Risk management is an aspect that many managers underestimate, thinking it’s difficult to apply practically. They argue that no one can predict the unknown and the potential risks that might occur. As a result, they tend to deal with risks after they happen, rather than preparing for them to prevent them entirely. This approach can lead a company to bankruptcy or a product or project to failure. For instance, imagine you own a company planning to produce a new product or launch a new project. Naturally, you will need to create a massive marketing campaign, hoping that the product will succeed and generate profits that exceed the costs you spent on designing, manufacturing, and promoting it. Right? But wait, don't you think you also need to consider the negative possibility? What if your product or project fails, causing many problems and crises? For example, think about conflicts between team members, such as designers and engineers, delays in completing and delivering product designs, a lack of consumer interest in purchasing the product, and significant design flaws when the product is launched in the market. As a result, the product or project could go from a potential source of profit to a disaster, driving the company toward bankruptcy. All these possibilities are likely to happen and could happen to any company. Fortunately, they can be avoided by implementing a proactive risk management approach. Yes, risk management can significantly impact the success of companies and their projects across different fields, as it enhances the overall quality of work at every stage. So, if you're a company owner, project manager, or an employee looking to enhance your ability to manage problems and risks at work, what follows will guide you on how to achieve this.
The First Step in Risk Management: Anticipating and Identifying Risks Based on Seven Elements
To begin, to avoid confusing risks with emergencies, it's essential to clarify the difference between the two.
Risks have three distinct characteristics:
-First, risks are not existing problems.
-Second, risks lead to losses if they materialize, such as financial losses or loss of work time, etc.
-Third, risks are tied to a specific time frame and end once that period passes, such as the risk of missing a product delivery deadline. The risk either materializes by missing the delivery, or it ends with the delivery on time.
Anticipating potential risks isn't pessimism or expecting the worst, but rather an analysis of the real factors that make the occurrence of risks possible based on objective reasons. Brainstorming is one of the best methods to help identify potential risks for any project. This can be done by organizing a meeting with the entire project team. After presenting the feasibility study of the project and explaining the basic information related to its implementation—such as product specifications, target market, design and production timeline, and production partners, including suppliers and marketers—team members are encouraged to freely express their views on potential risks that could affect the project's progress. These risks are then listed in a spreadsheet detailing the risk, the expected damage if it occurs, and the reasons that make it likely to happen.
To organize the presentation and discussion of risks, you can use a standard risk model that consists of seven elements:
1. The event or situation that causes project losses, such as production stoppage for a certain period.
2. The risk factor that may lead to a specific risk, such as the breakdown of production machinery.
3. The likelihood of the risk occurring.
4. The potential impact or loss if the risk occurs.
5. The factor influencing the risk, such as neglect in machine maintenance.
6. The likelihood of the impact.
7. The total actual loss if the risk occurs, which can be assessed in terms of money or time, depending on the type of risk and its impact.
For example, if a product's delivery is delayed as stipulated by a formal contract between two companies, the expected risk is paying a penalty for failing to deliver on time. What makes this risk predictable is the delay in the design team's preparation of the required designs, and the likelihood of this delay is high because the design team has previously delayed deliverables in past projects. Everything can be anticipated by creating logical scenarios based on cause and effect.
Risk Analysis: To Clarify the Underlying Causes
Do you think that risks are over once they’re identified in brainstorming sessions? Of course not. Identifying risks is just the first step in managing them, and you likely already know this. Many teams fail to prevent risks despite identifying them at the start of the project. This happens because, even though team members are aware of the risks, their impact is often not clearly understood. Therefore, the second step is to gather the team for regular meetings and workshops throughout the project to analyze the risks, reassessing their likelihood and impact. These workshops should be time-limited, no more than two hours per week.
During these workshops, you should encourage the team to share their opinions by asking questions like: Is the product development team experienced enough to handle new technologies being introduced? Does the management team have enough experience to oversee such a complex project? These investigative questions help uncover potential sources of events that lead to risks. This analysis method is known as the "George Patton approach," named after the famous American general, who was known for questioning every piece of information provided to him by his subordinates to ensure a thorough understanding of the situation, leaving no critical details overlooked.
For objective risk assessment, there are several simple methods to determine the severity of each potential risk: 1. Team consensus: If the team agrees on the likelihood of a specific risk, prioritize it over others. 2. Delphi method: Each team member anonymously votes on the likelihood of each anticipated risk, and then risks are ranked based on the total votes received.
