The 4 Essential Risk Management Strategies
While it’s great to be very confident about the success of your project, it’s also essential to have a plan in case things go wrong. Even the most promising projects can run into serious obstacles, so a good executive must be prepared to deal with all eventualities.
A risk is defined as a potential situation that, if it arises, could have a negative effect on the success of your project.
There are four fundamental ways to manage risk, which we describe below, plus our tips on how to implement each of them successfully.
Risk assessment and planning
When launching a new project, it’s important to define the project risks as precisely as possible. That way, if things do go wrong, you’ll be ready to handle them well.
Ideally, you should start a new project with a list of potential risks, plus a precise plan for how to deal with each risk, should it become a reality.
When you assess the risks, each risk should be given a value of the probability of it occurring, plus the impact it would have on the successful outcome of the project. Probability and impact are scored on a scale from 1 to 10.
Based on the risk assessment values, you’ll be able to prioritise the risks with the highest probability and impact for your risk management strategy.
In addition, you need to revise the list of risks as the project unfolds, because new developments can add new risks that you should be aware of.
Four main approaches to manage risk
Especially in the case of risks that have high probability and impact values, it may be best to modify your project strategy to avoid them altogether.
An example of this could be that specific expertise and/or technology may become critical for the success of the project, but these resources are presently not available, or fully developed in your company.
In that case hire the appropriate experts, or purchase the appropriate technology in order to avoid the risk.
If your project involves several partners, it’s possible to transfer some of the risks to the other parties.
A common example of this would be when a business hires or partners with an outside company to deal with a specific technology. In that case, all risks associated with that technology could be transferred to the outside company.
If you choose this option, make sure that the risk transfer is properly documented in the contract you sign with an outside partner.
Another example of risk transfer is insurance. You can hire an insurance company to deal with specific risks so that you don’t have to worry about managing them. Again, this should be contractually documented in great detail.
Mitigation of a risk essentially means that you have a plan in place to reduce the effect of a specific risk if it should occur. In other words, the problem caused by the risk will be smaller due to your risk mitigation.
A good example of risk mitigation is planning for the eventuality that you won’t have sufficient capacity or supplies to deal with a very high demand.
In that case, you should have a mitigation strategy in place that will allow you to rapidly scale your capacity, or to subcontract some of the work to other parties in order to meet the high demand.
If you are working with outside partners, one risk that you have to plan for is that the outside parties may not deliver as promised. Your mitigation strategy, in this case, would involve the option of switching to another partner.
As the name implies, risk acceptance means you don’t try to avoid or mitigate a risk, but instead choose to live with the consequences.
This strategy is the best choice if the impact of the risk is small, and avoidance or mitigation would be more expensive than justified by the size of the impact.
A common example of risk acceptance is planning for potential production delays (within a reasonable time range) since it’s often difficult to predict a precise delivery schedule in advance.
Active risk acceptance is different from not doing anything, since you are already prepared for the risk occurring, and know that you can live with it because you have calculated the consequences.
Choosing the best strategy
The most important skill in risk management is pairing a precise risk assessment with an appropriate risk management strategy.
In other words, you have to determine which risks you can live with (in which case acceptance is probably a good choice), and which risks will seriously jeopardise your project (in which case you must have an effective plan to deal with the consequences).
In the case of the most serious risks, you could actually set up several risk management plans if you want to be on the safe side.
A great example of this is the possibility of losing important data due to malware attacks. Every company usually has software in place to protect against these attacks (avoidance), an external backup service (transference), and a strategy to wipe the whole system and restore the data from backup if an attack does succeed (mitigation).