certification.
Let us summarize what have learnt so far:

• A Risk is an uncertain event or condition that if it occurs, has a positive or negative effect on a projects objectives
• Risk Management is the act of increasing the probability and impact of positive events & decreasing the probability and impact of adverse events within a project
• The goal of risk management is to identify the risks within the project and develop a response to either reduce the impact or the probability of a negative risk. If the risk is a positive risk (opportunity) then the goal is to increase the probability and impact of the same.
• The PMBOK Guide covers the Risk Management knowledge area extensively and it is the basis on which our preparation for the RMP Certification is going to proceed
• The Risk Management Plan and the Risk Register are two important documents that are vital to efficient Risk Management
• The Environment in which the Project is executed can have a direct influence on the Project and can be a source of risks for the project. These environmental factors can be grouped into two “Internal” and “External” factors.
• The Project Organizational Structure is one of the vital Internal Factors that affects a Project. An organization can be of 3 types – Functional, Projectized or Matrix. A Matrix Organization in turn can be either a weak matrix, a balanced matrix or a strong matrix
• An Issue is something that is occurring now in the present and is currently being dealt with
• Risk Triggers are signs or indications that is risk event is about to occur or has already occurred. They are also known as Risk Symptoms or Warning Signs
• Pure risk is a type of risk that can result only in losses
• The purpose of Risk Categorization is to systematically identify risks in a consistent manner and organize them so that they can be managed better
• Uncertainty refers to the lack of knowledge of future events whether these events are positive or negative to the project.
• In almost all cases, a risk is taken in pursuit of some kind of benefit
• Part of managing risk is, knowing when to accept a risk.
• The Standard 5 Step approach to managing project risk is widely used to manage project risks and we will use it too. The 5 steps in it are:

o Risk Management Planning
o Information Gathering & Risk Identification
o Risk Assessment & analysis
o Risk Response Planning
o Plan Execution

Prev: Five Step Approach to Risk Management

Next: Risk Management Plan - An Intro

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