Risk Management: Definition, Importance, & Types
Unfortunately, all projects and undertakings involve some amount of uncertainty or risk. Whether it’s minuscule or highly likely, the consequences can end up being costly on a number of levels — and when you’re unprepared, these consequences can be catastrophic. But what does risk management actually mean, why is it so crucial to a quality product, and how can you ensure that yours is strong? Let’s discuss.
What is Risk Management?
Put simply, a risk is a potential problem — this could be an event, a level of performance, or a variety of other circumstances, where the risk measures the odds of it occurring. Risk management is the planning process to identify, assess, avoid, control the probability of, or deal with these potential problems. The purpose is to mitigate the chances of potential issues becoming reality (and if they do, having plans in place to resolve them).
Why is Risk Management Important?
Because the impact of a risk depends on both the probability that it will occur as well as the magnitude or severity of the resulting circumstances (more on this in the “Assessment” section below), it’s critical to have a plan for determining which risks are worth planning for, and which aren’t.
The major advantages of risk management come down to budget and resource efficiency, as well as general preparedness:
- Saves additional money and time being poured into unexpected or unmitigated emergencies that snowball out of control.
- Increased worker productivity without the need to double- and triple-check their work (because they know all risks are covered) or constantly go back and make fixes.
- More accurate estimation of project costs and timeline due to a more comprehensive assessment of potential hurdles and expenses.
- Stronger company reputation built on smoother projects that output a higher-quality final product with fewer hiccups.
Types of Risk Management Strategies & Responses
Before we discuss the process steps, there are several common methods that organizations may use to respond to different risks. These strategies to minimize or deal with risk are:
- Risk Avoidance: Perhaps the first strategy that comes to mind, this involves adjusting the project’s scope, timeline, budget, or other constraints to entirely avoid or refuse to take certain risks (such as if the probability or consequences are too high).
- Risk Mitigation: For those unable or unwilling to outright avoid certain circumstances, risk mitigation involves taking action to minimize the impact or odds of a risk (this is common in modern software development).
- Risk Transfer: If the above strategies are too constraining or too risky to deal with internally, an organization can procure a third party to deal with them on your behalf. While expensive, outsourcing this process allows you to focus entirely on core work rather than worrying about risks.
- Risk Acceptance: This final strategy involves simply accepting that a risk is affecting the project, and not taking any action or making changes to the project (this should only be used when a risk has a low impact or effect on users).
Traditional Risk Management vs. Enterprise Risk Management
The primary difference between these two risk management approaches is the scope of mitigation. Traditional risk management primarily focuses on risk to a specific project or area, while ERM takes into account risk across the entire organization. This organizational or enterprise risk also extends to factors like financial and reputational risk.
Types of Risk
Understanding the consequences of risks and the general process is a crucial foundation for effective risk management. Every company and application is different, so let’s cover the different types of risks that should be considered in the planning process:
Technical Risks
The software industry revolves around new technologies, but these new and unproven applications and tools can result in significantly higher risk levels of poor code, integration issues, etc. This impacts the functionality of the final product and its performance, which can lead to poor user reception. If not caught early, it can be disastrous to the entire project.
Estimation Risks
Setting expectations that are unrealistic can set up any project for failure. These risks include underestimating timeline or required budget, which can result in all parties being unhappy. In these situations, workers will be pressured to complete work faster and stakeholders will unexpectedly have to spend more money and time on the project.
Scope Risks
These are similar to estimation risks but more focused on expectations changing rather than budget not meeting expectations. Scope creep is a common issue in many industries where the goals, features, or requirements evolve and change over the lifetime of the project. If not kept in check and monitored, you risk projects going over budget and taking longer than initially planned.
Communication Risks
Breakdowns in communication can cause massive headaches and roadblocks for development projects, particularly by increasing the risk of delays and misunderstandings. This type of risk heavily affects other categories like scope risks and technical risks, so it’s important to maintain clear and frequent communication between all parties involved.
