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 of risk 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 then, is the planning that’s done to entirely avoid, control the probability of, or deal with said potential problems.
Why is it 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, it’s critical to have a plan for determining which risks are worth planning for, and which aren’t.
The importance of risk management really comes down to budget and resource efficiency. Some examples of this are:
- Saves additional money and time being poured into unexpected or unmitigated emergencies.
- 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.
- Stronger company reputation built on smoother projects that output a higher-quality final product.
Risk management process
So, with the importance of this factor 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:
- Identify risks - brainstorm all potential risks and detail their projected impact, likelihood, and any other important factors of each.
- Assess and prioritize - once you have a list of potential risks to a project, assess which are the most likely to occur and which will have the biggest impact if they occur.
- Develop a plan - decide on corrective action that can be taken to respond to each risk and set predetermined thresholds for each (at which point you’ll take action).
- Monitor throughout the project - as the project gets underway, continually monitor progress and sections that bring more risk than others to ensure any problems that occur can be dealt with immediately.
- Implement plan if necessary - if a risk does become an issue, implement your planned action for the associated scenario to mitigate its impact and circle back to step 4, monitoring and taking action until the project is finished.
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.
Consequences of poor risk management
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.
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Types of risk
Understanding the consequences of risks and the general process is a crucial foundation for effective risk management, but how you go about the specifics will depend on your situation. Every company and application is different, so there are different types of risks that should be considered, which can then inform the direction that your risk management strategy takes.
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 significantly impacts the functionality of the final product, as well as its performance. If not caught early, it can be disastrous to the entire project.
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 (workers will be pressured to complete work faster, while stakeholders will unexpectedly have to spend more money and time on the project).
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.
Breakdowns in communication can be disastrous 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.
One of the risk types most influenced by communication and scope is stakeholder expectations, which typically relate to the project’s scope. Communicating and managing their expectation effectively so there aren’t any surprises is critical to a successful project and final product that everyone is happy with.
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 being involved with 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.
Types of risk management
Lastly, when it comes to responding to risk, there are a handful of common philosophies that organizations take. These strategies to minimize or deal with risk are Avoidance, Mitigation, Transfer, and Acceptance:
- 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 the most common strategy in 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 affect for users).
Improve your risk management today
Risk management doesn’t have to be a complicated hassle to implement. SpiraPlan is an intuitive and powerful tool that has a host of features, including efficient risk management. It quickly and conveniently integrates to make your life (and your developers’ lives) easier, without sacrificing the potential consequences we’ve discussed.
There are a number of key factors that you should consider when looking for a risk management tool — 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: