Risk management something which is being buzzed about a lot among the project management community but most people don’t act on it efficiently enough resulting in failed or financially unfeasible projects.
Prince2 explains the whole risk management approach through the risk management strategy. It talks about an organization’s attitude towards risk, risk appetite of an organization and the necessary control actions necessary.
Prince2 defines Early Warning Indicators as a set of events which if occur, then the project manager needs to prepare for the respective risk events to materialise. These events need to be monitored consistently to determine how the project is performing. For example, if the number of defective items is identified during early inspections, huge financial losses can be avoided at a later stage when defective products are out in the market and customers start returning them.
The PRINCE2 manual classifies risk into 3 types – inherent risk, residual risk and secondary risk. Inherent risk is the risk which is primarily a part of the project under question. Residual risk is the risk which is left over after risk management techniques have been undertaken. Secondary risk is the new risk which arises as a result of the risk management techniques.
When the possible risks are identified, the next step is to estimate possible risk in terms of probability, proximity and impact. Probability estimates the chances of the risk occurring, proximity tells you how soon or later might the risk occur and impact analysis will give you a picture of how the risk will affect the project and its products. Finally, the cost of these risk management techniques needs to be assessed. The opportunity cost of implementing a risk management technique costing more than the money that the risk in itself would have cost needs to also be determined. After this analysis, a risk budget needs to set aside to help execute these activities in case of the risk materialising during the project.
Risk is an uncertain event, which could be either a threat or an opportunity. The Project Manager should always be working to identify opportunities to improve the project.
Learn how to master risks by attending our PRINCE2 Training classes.