Risk Management Approaches in Project Management

A risk can either be an Opportunity, i.e., a risk that brings a positive impact on project goals, or it may be a Threat, i.e., a risk with an adverse effect on the project goals. Accordingly, there are various approaches to dealing with positive and negative risks regarding project management.

In this blog, we’ll discuss the different risk management strategies in the project management domain.

Negative Risk Management Approach

1. Avoid

Avoidance eradicates the risk by eliminating the cause. It may lead to not performing the activity or uniquely performing the same. The project professional may also modify or isolate the goal that faces an obstacle.

Some risks can be eliminated by early data collection, enhancing communication between stakeholders, or leveraging expertise.

This risk management strategy includes extending the scheduling or modifying the project activity scope. Another instance could be a dangerous risk that may lead to life loss and is eliminated by shutting down the project altogether.

2. Transfer

In the Risk Transfer strategy, the risk is transformed to a third party like an insurance firm or vendor - paid to accept or tackle the risk on your behalf; hence the ownership and risk impact is borne by that third party. This payment is known as a risk premium. Contracts are signed to transfer the risk liability to the third party.

Risk Transfer doesn't eradicate the risk, but it minimizes the direct effect of the risk on the project. Few Transference tools are performance bonds, guarantees, insurance policies, warranties, and more. This technique is most effective in covering financial risk exposure.

3. Mitigate

Mitigation minimizes the probability of risk occurrence or reduces the risk effect within acceptable limits. This technique is based on the basic principle that earlier, the action taken to minimize the risk effect is more effective than repairing the damages after the risk happens.

An example of mitigating a risk includes leveraging innovative technology or top techniques to offer more error-free products. This strategy may need a model developed to estimate the risk level.

In the case where it isn't possible to minimize the risk probability, the risk effect minimization is focused on determining the connections that identify the risk depth.

4. Accept

Like the name, this strategy means accepting risks, especially when no other appropriate method is available to eradicate the risk. Acceptance can be active or passive. In the case of dynamic, a contingency reserve is built to recover the losses of resources, time, or money.

While passive acceptance needs no other action to expect to document the risk and leave the team to deal with the risks as they happen.

Positive Risk Management Approach

1. Exploit

Exploitation increases the chances of creating a positive risk, resulting in an opportunity. As a project professional, you're allocated sufficient and efficient resources to take advantage of this chance. This strategy minimizes the uncertainty linked with a positive risk by ensuring that it occurs.

2. Share

When the project team themselves aren't fully capable of taking advantage of the chance, they might call in another organization to ally. The expertise of this organization is used to increase the return of the opportunity. Examples of sharing opportunities include forming risk-sharing alliances, teams, different purpose organizations, or joint businesses. In this, all parties gains as per their action and investment.

3. Enhance

Enhancing involves increasing the probability of risk occurrence and expanding its effect. This is done by determining and influencing different risk triggers. An example of improving an opportunity is adding more resources to project activities to finish earlier.

4. Accept

Acceptance involves taking advantage of the positive risk as it occurs but not actively achieving it. This technique is just like an opportunity coming and being accepted without any pre-planning.

Contingent Risk Response Approach

These approaches are implied only when a specific event happens, and the execution of these approaches takes place under a particular predefined condition.

The team waits for appropriate warning signs before executing a contingent risk response. For example, these signs could be missing the target's work items or timelines. These approaches include staffing reallocations, implementing workarounds to reduce the loss, and financial reserves, repairing the damage to the extent possible, and preventing recurrence.