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Risks refer to the unfortunate events, which upon occurrence affect the business or organization negatively. To mitigate the effects of risk, businesses and projects have channeled necessary resources to prevent the occurrences of risks (Crouhy, et al., 2000). Risk management is a process that involves identifying, evaluating, and prioritization of a project or business risks, preceded by synchronized and economical deployment of resources. The main reason for risk management is maximizing the realization of opportunities and increase profits. The success of a business or project depends majorly on their capability to take risks to compete and survive. This implies that risks are integral in businesses or project. Business risks might emanate from improbability of the financial markets, project failures, legal liabilities, accidents, credit risks and natural disaster causalities (Flouris & Yilmaz, 2010). With regard to this, paper describes the necessary steps that should be taken by business or projects in managing their risks. Additionally, the study elucidates on the roles of project manager, and the benefits attributed to and disadvantages of risk assessment.
Risk management process involves five significant steps, which include risk identification, risk assessment, risk analysis, risk transfer and risk monitoring (Kutsch & Hall, 2010). The process should be done concurrently, and the steps to follow each other procedurally to have an efficient risk management.
Risk identification is the initial phase of managing a risk. Notably, risk management cannot be initiated if a risk has not been apparently recognized. This stage involves establishing the cause of the problem before proceeding to the next process. It can be briefly defined as determining risks that exist or that are anticipated, their remoteness in the time, period, characteristics and possible results. Methods such as risk simulation, conducting feasibility studies, seeking expert opinion and reviewing current and previous projects are used to identify risks.
Risk assessment, the second step, refers to determining the quantity or quality of the risk related consequences that might arise upon occurrence (Zwikael & Ahn, 2011). This indicates that there are two types of risk assessment, which are quantitative and qualitative risk assessments. Quantitative risk assessment demands the computation of two risk components that are potential magnitude of the loss and probability of the occurrence of the loss. On the other hand, qualitative risk assessment entails calculating relative values of losses and cost controls if the risk occurs. A Risk Assessment Matrix defines the varying intensities of risks.
Risk analysis, the third step, involves identifying and assessing effects attributed to the risk that might jeopardize the success of the business or achieving a goal. At this stage, risks are prioritized in that those that are likely to cause immense damages or losses are dealt with first (Zwikael & Ahn, 2011). Risks that have minimal effects are assigned less priority and are dealt with after the high priority risks. Risk analysis is significant in the sense that it defines measures to avert the possibility of occurrence of a risk.
Risk transfer, the fourth stage, entails getting rid of unmanageable risks. Unmanageable risks are transferred to third parties such as insurances. Insurance companies are willing to cater for the adverse effects linked to unmanageable risks. Organizations or businesses seek insurance cover to prevent them from the effects (Kutsch & Hall, 2010).
Risk evaluation, the fifth stage, involves examining the previous steps. Risk evaluation is also referred to as risk monitoring and is a continuous process. Some businesses conduct risk monitoring depending the changes and circumstances that are inherent to them. This final stage is significant in that it helps project managers and entrepreneurs to determine whether the conducted risk management process has achieved its objectives.
Role of Project Manager in Risk Management
Project managers have an overall role in ensuring that the project is accomplished, and the stipulated target is achieved (Kutsch & Hall, 2010). The principal roles of project managers include designing, executing, monitoring and closure of the project. The above roles are summarized into three basic roles of a manager, which are controlling, organizing and planning. With regard to risk management, project managers should notice unstated risk assumptions. The recognition that risks negatively affect the success of the project should be measured formally or informally to reduce the level of risk. The project manager is also responsible for making decisions that aim to avert risk levels (Flouris & Yilmaz, 2010).
Advantages and Disadvantages of Risk Assessment
Risk assessment has various advantages to a project or business. The success of any project depends on contingency level (Flouris & Yilmaz, 2010). Projects having high contingency levels are uncompetitive, whereas those having low contingency levels are vulnerable to failure. It is the role of risk assessment to define the correct contingency level in relation to the level of a risk. Additionally it increases confidence level of the resultant targets.
Risk assessment gives the project team forum for expressing their views and concerns (Raz, et al., 2002). This is achieved by eliminating restrictions of having to work with single-point approximates. Risk assessment allows the project team to come together and share opinions, leading to discussions and clarifications of project scope tasks. As a result, the team gets equipped with the necessary information about the project and its status. Noteworthy, the process of risk assessment brings together the projects’ cost and schedule disciplines, which further facilitate discussion.
Risk assessment comes along with different disadvantages such as poor resolutions, errors in relative ranking and ambiguous inputs and outputs (Raz, et al., 2002). Poor resolutions can be reached at because in most occasions risk matrices relate a minimal portion of the arbitrarily chosen pairs of risks. Risk Assessment Matrices can allocate similar rating to risks that are quantitatively different.
Errors of relative ranking arise when risk matrices allocate mistakenly higher qualitative ratings to risks of low priority (Flouris & Yilmaz, 2010). As a result, risks having negatively simultaneous occurrences and severities become extremely detrimental, leading to worse and more random decisions. Eventually, these decisions affect the normal operation of the business or project or lead to failure.
In conclusion, Risk management is a process that involves identifying, evaluating, and prioritization of the project or business risks. Risk management process involves five significant steps, which include risk identification, risk analysis, risk control, risk transfer and risk monitoring. The principal roles of project managers include designing, executing, monitoring and closure of the project. It is the role of risk assessment to define the correct contingency level in relation to the level of a risk. Risk assessment comes along with different disadvantages such as poor resolutions, errors in relative ranking and ambiguous inputs and outputs.