End-User Risks
This can come in a number of different situations, from the risk of users being resistant to change to performance simply not matching their expectations. Not talking — and listening — to end-users through the development process (or at least being aware of their thoughts and expectations) is a recipe for an application that fails on arrival and is never adopted by its target user base. Mitigate these risks through surveys, frequent releases, beta testing, and other ways that allow you to gather feedback and respond to it.
Examples of High-Risk Industries
There are certain fields and industries that naturally come with greater risks and have a higher need for risk management. This often comes from their impact on the public’s health, safety, or financial stability, such as:
- Construction
- Food Production
Risk Management Process
So, with risk management’s importance to all businesses, what’s actually involved in achieving this? The process of risk management begins with identification, but creates an ongoing cycle of monitoring and responding to risks. The primary steps of a risk management plan are:
Step 1: Identification
The first step of risk management is to surface potential risks before they can cause issues. This includes not only the risks themselves but also their root causes — identifying the causes can lead to additional risks being discovered.
It also makes future steps toward mitigation more effective because you’re treating the disease rather than the symptoms. This stage may involve brainstorming sessions, data analysis, policy reviews, and more to find potential weak points.
Step 2: Assessment
Once you have a list of risks, it’s time to evaluate the likelihood of their occurrence and the severity of their impact. This step is not just an assessment of the risks, but also the organization’s risk aversion or appetite. A risk assessment matrix like the one shown below can be a great way to visualize this information and make it more digestible for further analysis:
Step 3: Prioritization
Based on the assessments done, we can now determine which are the highest priority for mitigation and which are less critical. This is a vitally important step because there are often too many risks to address all of them. Categorizing these risks based on the assessments of the previous stage allows for better resource optimization and puts focus on the more important areas. Prioritization is also where risk tolerance comes into play, as higher risk tolerance may translate to fewer “high-priority” risks (while more risk-averse groups will likely have more “high-priority” risks to manage this).
Step 4: Response
This phase of risk mitigation is where a plan is developed and executed to address as many of the risks identified, assessed, and prioritized in the previous steps as possible.
The nature of each risk will determine the management strategy — but most response plans will fall into the types we outlined earlier (avoidance, mitigation, transfer, or acceptance). Once plans are finalized, they will be prepared and put in place.
Step 5: Monitoring
Just because plans are in place doesn’t mean that the job is done. Risk management is an ongoing process that continues to monitor and evaluate previously-identified risk and any new risks that surface. Monitoring involves ongoing data gathering, testing, and responding so that issues are caught early and can be addressed quickly.
This can be accomplished with automated tools like tracking systems, auditing platforms, and testing software. This stage should also involve documentation of any changes or events that occur so future projects can learn from potential gaps in coverage or mistakes.
Step 6: Reporting
Largely based on the documentation of risk management processes, it can be incredibly valuable to organize that information into reports and centralized hubs for future teams and projects. Whether these reports are presented to all stakeholders or kept internal is optional, but having the information easily-accessible will greatly benefit future efforts.
Consequences of Poor Risk Management in Software Development
While risk management is applicable to almost every industry on the planet, it is especially important for the development of software due to the emphasis on functionality and user experience. Another reason behind risk management’s strong presence in software development is that the different methodologies behind the development process have a host of risks associated with each.
There are many ramifications that can come with poor risk management. They primarily come down to unhappy customers and users, but range from slow user adoption and missed opportunities to reputational damage and complete project failure.
Click here to see the 10 best risk management tools available.
Upgrade Your Risk Management Capabilities
Risk management is vital for project management effectiveness — but it doesn’t have to be a complicated and difficult implementation process. SpiraPlan is an intuitive and powerful tool that has a comprehensive suite of features and tools, including efficient risk management. It quickly and conveniently integrates with your current workflow to make your life (and your developers’ lives) easier, without sacrificing the potential consequences we’ve discussed.
Not convinced? There are a variety of key factors that strong risk management tools should cover — see how SpiraPlan checks all the boxes here.
If you’re interested in learning more about SpiraPlan’s risk management capabilities, watch our walkthrough below:
How Risk Management Works In SpiraPlan | Inflectra
Note: The risk management features are also available in our SpiraTeam edition as well.