No matter what your processes and operations look like, it’s not wild to say that some of your energy is dedicated to risk management. In business, it’s simply required.
In project management, the systems associated with risk management are used to protect the scope and timeline of a project, as well as the budget. But risk management in business is a bit different—it’s more comprehensive.
In this piece, we are going to cover the following.
- Risk management in project management
- Compare risk management in business
- Explain some applications
- And justify why we feel project managers should be using this practice
What is Risk Management, Anyway?
The Association of Project Management defines risk management as “a process that allows individual risk events and overall risk to be understood and managed proactively, optimizing success by minimizing threats and maximizing opportunities and outcomes.”
You may not have caught it, but the Association mentions “threats” and “opportunities” as an inherent part of risk somewhere in that definition. Whether it has a positive or negative result, all of these terms live under the umbrella of uncertainty.
For example, you could be waiting on a shipment. Automatically, there is a level of uncertainty in that. If the shipment comes early, it becomes an opportunity that you and your team can take advantage of. But if the shipment is late, it then becomes a threat to your operations.
Because of the ambiguity, risk management can involve many different kinds of work, including
- A security detail
- Monitoring the supply chain
- Managing contractors
- Proposing a new plan to incorporate timing issues
Ultimately, risk management—specifically in project management—means preparing for anything that the team, the management, or the stakeholders can’t control, which means it covers a lot.
What is Risk Management in Business?
On the flip side, risk management in business looks at bigger problems that tend to be more ongoing. Project management is limited to a project. A business is a continuously functioning organism that’s sensitive to its environment. It ebbs and flows. It (hopefully) never has an actual end, which means that risks carry on just the same.
At times a business will have great employee retention rates while customer satisfaction dips. And other times, a business could see the cost of supplies suddenly drop while facing a lawsuit that could cost them greatly.
Some examples of risk management include
- Security watching over an office building
- Quality control making sure the product is assembled correctly
- Safety officers make sure construction workers are tied properly
- Insurance agencies selling debt
When attempting risk management in business, they usually have to break the concept down into particular topics or departments. This could look like having a full legal staff available to continuously check the company’s processes for possible lawsuits. Often corporations have entire legal departments for that very reason.
Even in movies, you’ve heard people say, “Let me run this by legal.”
Another way companies manage potential risks is by using a PR team that can identify opportunities for good exposure and threats to the company’s image.
Risk management is a huge aspect of how businesses across the world function. So much of what we associate with being a normal part of the day-to-day function of a business can be boiled right down to risk management.
Why Distinction is Important
Because risk management in business is so often brought into the equation—and without people knowing it—it’s important to give it a name and a clear position. For anyone who ever finds themselves navigating professional settings that have a factor of uncertainty, it’s especially important.
When you clearly understand the risk involved with your situation, you are in a better position. Suddenly, you’ll be better informed, have a more advantageous point to start negotiations (if necessary), and complete transactions with more personally advantageous outcomes.
Characteristics of Risk Management in Project Management
In project management, due to the nature of projects in general, risk management aims to reduce uncertainty to the most tolerable level. These risks will always be there, but they have to be outweighed by the payoff of working through them.
In a project setting, there are all these hurdles, like limited timeframes, budgets, and scope, that risk management in business does not need to navigate. That is not to say that businesses don’t face any of these constraints, but rather to clarify that project managers must always face these limitations. There is almost no aspect of a project that is permanent.
Risk management in project management needs to address two aspects of threats.
- How likely is the risk to present itself
- What that risk could affect
Management teams will often have meetings that will update everyone on progress and look for potential opportunities and threats. If uncertainty affects the team, they’ll develop responses and evaluate any risks that could result from the response.
All of the plans that result have to be completely based on the data available to management, which seems like a given, right? It’s not. These decisions cannot be based on feelings, or things can easily snowball into something much messier and more expensive than you could have ever thought possible.
Another characteristic of risk management in project management is that it has to be centered around the project’s effort and the project’s desired result. The concerns and needs of stakeholders will need to be addressed and can even act as a starting point for your risk management strategies.
Characteristics of Risk Management in Business
When you compare them, there are fundamental differences between risk management in business and project management. First, entire departments tend to be dedicated to managing particular uncertainties.
All the possible departments depend on the size of the company and are typically brought in as it grows. Most major corporations couldn’t function without multiple departments preparing for, avoiding, and handling all the possible risks.
But here is the bigger difference.
Companies have to think about the long haul, specifically how they are going to continue operating as time goes on. The two main pillars of the “long haul” are the company’s financial standing and its reputation.
