Risk Management

Effective Project Risk Assessments and the Best Risk Mitigation Strategies

What are the source and nature of project risk? What are the functions and nature of project-risk assessment? What is the best way for firms to choose risk mitigation strategies? What is the relationship between project risk assessment and optimal risk mitigation strategies? How can firms achieve their financial goals through statistical and quality management? These strategic questions will help you formulate and execute a risk mitigation strategy that minimizes risk. The optimal risk mitigation strategy reduces project risks’ probability and incidence and maximizes profit-producing capacity.

We will review the most relevant academic literature available on project risk assessment and mitigation strategies. Every risk mitigation strategy has its costs and its benefits. The objective function of risk mitigation strategies is to maximize their net benefits. In practice, the optimal risk mitigation plan is one that equates marginal cost with marginal benefit. It minimizes the risk of project failures and maximizes the enterprise’s profit-producing potential. The project standard deviation (or weighted average) of all possible deviations from expected value is what measures project risk. The project standard deviation is a measure of the likelihood that any unpredicted event or condition will adversely impact a project and prevent it being carried out as planned.

Project risks, such as financial risks, are based on a weighted average or range of possible variations to expected results. This is based on historical data. To mitigate risks, firms must be aware of the source and nature of variances in order to create effective strategies to reduce them. This allows the firm to meet its financial goals through quality management and statistical techniques.

All project risks-variations do not have to be negative. Certain risk events, such as new approaches or methods to complete an activity, or favorable conditions like lower prices for certain material, can reduce risk and facilitate project completion. These positive events and conditions are called opportunities, but they should still be considered project risks-possible deviations (mean)

Some Operational Guidance

Some project risks cannot be effectively managed. Effective project risk mitigation strategies can only be developed and implemented by organizations that have a culture of continuous improvement and assessment. Firms can’t apply or manage what isn’t understood. They also cannot measure and understand what they don’t know. And they cannot believe what they don’t know. Firms should always be able to inspect their expectations by developing and deploying a robust assessment system that supports the collection, analysis, and interpretation of timely, relevant and accurate data.

Types and Sources of Variation

Variation source identification is crucial for improving product quality in operations. Many methods for identifying variations source are based on a linear fault-quality model. In this model, the correlation between product quality and process faults is linear. Many quality measures are not linearly related to process faults in practice. It is crucial to determine and quantify the sources and types variation that are important for process characterization so that they can be minimized.

Firms have a competitive advantage by being able to identify and minimize variation in project processes. This allows them to deliver superior quality products to customers worldwide and reach their financial goals through quality management and statistical methods. Traditional quality control is based on statistical process control (SPC), which identifies anomalies and deviations using product and process measurements. This approach doesn’t provide operational guidelines for identifying the variation sources. This is a crucial step towards reducing variation and minimizing derivative project risk.

Additionally, due to the abundance of data on project and process assessments and the importance of the problems caused by project or process variation, innovative methods for identifying source variation were developed. The process of normal causes-common variations is predictable and controllable. The firm can therefore predict its future behavior based on the current process pattern. All within the limits of control. If the process is affected by special causes or exceptional variation, it may be out of control and unpredictable. This means that a firm cannot predict how the future process will look based only on the current process pattern.

You know that there are different sources and types of variation. Common cause variation refers simply to random variability in the process. Assignable cause or special cause variation is caused by specific circumstances. There are two types of variation: controlled variation and uncontrolled. Controlled variation is defined as a steady and consistent pattern over time. This type of variation is random, and shows a steady level of fluctuation. Uncontrolled variation refers to a pattern that is constantly changing and therefore unpredictable.

The concept of controlled/uncontrolled variation is critical in determining if a process is stable and in control. If the process operates in a consistent and predictable fashion, it can be considered stable and control. This means that the process average value is stable and predictable, and that variability is controlled. If there is too much variation, the process is either not predictable or is changing.

Risk Assessment and Mitigation Strategies

Management of project risks involves a risk assessment process and a mitigation strategy for known and predictable risks. The project risk assessment involves both the identification and evaluation of possible risks that have known probabilities. Risk mitigation strategies aim to minimize or eliminate the negative or adverse effects of risk events. It is both a creative as well as a systematic process to identify risk. Creative thinking involves actively gaining new insights and finding innovative solutions to problems. Systems approach involves the ability to understand and anticipate the consequences of project risks, and devise mitigation strategies that will work across the firm.

There is evidence from academic literature that suggests that firms should try to eliminate, minimize, or eliminate all uncontrolled variation during process characterisation. Because they have not occurred yet, risks remain uncertain at the planning phase of a project. The firm must manage some of these risks eventually. Here are four strategies to manage project risks.

1. Avoiding Risk: This is the best thing a company can do to reduce project risks. It will not negatively impact the project if a company can prevent it from happening. It is possible to avoid project risk by walking away. However, this might not be an option. It is common to avoid risk by using established methods instead of adopting innovative ones. Even though these methods might have better potential outcomes, it is still a common method of risk mitigation. Risk avoidance is sometimes effective, but rarely practical.

2. Risk reduction: A firm can reduce or mitigate the risk if it cannot avoid it. This refers to taking steps that minimize the risk and damage to the project. The industry’s best practices include the effective use of management information systems, early problem detection systems and warning systems.

3. Risk Transfer: Paying a third party to take on the risk of a project is one way to manage it. Insurance or reinsurance are the most common ways to do so.

4. Risk sharing: This means that other firms can partner with you in order to share the risk. If the other firm has unique expertise, competency-resources or capabilities that a firm does not have, it may be a useful partnership to share the risk.

5. Risk Retention is the plan to assume risk. If a company cannot avoid, reduce, transfer, or share project risk, it must retain or accept part of the risk. Self-insurance, copayments, or deductibles are the most common ways to accomplish this.

All business decisions and strategies have costs and benefits. To determine whether the benefits outweigh any costs, companies must carefully weigh the cost and benefits of project risks assessment and mitigation strategies. Ceteris Paribus says that the optimal mitigation strategy is one that equates marginal cost with marginal benefit.

molw.net

We are a team of professionals with each having two decades of experience in start-ups, sales, marketing, finance, HR, large scale project and profit centre management and running mature cross functional operations. At Molw.net we are big believers that knowledge transfer is critical to our industry’s evolution. We love to share our experiences and learnings through our online resources.

Related Articles

Back to top button