The 4 Most Common Risk Mitigation Strategies
Estimated reading time: 5 minutes
Project risk management is defined as the process of identifying, analyzing and then responding to any risk that arises over the life cycle of a project to help the project remain on track and meet its goal. Managing project risks is a process that includes risk identification and assessment, to prepare for a risk mitigation strategy. Risk assessment includes both the identification of potential risks with the evaluation of the potential impact of the risk. After which, it is just as crucial to prepare a risk mitigation plan to reduce the likelihood that a risk event will occur and/or reduction of the effect of a risk event if it does occur.
A risk mitigation plan is designed to eliminate or minimise the impact of the risk events that have a negative impact on the project. A good risk mitigation plan should address the following:
- Characterize the root causes of risks that have been identified and quantified in earlier phases of the risk management process.
- Evaluate risk interactions and common causes.
- Identify alternative mitigation strategies, methods, and tools for each major risk.
- Assess and prioritize mitigation alternatives.
- Select and commit the resources required for specific risk mitigation alternatives.
- Communicate planning results to all project participants for implementation.
Some risks, once identified, can readily be eliminated or reduced. However, most risks are much more difficult to mitigate, particularly high-impact, low-probability risks. Therefore, risk mitigation and management need to be long-term efforts by project directors throughout the project. With regards to the techniques for effective project risk management, the 2 main types are qualitative or quantitative risk analysis technique.
Each mitigation technique has its own strength in reducing different types of risk. A comprehensive risk mitigation plan describes the risk mitigation approach for each identified risk event and the steps to take to reduce or eliminate said risks.
Here are the 4 most common risk mitigation strategies:
- Risk avoidance
- Risk sharing
- Risk reduction
- Risk transfer
Risk avoidance involves an alternative strategy with a higher cost, that would result in a higher probability of success. For example, a common risk avoidance technique uses existing proven methodologies instead of adopting new ones, as they present lower risks. Although the new technologies may present better performance or lower costs, due to the higher risk factor, they are avoided. Another approach is to establish policies and procedures that assist the organization to foresee and avoid high-risk situations. This strategy is usually the most expensive of all risk mitigation options.
Risk sharing involves sharing the responsibility for the risk activities with another party. The most common form of risk sharing done for international projects is through a joint venture agreement. Joint ventures are highly advantageous for both parties as they lend on the expertise and knowledge of the other company. It also helps to reduce the political, legal, labour and others risk types commonly associated with international projects. In the event that the risk event does occur, both companies absorb the negative impacts, hence lowering the costs for both parties.
Risk reduction involves the investment of funds to reduce the risk on a project. On international projects, companies mitigate the risks of fluctuating currency exchange rates by purchasing the guarantee of a currency rate. Another example is by investing in highly skilled project personnel to review the project costing and scope, to reduce as much project risks as possible. Companies also use diversification of products by mixing products, technologies, markets and supply chains to spread and reduce risks.
Lastly, risk transfer is a risk reduction method that hands off the risk to a third party. The most common example is through outsourcing certain operations such as customer services. Another method is through the purchase of insurance, allowing the risk to be transferred from the project to the insurance company. It also safeguards the project team against unpredictable risks such as weather and political unrests, which are outside of the project team’s control.
To provide more information on how to effectively manage project risks, the Project Manager and Designer has jointly developed a guideline to help people cope with threats and opportunities throughout the entire project life cycle. This guideline aims to aid people in identifying, quantifying, preparing a response to, monitoring and controlling project risks. It provides information in the following areas that will help with risk management efforts: a consistent methodology for performing project risk management activities, techniques and tools for project risk management, identification of data requirements for risk analysis input and output, information on how risk management fits into the Capital Project Delivery (CPD) process and guidance on how to proactively respond to risk.
Project Risk Management is a 3-day training course held from 4-6 December 2019 (Kuala Lumpur). In this 3-day course, you’ll work through the proactive approach to threat and opportunity—based on a clear understanding of the powerful nature of both qualitative and quantitative approaches to risk management. You will be able to effectively pinpoint the various types of risks, identify, analyse and prioritise risk, master the various risk-based financial tools and techniques.