Most of the effort of risk management in business is concentrated on protecting those two pillars. Legal teams save money by avoiding lawsuits. Quality control protects the reputation by not allowing faulty items out into the world. Once you see this, almost every action a company takes comes down to that.
Along with protecting the pillars, the goal of risk management in business settings is to alleviate the chance and encounters with risk (namely threats) on the way to meeting the business’s core objectives.
Another particular consideration of risk management in business is the cost. Meaning companies sometimes have to weigh the cost of preventing the risk against letting the event unfold. To clarify, a business might choose to face a regulatory fine because that is cheaper than implementing the technology, systems, or procedures that the law requires.
Sometimes, risk management in business can involve legal compliance that is much bigger than the bounds of a project. An example of this is data security.
Responses & Strategies For Risk Management in Business
Because risk is the manifestation of uncertainty and can have positive or negative results, when planning responses to all of these possibilities, you have to consider the best and worst outcomes.
But what exactly does that look like?
Threats
Risk management in business revolves around protecting the company’s reputation and financial situation. So, when something teeters on the edge of possibility, you must plan for the worst.
The Project Management Institute highlights a few ways to handle threats. Consider using a couple of these strategies when developing your organization’s response. Don’t put all of your eggs into one hypothetical basket.
The five ways you might deal with a threat to your business include
- Avoiding or eradicating the threat
- Transferring potential fallout to another party
- Mitiagaging proactively to minimize the impact of the threat
- Accepting the fallout by creating a plan for going forward with the consequences incorporated
Again, due to the lifespan of a business, the way you’d be working with threats has a much broader context—especially compared to a project.
Opportunities
While threats to a business can be extremely dreadful, opportunities that are born from risk can be just as fruitful. You might willingly walk into risk because the potential payout can be so good.
And, of course, the act of running a business alone can be hazardous. It can also be exceedingly rewarding. So, when you’re anticipating an opportunity resulting from a calculated risk, you might be inclined to grab that bull by the horns.
Some ways to address opportunities include
- Exploitation to ensure the event occurs
- Enhancing them to increase both the likelihood and the benefit of occurrence
- Accepting them (just taking it as it comes)
As with both opportunities and threats, be sure to check that there are no secondary risks associated with your initial response, no matter what that might be.
For example, you exploiting an opportunity could open you up for a lawsuit.
Examples of Risk Management In Business
To further illustrate some of the ways a company handles risk, we’ve come up with a few common examples.
Avoiding Risk
You can ask anyone. The best way to mitigate risk is by taking proactive measures to avoid it altogether. One way companies do that is with background checks to ensure that incoming employees don’t have an apparent criminal history to avoid theft.
Transferring Risk
Insurance is the most common form of risk transfer. Businesses do it. You do it. Your grandma does, too. Having insurance on the items that—in the event of an issue—can cause great financial risk.
Preventing Risk
While complete avoidance is the most effective, the next best option is prevention. Remember, proactive steps are almost always better than passive ones. A prime example of prevention is installing security cameras and alarm systems in your business and making it known that they are working with signs.
Retaining Risk
Most departments found in corporate settings have the sole purpose of risk management in that business. In-house IT departments will be dedicated to ensuring data security. The company could hand the task to an outside party, but leadership might decide it’s better to keep those efforts close to the vest. Legal teams are also an example of risk retention.
Spreading Risk
Risk management inside the insurance industry generally falls under the category of spreading. For example, when an insurance company sells a debt to a collector, they are spreading the risk of non-payment.
Why Project Managers Need To Understand Risk Management in Business
You might be wondering how any of this applies to project management. In most cases, the happenings inside a project can feel relatively protected from those within the business, but that’s not the truth.
There are business-like interests all around project managers. Stakeholders, contractors, and other management have to keep their eyes on other affairs, not just those tied to the project.
In our experience, having some experience with managing business operations is extremely helpful to project managers. Don’t let that escape your notice. We believe some business experience (or, at the very least, understanding) is essential.
The circumstances of the company can easily affect the environment of a project. If the company is preparing for mass layoffs, a project manager will have to roll with that.
Additionally, it can give you a better footing in day-to-day operations. You’ll better understand the needs and concerns of stakeholders and be able to cover so much more ground in meetings with them. You’ve probably noticed that stakeholders tend to have their own agendas. When you consider the business’s experience of the project, your life will be easier.
Generally, a project acts as a branch of the business. They don’t happen in a vacuum. Understanding the patterns of how the companies you are involved with manage risk will help you be more prepared to face it—because sooner or later, you will.
At A.McBeth Consulting, we pride ourselves on being a resource for project managers and all management positions. If you’ve found this helpful, be sure to check out our blog for more helpful tips, suggestions, and information.
