Risk analysis in projects and tools to facilitate it | #38 Getting started with project management

Risk analysis helps increase the chances of the successful completion of a project. But what types of risks can threaten a project? What tools to employ to identify them in time?

Risk analysis – table of contents:

1. Introduction
2. Types of risk in projects
3. Technical risks
4. Resource risk
5. Business environment risks
6. Risk analysis tools
7. Ishikawa diagram
8. Risk matrix
9. Summary

Introduction

Risk analysis is a key component of project management because it allows:

• identification,
• assessment and
• responding to potential risks, the overlooking of which could fail the entire project.

According to the Project Management Institute’s (PMI) 2021 report, nearly half of the projects fail to achieve their goals, and more than half are behind schedule or over budget.

Types of risks in projects

The three most common risks affecting most company projects are:

• Technical risk – refers to problems related to software, hardware or processes that may prevent the implementation of the project
• Resource risk – includes problems related to the availability of resources, such as employees, budget or time
• Business environment risk – concerns problems such as changes in regulations or competition.

Let’s take a closer look at each of them to see how to identify, analyze and respond to each type of risk.

Technical risks

To effectively identify and analyze technical risks, you have to conduct a detailed analysis of the technical specifications of the project by answering these questions:

• What tasks will require the use of innovative technology?
• Does the organization have a team to develop, implement and operate the technology side of the project? If not,
• Which solution provider to choose and how to formulate a contract with contractors?

You should also conduct a scenario-based risk analysis to spot potential problems and their consequences. To minimize technical risks, pay special attention to quality control in the project, and provide for regular testing and maintenance. A contingency plan may also be considered. The Project Manager should also keep abreast of technological innovations and consult with experts in the field in which the project is being implemented.

Resource risks

Minimizing resource risks requires an analysis of the availability of specialists and skilled workers, the realistic availability of budget, and the time for the uninterrupted execution of tasks.

When analyzing this type of risk, the Project Manager should ask the following questions:

1. Does the organization have enough specialists in key areas of the project, such as programming, design or financing, for example?
2. Are there adequate procedures and tools for resource management, such as resource planning or reporting?
3. Does the project budget include sufficient funds to recruit or outsource resources as needed?

Risks related to the business environment

Business risks are mainly related to the emergence of the dynamic development of competition. They can also refer to new regulations affecting the budget or the timing of the project. Good examples are the need for certification of solutions or official procedures preceding the introduction of the result to the market or the necessity for the continuation of the project.

Sample questions that can help the Project Manager analyze business risks are as follows:

1. Are we aware of potential regulatory changes in the industry in which our project operates?
2. Have we analyzed potential threats from competitors, such as new products or services?
3. Do we have a contingency plan in case of adverse changes in the business environment, such as a decline in demand for our product or service?

Risk analysis tools

For initial risk analysis, a widely applied SWOT will work well. However, when conducting a thorough diagnosis of technological, resource and business risks, it is better to opt for dedicated specialized tools. The following are famous for their effectiveness:

• Ishikawa diagram also called a fish diagram because of its distinctive shape, and
• Risk matrix.

Ishikawa diagram

The Ishikawa diagram is a tool to identify and analyze the causes of problems and potential risks. It was developed by Dr. Kaoru Ishikawa, a Japanese engineer and quality consultant. Ishikawa was a well-known lecturer and expert in quality management and the creator of many other quality-related tools and methods, such as the Pareto diagram and the histogram diagram. Ishikawa worked primarily in industry, but his tools and methods also found application in other fields, including project management.

The Ishikawa diagram presents a problem in the form of a cause-and-effect graph, from which you can extract the key causes of the problem. Among other things, it can provide an assessment aimed at discovering technical risks. This is because it can identify potential deficiencies or problems related to technology and determine their causes.

Risk matrix

The risk matrix first appeared in the 1950s in the aerospace industry, where it was applied to assess flight safety risks. The tool is popular not only in project management but also in business, science or safety analysis.

The risk matrix enables you to determine the level of risk for each hazard by assigning it a weight based on its probability of occurrence and effects. It is a simple table in which the rows represent the various risks and the columns represent the probability of occurrence and impact.

The risk matrix diagram consists of squares that represent individual risks. Each hazard is assigned to one of four squares that correspond to the level of risk:

• low,
• medium,
• high or
• very high.

The squares provide information about the probability of occurrence and the consequences of the risk. By employing the risk matrix, the Project Manager can identify what risks are associated with the project and consider what actions to take to minimize them.

Summary

Risk analysis identifies, assesses and responds to potential risks that could affect the success of a project. However, the volatility of today’s business environment makes it increasingly difficult to analyze and accurately draw conclusions. New types of risks are emerging related to, for example, cybersecurity, inflation, or the availability of raw materials. Therefore, it is worth remembering that risk analysis is an ongoing, repeated and updated process taking place throughout the project.

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