Risk analysis methods and applications

Sochi

Every project has risk of some sort. For the project manager, it is not possible to eliminate all risk, but it is beneficial to reduce risk as much as possible. Thus, risk analysis is required to identify the major risks to the project, to understand the threats that are posed and prioritize the risks. At that point, the project manager is in a better position to take steps to reduce or eliminate the most important risks. This process is necessary because focusing on minor risks will make the project inefficient, but ignoring major ones could represent an existential threat to the project. Thus, risk analysis helps to strike a balance between ensuring that the project goes through without any major issues, but still comes in on time and on budget.

Process used to Uncover and Prioritize Risks

There are a number of processes that a risk analyst can utilize in order to determine what the risks are to the project. While all are based on the idea of brainstorming, it helps to have a formalized process for this, to ensure that nothing is missed, and that the risks are not only correctly identified but the threat that they pose is equally well-understood. The first step is to understand the nature of the project. The risk analyst should therefore have experience -- someone who is trained in the risk analysis of a financing deal for a new factory in China is not qualified to analyze the risk of a new bridge project, and vice versa. So the risk analyst needs to come from a position of expertise in the subject. A formal list of issue processes and issues should be used to work through the potential risks. Discussing with key stakeholders also helps to leverage the power of others -- especially those who are already familiar with the project -- to identify other key risks.

Once the risks have been identified, the list might be very long, ranging from broad-based macroeconomic or political risks to project-specific risks like those associated with using certain materials for a given purpose. The next step is to prioritize the risks, and this is arguably the more complex of the two steps. There are a number of ways that this is done. A probabilistic approach is usually taken first, to assess the likelihood of an adverse event occurring (Hsu, Tseng, Chiang & Chen, 2012). In some cases, there might be actuarial or scientific data, but in other cases developing the probabilities is more complicated (i.e.. The likelihood of war disrupting your new mining project in Africa). Again, the more knowledge that you have the better your estimates of probability will be.

The final step in prioritization is the potential damage caused if the adverse scenario occurs. This helps to determine the expected negative impact of an action, which is defined by the likelihood of it occurring and the total damage that will occur if it does occur. Today, past data is often gathered and applied to simulations that incorporate a wide range variables, so that the managers can run the simulation multiple times to determine better numbers with respect to both probabilities and damages (Winkelvos, Rudolph & Repp, 2011).

Three Major Risks and Potential Impact to the Project

The project being chosen is the Sochi Olympics. The three major risks are terrorism, construction problems and bad weather. The weather is something that can be studied ahead of time based on past weather. Terrorism is something of an unknown but it would be catastrophic. Construction risk is easier to manage because there are best practices in construction that can be followed.

Suggested Ways to Manage the Risks

There are many ways to manage these risks, because there are best practices available based on other projects in other parts of the world -- there have been many similar events. Thus, the risks come from a number of things -- poor security, poor construction management, and the inherent risks of the weather. The physical infrastructure must therefore be designed with adequate safeguards. Further, it must receive proper maintenance. It is also worth adding that training is another way to mitigate risks -- a lot of the risk comes from everyday security and construction operations, so employees need a high level of training on best practices, and proper supervision as well. Further, the organizational culture needs to be one based on risk reduction. Risks can be costly if they occur during such a short event, so the culture needs to really emphasize the empowerment of employees to recognize risks and make sure that they are dealt with.