Understand the Risk Tolerance Level in Your Organization

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All projects have risks and all risks have the potential for negatively impacting the project. You use risk management to determine the risks that are important enough to manage. During the risk identification process, you may encounter many risks that have some likelihood to occur and have a marginal impact to the project. The question to ask is whether the risk has enough impact on the project to worry about (this same question occurs for both qualitative and quantitative approaches). The answer says something about your risk tolerance.

For example, let’s say you identify a risk that is very likely to occur, but has an impact of $100 and one-half day duration. You may choose not to manage it. You cannot list this as an assumption since there is a good chance the risk will occur. However, the impact is small enough that you are willing to absorb the cost if it occurs, rather than deal with managing the risk (which would probably be more costly). Therefore you would choose a risk management strategy of leaving the risk.

In the prior example, the numbers were fairly trivial and the risk was easier to ignore. But, ratchet the impact up a little higher. Let’s say the risk now was $500 and one day duration. What about $100,000 and three months duration? Of course, the answers are all relative based on the size of the project. If your project had a $20,000 budget, a $1,000 risk impact might be worth managing. If your project budget is one million dollars, the risk impact of $1,000 would just be marginal.

When you are performing risk identification, you need to determine your tolerance level for risks. This will help you focus on the risks that are important and above your tolerance level, while ignoring risks where the impact falls below the tolerance level. Risk tolerance is also cultural in your organization. Some organizations are bigger risk-takers and will accept a higher level of risk on projects. They will also tend to have a higher threshold before they chose to manage a risk.

On the other hand, some organizations are more risk-averse. They will tend to accept less risky projects and they will also tend to have a lower threshold to manage risks. For example, let’s say you have a similar project in both organizations. The project managers in these risk-averse organizations will tend to manage risks that a project manager in the other organization might choose to leave.     

Seven Components to a Risk Management Plan

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The Risk Management Plan describes how you will define and manage risk on the project. This document does not actually describe the risks and the responses. This document defines the process and techniques you will use to define the risks and the responses. The information in this plan includes:

  • Roles and responsibilities. This section describes the leading and supporting roles in the risk management process. The project manager typically has overall responsibility for risk management, unless the team is large enough that this role can be delegated to another team member – perhaps a specialist. Third-party risk management teams may also be able to perform more independent, unbiased risk analyses of project than those from the sponsoring project team.
  • Budgeting. Discuss your budget for risk management for the project. Since you may not know enough to request budget for risk management you can also describe the process that you will use to determine a risk management budget estimate.
  • Timing. Defines when the initial risk assessment will be performed, as well as how often the risk management process will be conducted throughout the project life cycle. Results should be developed early enough to affect decisions.
  • Scoring and interpretation. You should define risk scoring and interpretation methods appropriate for the type of the qualitative and quantitative risk analysis being performed. Methods and scoring must be determined in advance to ensure consistency.
  • Thresholds. The threshold level is how you determine which risks are important enough to act upon.  The project manager, client, and sponsor may have a different risk threshold. The acceptable threshold forms the target against which the project team will analyze risks.
  • Communication. Describe how the information on risk will be documented and communicated. This includes the risks themselves, the risk responses and the risk status.
  • Tracking and Auditing. Document how all facets of risk activities will be recorded for the benefit of the current project, future needs, and lessons learned. Also describe if and how risk processes will be audited.

Other sections can be added to the Risk Management Plan as needed.

Assumptions and Risks

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Assumptions are statements that we believe to be true. You “assume” it to be true, but if it turns out not to be true there could be a detrimental impact to your project.

The key point about an assumption is that you are not 100% sure if it true. You believe it to be true, but you are not certain. This means there is some risk that the assumption will not come true.

Because of this uncertainty assumptions are very much related to risk, and in fact are simply low-level risks. They have the same characteristics as a risk – probability of occurrence and impact to your project.

Assumptions and Risks – Two Sides of a Coin

Let’s take an example of a common statement that is included in many Project Definitions – that the resources needed for this project will be available when needed. What kind of a statement is this? Most people would say it is an assumption. After all, when a project starts, you always assume you will get the resources you need.

However, is it really an assumption? Can you imagine starting a project where the people and equipment were not available and there was a realistic possibility that they would not be ready when you need them – perhaps because another project needed to finish first? It is not too difficult to imagine that scenario. In that case, the same statement would definitely be a risk – not an assumption.

The same statement might be an assumption or a risk depending on the circumstances of your particular project. There is some degree of uncertainty to an assumption. If the event is negative and there is a low probability that it will happen, it can be stated as an assumption. If the event is positive and there is a high likelihood it will happen, it is also an assumption. One way to identify important assumptions is to perform a risk assessment and look at all the low-risk items. Most of these low risks are not worth mentioning, but some will have significant implications if events do not turn out as you think. These are the ones that you can document as assumptions.

There are two key characteristics of risks and assumptions. First, there must be some uncertainty to the event. If there is 100% chance of an event occurring, it is simply a fact. If there is a 0% chance of the event occurring, it is fiction. Neither are risks or assumptions.

Second, assumptions and risks are both outside the total control of the project team. If the event is within the control of the project team it is neither an assumption nor a risk. It should simply be managed to make it happen.

Review the following examples for more clarity on assumptions and risks.

Statement

Assumption, Risk or Other?
We will have strong support for this initiative from our executive sponsor. Can’t tell if it a risk or an assumption. Depending on the project, there could be a high degree of risk in this statement (risk) or very little (assumption).
We will complete requirements before we begin design work. This is part of the project approach. It is not a risk or assumption because it is within the control of the project team.
Our vendor will complete their installation by October 1 Can’t tell if it a risk or an assumption. Depending on the project, there could be a high degree of risk in this statement (risk) or very little (assumption).
We must go to the moon to get the supply of meteor fragments that this project requires. This is not a risk or assumption because there is no risk involved. It is a fiction (0% true).
It is 60 miles from one project team location to the other. This is not a risk or assumption because there is no risk involved. It is a fact (100% true). (If it were not true it would be a fiction (0% true), but it would still not be an assumption or risk statement.)

Risk Management Worksheet

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The use of a risk management worksheet is similar to that of a risk management plan, but for big projects, they will have a limit of effectiveness. This is because of the size and number of the risks involved that could impact the larger business ventures.

You can use the risk management worksheet as an accompaniment to your risk management plan. It would be like a cheat sheet of sorts. To be effective you will have to list all of the possible risks you already placed in your risk plan. Not only will the names and nature of the risks that could impact your project be listed on this worksheet, but also the paths for mitigation. This will allow for an even faster response to the risks damage when they impact your project.

Not all of the information in your risk management plan needs to be listed on the risk management worksheet. Some of the items in the plan can be eliminated. The leading ones are the risks that have already been mitigated before the project enters its execution phase of its project lifecycle. The mitigation can be from someone in your project team or an outside source. The only ones that will fall into this category will be the risks that need no action taken if and when they impact your project.

One of the most important components of the risk plan that should be on the risk management worksheet is the contacts for the third party vendors who are the alternates for supplying your raw materials. The risk that makes an impact could be as simple as a vendor not meeting your schedule. To keep your project going, you will need to fill in this gap of supplies with another party. The sooner you contact them, the faster you will be receiving the raw materials you need for your deliverable.

The risk management worksheet is just another handy little tool the project manager can use to keep their business venture progressing towards a successful conclusion. Like all tools, the proper use of it and acting fast will make all the difference in just how effective it really is.