Although the probability of a risk occurring and the potential losses from it are estimates by nature, they are not just random guesses and can be calculated with numbers. For instance, to calculate the potential loss from a production phase breakdown, take the average of the team's estimates for the likelihood of occurrence (let’s assume 50%), along with the likelihood that a production machine breakdown will delay production for a week (let’s assume 70%), and the expected financial loss from the delay (let’s assume $500,000). You can calculate the expected loss from this risk as follows: 70% x 50% x $500,000 = $175,000.
"The key to successful risk management is not managing the risks themselves, but managing the causes that make risks likely."
Once risks are identified, they should be prioritized, giving attention to those that are most harmful and most likely to occur
Successful brainstorming sessions generate a vast amount of suggestions about potential risks, which can leave you wondering which risk should be prioritized. To avoid wasting time and effort by tackling risks randomly and ineffectively, you should create a priority list in consultation with your team. Arrange the risks based on the magnitude of expected losses—e.g., the risk of production delays for several days cannot be compared to the delay of a team member in completing a sub-task or to risks that might completely end the project, such as legal or health-related risks. Additionally, classify risks according to the likelihood of their occurrence as active or inactive. A highly damaging risk may have a low likelihood of occurring, while a less damaging risk could have a higher probability.
After identifying and analyzing risks, the time comes to address them practically. Sometimes, the best way to handle a risk is to ignore it! You may choose not to take any action and accept the losses if a risk with limited damage occurs, which is the case for minor flaws that may appear in products after they are released in the market. Fixing these flaws may require redesigning the product. However, if you decide to take action to prevent a risk, there are four types of measures you can adopt:
1. **Avoiding the risk**: Eliminate the causes that produce the risk. For example, if specific software in the company causes risks like errors in products, you can avoid these risks by replacing that software.
2. **Transferring the risk to another party**: Outsource to external specialists or experts to handle risks your team may not be experienced enough to address, such as legal or technical risks.
3. **Developing a contingency plan**: This is what some companies do by assigning two teams to develop a product. If one team fails to handle risks, the other team can avoid them.
4. **Mitigating the risk**: This is the most common approach, where companies allow their teams flexibility to work around changes. For example, if the risk involves production delays due to machinery failure, companies reduce this risk by performing regular maintenance on their machines.
Continuous Follow-up Ensures Maximum Benefit from a Risk Management Program
Risks never end. A common mistake that causes disasters for companies is when project teams neglect to follow up on risks after successfully implementing a mitigation plan, only for those risks to resurface or for new risks to emerge without the team realizing it, wasting their efforts! Therefore, you must continue to hold risk management meetings with your team until the project is completed successfully, ensuring effective communication between team members. Keep in regular contact with them, informing them about the results of risk identification, analysis, and prioritization, as well as proposed solutions and steps for execution. Receive their feedback and ideas and discuss them openly.
For risk management to be fully successful, you need to transform the company culture, employee behaviors, and ways of thinking. Some necessary behavioral changes to turn your company into a risk-effective environment include overcoming the "firefighting" approach adopted by some managers who don't address risks until they turn into crises. You also need to resist the pessimism and assumption of the worst that some employees have, making them less prepared to confront risks related to innovation and updates. Additionally, preparedness to invest effort and money in preventing risks should be part of the company culture, not something up for debate. Furthermore, it’s important to
encourage all employees to actively participate in identifying risks and suggesting ways to address them. For example, Invetech, an Australian medical equipment manufacturer, involves sales staff and after-sales product monitors in the process of designing and developing new products. Many companies also rely on customer feedback and critiques to improve their products and identify potential sources of risk. Moreover, combating the fear of failure culture is crucial because such fear stifles creativity, innovation, and learning, making team members hesitant to express their opinions.
"If you don’t plan to make risk management part of your company’s culture and approach, you’re wasting your time starting down this path. This applies to any other business improvement program you may be considering."
Conclusion
Every new project comes with numerous risks, and this is the challenge faced by every innovator and creator. However, these risks—whether legal, technical, administrative, or financial—can be managed in an organized and scientific way that minimizes their damage, or even turns them into sources of strength. When identified at the right time, risks reveal the weaknesses of a project. Therefore, no matter what risks your project faces, you can create a well-structured plan to prevent them, starting with risk identification, then analyzing them to understand the causes of their emergence and the expected losses if they are not avoided. After that, prioritize them and create a plan to address the risks that are most likely to occur and the most dangerous. Finally, address these risks, eliminate their causes, and continue monitoring progress to ensure they don't appear again. These steps, when performed with your team, not only help avoid risks but also strengthen the team and instill a positive company culture that refuses to surrender to problems, anticipates them, and prevents their causes from the start.RépondreTransférerAjouter une réaction