Risk is an inherent part of every organisation, no matter the size or the sector in which the company is operating.
Every team has to deal with some risks in the span of a project. So, to tackle the negative impacts due to unlikely scenarios, risk management strategies are developed.
Risk Management is not a single step, it’s an ongoing plan, alongside the project you have to keep working on it.
Let’s start with,
What is risk mitigation?
Basically, risk mitigation reduces the likelihood that a certain risk will occur and if it does occur it tries to reduce the impacts due to it.
We will follow a 3 step process which will help us in understanding Risk mitigation.
- Risk Identification
- Risk Analysis and Assessment
- Risk Mitigation
Risk Identification :
This is the first step towards risk mitigation, here we identify the risk involved with the project including all the major and minor risks.
Risk Analysis and Assessment:
The purpose of risk analysis is to break down every risk identified into smaller components and try to determine its root cause.
This helps you in avoiding similar risks, and the possibility of them reoccurring goes down drastically.
Take an example, if you run a Mexican food chain, and you have low sales in a few locations. There can be multiple reasons for it. It can be due to changes in food quality, bad consumer experience, or the region may not have too many Mexican food lovers.
You don’t know the reason, so it’s important to analyse the risks involved before setting up restaurant at new locations.
One more advantage of analysing risks is we forget that each project has thousands of risk associated with it. Dedicating all your resources to manage risks is not a smart choice. So, you have to choose which risks are to be targeted.
Distributing the risks makes it easier for you to analyse them.
- Low Probability, Low Impact
- High Probability, Low Impact
- Low Probability, High Impact
- High probability, High Impact
Low Probability, Low Impact
Risks having little impact and low probability are discarded in many of the cases unless the stakes are too high.
In a shuttle launch to space, every possibility must be considered as even a small mistake can lead to a loss of billions of dollars. On the flip side, a company producing thousands of bearings daily can bear a few damaged pieces due to the inaccuracies of the machine.
It varies from project to project whether the risks involved are worth targeting or not.
High Probability, Low Impact
This type of risk has a low impact on the project, but when combined, you can see a significant impact on the project.
Situations such as changes in labour cost, changes in material cost, changes in delivery time, and other uncertainties come under this type. The risks in this category are generally within the natural limits of the project.
Low Probability, High Impact
This type of risks are most difficult to predict due to the lack of sufficient and reliable data.
So, the project team has to come up with metrics on how to tackle them. Suppose, the probability of occurrence is less than 1%, then you can choose to avoid it. It all depends upon what’s on stake and whether the client is ok with metrics.
High probability, High Impact
In this case, the project manager or project owners have to decide whether to accept the risk or not. Considering both the benefits and consequences of their decision.
Consider an example of a brand, who wants to run a marketing campaign, and it has plans to do a woke advertising on a social issue. The outcome of this campaign can go in two directions –
- One the campaign is successful, and the advertisement goes viral boosting the sales for the company.
- Other, the audience takes it in a wrong way, and it hurts the brand image with losses ranging in millions of dollars.
The purpose of the analysis is to reduce uncertainty in a project. Using the data obtained until now, a risk mitigation strategy can be formulated by the project team.
The purpose of this entire process was to control the potential risks in a project. And a specific action plan needs to be developed in case an unlikely scenario occurs.
Risk mitigation strategies are developed to reduce the consequences due to these risks.
- Risk avoidance
- Risk transfer
- Risk Reduction
- Risk acceptance
When you choose to avoid a particular risk, you plan a course of actions which ensure that the scenario never occurs or you change your plan, such that the event never occurs.
Its an all or nothing plan. A motorcycle manufacturer can choose to remove high beam headlight from their bike to avoid accidents or ensure that the intensity of headlight does not blind the other user coming from the opposite lane.
The best example of risk transfer is an insurance policy where you transfer the risk of accident (Accedianal insurance) onto the insurance company.
It’s highly unlikely for you to meet an accident when you look at the statics. But you still take up insurance just in case.
The premium on risk transfer is often high, and it goes up with the size of the risk. If the strategy is economical and equitable, and both parties are aware of the risks involved. This can be a great option.
Risk reduction is another effective strategy used by project directors or business.
A classic example can be seen in today’s smartphone market, where every competitor posses a risk to your business. If you are to launch a new smartphone in the market, accelerating the production of smartphone and releasing it earlier than the competitor can give you an edge. This significantly reduces risk to your business.
This is the last option when you cannot avoid, transfer or reduce risk there is no way but to accept it.
This implies the risks are acceptable and cannot be reduced further, and all the consequences are clearly understood and processed.
Every team must be aware of the risks involved in a project. So, at the start of every project risks are assigned to team members. When a standard procedure is followed it becomes easier for the team to take countermeasures.