Risk Management

Know Your Enemy: An Introduction to Risk Management, Part 2

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In the first part of this two-part series I described the value of managing risks formally on a software project and listed numerous common risks in various categories. This article describes the various activities associated with the practice of risk management and recommends specific information you should record about each risk you identify.

Risk Management Components

As with other project activities, begin risk management by developing a plan, perhaps using the risk management plan template available at www.ProjectInitiation.com. Small projects can include a concise risk management plan as a section within the overall project plan. Risk management consists of the activities illustrated in Figure 1 and described below.

Risk Assessment

Risk assessment is the process of examining a project to identify areas of potential risk. Risk identification can be facilitated with the help of a checklist of common risk areas for software projects, as I described in the first article in this series. Risk analysis examines how project outcomes might change with modification of risk input variables. In other words, just how could the risk harm your project.

Loss
Probability Low Medium High
Low

Low

Low

Medium
Medium

Low

Medium

High
High

Medium

High

High

 

Figure 2: Risk exposure is a function of probability and potential loss.


Risk prioritization helps the project focus on its most severe risks by assessing the risk exposure. Exposure is the product of the probability of incurring a loss due to the risk and the potential magnitude of that loss. I usually estimate the probability from 0.1 (highly unlikely) to 1.0 (certain to happen), and the loss (also called impact) on a relative scale of 1 (no problem) to 10 (deep tapioca). Multiplying these factors together provides an estimate of the risk exposure due to each item, which can run from 0.1 (don’t give it another thought) through 10 (stand back, here it comes!). It’s simpler to estimate both probability and loss as High, Medium, or Low. Figure 2 shows how you can estimate the risk exposure level as High, Medium, or Low by combining the probability and loss estimates.

 

Risk Avoidance

Risk avoidance is one way to deal with a risk: don’t do the risky thing! You might avoid risks by not undertaking certain projects, or by relying on proven rather than cutting-edge technologies when possible. You might be able to transfer a risk to some other party, such as a subcontractor.

Risk Control

Risk control is the process of managing risks to achieve the desired outcomes. Risk management planning produces a plan for dealing with each significant risk, including mitigation approaches, owners, and timelines. Risk resolution entails executing the plans for dealing with each risk. That’s when you actually control the risk. Finally, risk monitoring involves tracking your progress toward resolving each risk item.

Let’s look at an example of risk management planning. Suppose the “project” is to take a hike through a swamp in a nature preserve. You’ve heard the swamp might contain quicksand, so the risk is that we might step in quicksand and be injured or even die. One strategy to mitigate this risk is to reduce the probability of the risk actually becoming a problem. A second option is to consider actions that could reduce the impact of the risk if it does in fact become a problem. So, to reduce the probability of stepping in the quicksand, we might look for signs of quicksand as we walk and draw a map so we can avoid these areas on future walks. To reduce the impact if someone does step in quicksand, the members of the tour group could rope themselves together. That way if someone does encounter some quicksand the others could quickly pull him to safety.

Even better, is there some way to prevent the risk from becoming a problem under any circumstances? Maybe we build a boardwalk as we go so we avoid the quicksand. That will slow us down and cost some money. But, we don’t have to worry about quicksand any more. The very best strategy is to eliminate the root cause of the risk entirely. Perhaps we should drain the swamp, but then it wouldn’t be a very interesting nature walk. By taking too aggressive a risk approach, you can eliminate the factors that make a project attractive in the first place.

Documenting Risks

Simply identifying the risks facing a project is not enough. We need to write them down in a way that lets us communicate the nature and status of risks throughout the affected stakeholder community over the duration of the project. Figure 3 shows a form I’ve found to be convenient for documenting risks. It’s a good idea to keep the risk list itself separate from the risk management plan, as you’ll be updating the risk list frequently throughout the project. You can download an alternative template for your risk list from www.ProjectInitiation.com. This format includes essentially the same information that’s in Figure 3, but it’s laid out in a way that’s amenable to storing in a spreadsheet or as a table in a word-processing document.

