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Risk Management: 3 Different Ways to Categorize Risk

For a project to become successful, project managers need to get everything right from effective project planning to efficient project scheduling as well as the well-defined project scope. Despite all these, projects do get affected by threats or risks, as is known in project management. Risk Management is an essential component of project management without which organizations cannot ensure successful project delivery.

Types of Risk Management

Risk Management

Project Risks can be defined as uncertainty in projects that may or may not have a negative impact on their overall success. While some risks are known to project managers in advance, some are discovered during the project development cycle. These risks affect the project scope and lead to scope creep which affects the desired project results. Therefore, risk management is crucial for project success.

The Project Management Institute or PMI’s A Guide to the Project Management Body of Knowledge (PMBOK Guide) includes risk management in its 10 knowledge areas. PMI which is the world’s leading project management governing body emphasizes the importance of an effective risk management plan in the planning stage of project management.

Thus, along with the project plan, project managers prepare the risk management plan to define the risks that may or may not affect the project during its development. Risk management includes identifying the various risks that may affect the project in a positive way and a negative way. It also involves performing qualitative and quantitative analysis on risks to address their severity level and the certainty of occurrence.

The risk management plan contains the risk responses in case of a risk occurrence. After preparing the risk management plan, project managers aim to reduce the impact of the identified negative risk during the monitoring stage of the project development cycle. This is also known as controlling risk or risk mitigation.

Importance of Categorizing Risks

As we have discussed above, risks can have a positive impact as well as a negative impact on the desired results of a project for an organization. Therefore, we can conclude that not all project risks are bad. It becomes a necessary reason to classify these risks and categorize them so that project managers can identify the negative project risks and plan the mitigation strategy to eliminate them altogether or reduce them to some extent.

Usually, project risks are categorized based on their area of impact on the objectives of the project. These three risk categories are:

  • Operational Risks – These risks occur when the project objectives or the outcome of the project are directly affected.
  • Short-term Strategic Risks – Risks under this category are limited to the short-term goals of the project that are required for the achievement of the project objectives.
  • Long-term Strategic Risks – These risks are related to the long-term goals of the project that the project will contribute to.

Project Managers and Risk Managers use these three ways to categorize project risks. This helps them identify the risks that will directly affect the project delivery as well as the objective of the organization.

3 Different Ways to Categorize Risk

Categorizing risks can become a difficult task for project managers and risk managers when the impact levels on the objectives of the project and the organization are not clearly defined. In this case, they can use these three different ways to categorize project risks and speed up the risk management process.

Nature of the Risk

Project risk can be classified by its nature as well. This will help project managers and risk managers determine and categorize the nature of the risk that is affecting the project delivery and the organizational objectives. According to the nature of risk, some projects are affected by pure risk, and some get affected by business risk.

Pure risks are definitive and will have a negative impact on the project outcome should they occur. Whereas business risks are speculative, the organization may gain or lose when they occur. Both pure and business risks can be mitigated with an effective risk management plan. While pure risk must be avoided at all costs, project managers and risk managers can take a chance on business risk by trying to make the risk successful or by coming up with an effective risk mitigation strategy.

Stage of Risk

The stage of risk refers to the risk at the various levels of the project development hierarchy. This can be applied to organizations with a functional PMO or project management office where there are different stages or levels of work structure. It can be categorized further into – task risk, project risk, program risk, and portfolio risk.

When a risk is affecting a particular task in the project development cycle it can be called a task risk. This can be managed through active communication between the project management team and the project manager about the risk mitigation strategy. Project risk affects the entire project, program risk affects the entire program of related projects, and portfolio risk affects the entire portfolio that the organization is producing. Each risk can be categorized and mitigated by communicating the risk management plan with the respective professionals managing them in the PMO.  

Knowledge of the Risk

Uncertainty in project risk is very common. However, there are some risks that project managers have absolutely no knowledge of and can creep up anytime during the project development cycle. Having knowledge of the risk is part of being an efficient project manager and risk manager. But preparing for the unforeseen threats in advance and creating a contingency plan to mitigate these risks when they occur is a characteristic of a successful project manager or risk manager.

Conclusion

Thus, having an effective risk management plan is an efficient way to minimize the damage caused by any kind of project risk. Project Managers and Risk Managers can use these above-mentioned ways to categorize risk and help their organizations successfully achieve the objectives. Aspiring project managers and risk managers can register for the PMP (Project Management Professional) Certification Training and PMI-RMP (Risk Management Professional) Certification Training Course to get an in-depth understanding of various project risks. The training and certification courses elaborate on mitigating these project risks by preparing an effective risk management plan. This will not only help future project managers and risk managers earn the prestigious credential from the Project Management Institute (PMI) but also help them achieve successful project delivery for the organizations they work in. 

Posted in ITSM

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