Topic 3.3: Risk profile
At the project initiation stage, we are more interested in the relative risk to the sponsoring organisation of proceeding with an opportunity.
It is therefore important that we assess each opportunity against a set of risk criteria that are predefined from that organisation’s perspective.
Given, too, that we will be undertaking a detailed risk-to-the-project analysis as part of our project planning, to do so in the project initiation stage would be both redundant and unnecessary for those opportunities that we end up discarding.
So, what are the risks typical to a sponsoring organisation that we should consider?
These are some standard options – you may identify more that are specific to your enterprise and its context.
For example, an organisational risk factor for projects delivered on a remote island community could be their level of dependency on imported goods and services.
In that instance, options that are delivered 100% locally might be considered much lower in risk than those that rely on the vagaries of coastal shipping or air freight.
Another risk factor that could vary by option might be the timing of project cash flows; no doubt you can think of several that are specific to your own organisational experience.
As always, you should look to develop your own categories, thresholds and definitions of organisational risk.
You can then assign a risk score to each option; for example, five is high risk, three is medium risk and one is low risk.
The sum of risk scores can then be converted to a percentage for ease of comparison.
It should also be noted that in some cases it will be a subjective judgement as to whether or not the risk of one criterion is low, medium or high.
The consensus of key stakeholders should be sought on the final determination, especially where conflict is likely.
Where the project risk profile contains critical economic or other risks, sensitivity analysis should also be performed on those metrics where a change will have a significant effect.
With this information, you can set appropriate low / medium / high risk thresholds for your organisation.
For example, a low risk opportunity might be one with a risk score of less than 40%; a medium risk opportunity might be 40-70%; and, a high risk opportunity could be one with a score of greater than 70%.
Applying these thresholds to our example above, the opportunity assessed would be categorised as medium risk.
Assuming the opportunity is not deferred or rejected, our concept canvas will now direct us (at the “Where do I sign?” section) to what the next steps in the initiation process should be:
- A high risk opportunity demands a detailed business case
- A medium risk opportunity requires a simple business case
- A low risk opportunity can be immediately chartered and proceed straight to project planning.
These subsequent steps are what we introduce in the rest of this unit.
We will return to the risk-profile tool regularly in this course; for now, though, appreciate that this method should be preferred to traditional forms of risk assessment at the project initiation stage.