ID: <sequence number or a more meaningful label>
Description: <List each major risk facing the project. Describe each risk in the form “condition – consequence.”>
Probability: <What’s the likelihood of this risk becoming a problem?> Loss: <What’s the damage if the risk does become a problem?> Exposure: <Multiply Probability times Loss.>
First Indicator: <Describe the earliest indicator or trigger condition that might indicate that the risk is turning into a problem.>
Mitigation Approaches: <State one or more approaches to control, avoid, minimize, or otherwise mitigate the risk.>
Owner: <Assign each risk mitigation action to an individual for resolution.> Date Due: <State a date by which the mitigation approach is to be implemented.>

 

 

 

 

 

Figure 3: A risk documentation form.

Use a condition–consequence format when documenting risk statements. That is, state the risk situation (the condition) that you are concerned about, followed by at least one potential adverse outcome (the consequence) if that risk should turn into a problem. Often, people suggesting risks state only the condition—“The customers don’t agree on the product requirements”—or the consequence—“We can only satisfy one of our major customers.” Pull those together into the condition-consequence structure: “The customers don’t agree on the product requirements, so we’ll only be able to satisfy one of our major customers.” This statement doesn’t describe a certain future, just a possible outcome that could harm the project if the condition isn’t addressed.

Keep the items with high risk exposures at the top of your priority list to focus your risk-control energy. Set goals for determining when each risk item has been satisfactorily controlled. Your mitigation approaches for some items may focus on reducing the probability, whereas the approach for other risks could emphasize reducing the potential loss or impact. With any luck, some of your mitigation strategies will help you control multiple risk factors.

Risk Tracking

As with other project management activities, you need to get into a rhythm of periodic monitoring. You may wish to appoint a risk manager for the project. The risk manager is responsible for staying on top of the things that could go wrong, just as the project manager stays on top of the activities leading to project completion. It’s a good idea to have someone other than the project manager serve as the risk manager. The project manager is focused on what he has to do to make a project succeed. The risk manager, in contrast, is identifying factors that might prevent the project from succeeding. In other words, the risk manager is looking for the black cloud around the silver lining that the project manager sees. Asking the same person to take these two opposing views of the project can lead to cognitive dissonance; in an extreme case, his brain can explode.

Keep the top ten risks highly visible and track the effectiveness of your mitigation approaches regularly. New risks might float up into the top ten as you gradually beat the initial list of top priority items into submission. You can drop a risk off your radar when your mitigation approaches have reduced the risk exposure from that item to an acceptable level. Don’t conclude that a risk is controlled simply because the selected mitigation action has been completed. Controlling a risk might require you to change the risk control strategy if you conclude it isn’t working.

A student in a seminar once asked, “What should you do if you have the same top five risks week after week?” A static risk list suggests that your risk mitigation actions aren’t working. Effective mitigation actions should lower the risk exposure as the probability, the loss, or both decrease over time. If your risk list isn’t changing, check to see whether the planned mitigation actions have been carried out and whether they had the desired effect.

Also, look for new risks that might arise during the course of the project. Conditions can change, assumptions can prove to be wrong, and other factors might lead to risks that weren’t apparent or perhaps did not even exist at the beginning of the project. Escalate risks that aren’t being controlled to the attention of senior managers or other stakeholders. They can then either stimulate corrective actions or else make a conscious business decision to proceed in spite of the risks.

Learning from the Past

We can’t predict exactly which of the many threats to our projects might come to pass. However, most of us can do a better job of learning from previous experiences to avoid the same pain and suffering on future projects. As you begin to implement risk management approaches, record your actions and results for future reference. The risks are out there. Find them before they find you.

Also read Know Your Enemy: An Introduction to Risk Management, Part 1

Jama Software has partnered with Karl Wiegers to share licensed content from his books and articles on our web site via a series of blog posts, whitepapers and webinars.  Karl Wiegers is an independent consultant and not an employee of Jama.  He can be reached at http://www.processimpact.com.  Enjoy these free requirements management resources.

 

 

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