The risk management process for startups that you mustn’t skip
07 January 2019
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One of the most important tasks that a project manager must handle is assessing risks. There are pre-set risk management processes that most managers apply in order to run the projects smoothly, without encountering any problems. For example, at TMS, we make sure to test the solution before launching it in order to mitigate the risk. The basic risk management process contains five core steps. Implementing this process is paramount for companies and it doesn’t require as many resources as entrepreneurs believe.
After understanding what is risk management, any organization should formalize the process and include it in its structure. In order to do that, entrepreneurs must carefully analyze their companies’ structure, resources, and objectives. The results will surely be rewarding if enough research is done and the proper risk management strategy is applied. The content below should help you understand the process and implement it in the shortest time.
Table of contents
- How can you define risk?
- Understanding project risk management
- Some risks are positive
- Project management steps
How can you define risk?
The definition of risk can be different from one source to another, but the most common one is this: a risk is an uncertain event that has consequences, either positive or negative. When talking about business projects, risks can affect the outcome.
In most situations, risks are perceived as negative. In reality, risks can have positive effects as long as they are managed appropriately. Here is where risk management intervenes – it reveals the risks that could lead to opportunities and make a project streamlined and profitable. The risk management process depends on understanding risks and their implications in business.
To put it in simpler words, risks are potential events that can affect the way a business project turns out in terms of time, performance or finances. Since they are potential events, no one can know exactly what is about to happen, but risk management can determine the risk type, category, priority and other relevant details before they become reality.
Understanding project risk management
When referring to business only, risk management represents a complex process where one identifies and analyzes any risk that may be encountered during a project. This way, the manager helps the project remain on the previously set direction and meet the goals it has. Risk management involves planning and reacting as well because one has to find potential solutions to the risk situations that may arise.
Some risks are positive
Risks can be positive as well, even though most people don’t know that. A negative risk is unwanted and can irreversibly affect a project, but a positive one can open doors for the business. The beneficial ways in which a positive risk can affect a business vary and the only differentiating factor is represented by risk management. A good risk management process involves positive risks approached correctly, as well as potential solutions for the negative ones. A balance between positive and negative risks can lead to a neutralized impact, which will lead to reaching the initially set goals of the project.
Project management steps
These are the core steps mentioned above, all presented in an extensive manner:
Risk management begins with assessing the risk and analyzing them in detail. This stage involves evaluating how likely the company is to be exposed to risks, both negative and positive. After determining the number of potential risks, one must check in which manner they would affect the operations included in the project. In the case of negative risks, the damage will be estimated. Both positive and negative risks will somehow affect the project, so risk management strategies are applied to determine the potential outcomes in each case.
The risk management process and the risk assessment techniques vary depending on the categories of risk that are targeted. There are four basic risk categories that are usually considered. The first one is represented by hazard risks, which can occur at any given moment (including fires and other calamities).
The list continues with operational risks, which are related to resources (for instance, supplier failure) and financial risks that are determined by the country’s economy (recession). Strategic risks have to do with competition and branding, meaning that a competitor can outperform your company in terms of time or profit.
Determining the potential categories of risks that an organization can confront in the near future is part of a risk management plan. Then, research (internal and external, brainstorming and interviews can also help to find any other types of risks present along the way.
Measuring the potential frequency or severity of the risks found in the previous stage is the following step in risk management. Risk evaluation is the next stage in the process and it involves several criteria to be followed. The criteria include finances, socio-economic events, laws, and regulations, as well as potential technological malfunctions.
For risk evaluation, most companies use a heat map. This map is a visual tool to determine how dangerous or beneficial a risk is. The heat map should contain risks that are very often encountered and risks that have a high degree of severity. Severe risks need a high degree of resources to prevent or solve. Heat maps are used to identify how likely a risk is to occur and how strong the impact would be.
At the end of the risk evaluation stage, the organization will know where to spend more resources and what tasks should be prioritized.
After knowing exactly what the risks are and what they involve, the appropriate solutions should be found. Finding only one solution for each risk is most likely not enough. Finding alternative solutions keeps the project away from failure. From these alternative solutions, the one that’s cost-effective and rapid is the applicable solution.
At this point, one can either accept a risk or avoid one, based on the information gathered. Accepting one risk might attract other risks as well. This is why a set of alternative solutions must be created. Solutions reduce the impact that a risk will have on the project in case it doesn’t act like initially presumed. Risk control and transfer are part of this stage. Risk control prevents the risk from happening while risk transfer refers to taking responsibility for negative results.
Implementing a solution
From the list of alternative solutions that were found in the previous step, the one that seems to be the closest to the desired goals of the project should be selected. Once the solution is chosen, the needed resources have to be allocated to implement that solution. From money to teams and timelines, everything must be organized and planned at this stage.
Team members and everyone engaged in the risk management process must be formally informed about the selected solution. This way, no subjective differences will be encountered along the way. Employees should be kept up to date if any changes occur, to stick to the main goal of the business.
The whole risk management strategy has to be monitored. It involves keeping an eye on all details that can influence the path of the organization. Environment, finances, risks – they all need to be revisited and reassessed every now and then to make sure that everything goes as planned. All the decisions that have been taken should be checked to see if they are as effective as planned.
Adding updates if the results are not the anticipated ones is also an option. In some cases, several processes must be restarted to achieve business goals. In time, risk management can lead to building a culture that will help managers keep everything under control for future projects. Of course, environments and economies change, and risk management strategies must remain flexible and adaptable.
Ending thoughts on the risk management process
The uncertainty that risk managers must face can be scary at times. The easiest way to reduce the mystery that surrounds risks is to know the organization very well and apply the strategies that are most suitable for that specific moment in its development. Risk management can resolve problems that are not even there yet, clearing the path for the project entirely.
If you enjoyed reading this article on the risk management process, you should check out this one about startup failure.
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