Project Risk Factors, Their Influence and Analysis

Subject: Risk Management
Pages: 5
Words: 1386
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7 min
Study level: PhD

Project management is a broad area of management that encompasses wide-ranging chores, roles, and accountabilities that enhance accomplishment of business goals and objectives. Risk is an all-encompassing term that is highly debated in the field of management. Numerous researchers have endeavoured to define various aspects of risk that pertain to project management. This essay provides an insight into the definitions of various project management terms that are related to risk such as risk management, financial risk, financial risk management, project risk, and project risk management.

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Literally, risk refers to likelihood of incurring a loss from an unforeseeable event. From this definition, it is obvious that the knowledge about occurrence of unforeseeable events causes some loss of value. However, some definitions that used in project management slightly enhance and/or deviate from this meaning. For instance, Reding (2013) posits that risk is the possibility of occurrence of an uncertainty whose outcomes can be either positive or negative. This definition includes outcomes of desirable results, which deviates slightly from the previously mentioned definition. However, two key noticeable aspects that concur in the definitions. Firstly, risk implies uncertainty of occurrence of an event. Secondly, it implies an unanticipated event that poses an uncertain outcome, which can be either positive or negative.

Despite various conflicts of risk definitions, Ward & Chapman (2013) posit that a complete definition of risk should encompass desirable effects that are unforeseen. Regardless of the multifarious definitions, Wieczorek-Kosmala (2014) reveals that all definitions imply likelihood of an event that brings about either desirable or non-desirable aftermaths. However, desirability or undesirability of risk is usually based on human judgment. According to Simona-Iulia (2014), extent of perceived undesirable outcomes is quantifiable since risk is subject to judgment. Nonetheless, Aron, Clemons, and Reddi (2005) reveal that perception of uncertainty enables measurement of risks based on superficial factors. Situations that enable prediction unforeseen events are more risky; hence, they pose great losses to businesses and/or financial institutions. In this case, the prevalence measure of the unforeseeable event is high (Aron, Clemons, & Reddi 2005). Businesses are faced with many risks that make their future unpredictable. Knowledge about unforeseeable occurrences generates fear of unwanted outcomes. Nevertheless, businesspersons and investors must devise ways to prepare for impending risks that can have adverse effects on their operations. The process of controlling risks is known as risk management (Aron, Clemons, & Reddi 2005).

Various authors have defined risk management based on factors that lead to occurrence of risks and mitigation measures that can be applied to control risks. For instance, Măzăreanu (2011) defines risk management as a process that involves identification, assessment, evaluation, and mitigation of risks. It encompasses processes that entail distinguishing, measurement, and control of risks. However, many business scholars perceive risk management as a mere process of controlling risks. This definition lacks identification and assessment processes that are vital for ultimate risk management. Other scholars posit that risk management is a complete process that comprises recognition of a risk, assessment of the risk, and formulation of appropriate decisions to initiate proper control of the perceived uncertainty (Wu & Seco 2009). Therefore, the definition of risk management is rather a complex process than a single-step criterion.

Therefore, risk management practices should focus on analysis of both threats and opportunities that are likely to emerge in the event of a risk. According to Ward and Chapman (2013), this concept is applicable in managing risks based on the impending threats and opportunities that they pose to businesses. In this case, there is a need to analyse each risk and opportunity independently to obtain the best measures for control. Wieczorek-Kosmala (2014) posits that lessening of threats whilst trending on the opportunities is an appropriate approach to management of risks. However, not all practitioners apply the aforementioned concept. In the context of the concept, Wieczorek-Kosmala (2014) denotes that not all organisations base their risk management measures on two possible outcomes of a risk. As a result, most organisations manage risks based on undesirable outcomes whilst ignoring the positive effects of the outcomes.

Teller, Kock, and Gemünden (2014) define a project risk as a factor that affects the normal progress and feasibility of a project. This definition expressively denotes that that there are various threats that pose risks to the progress of the project. In this case, risk is perceived to bring about unwanted results. Elsewhere, Sarker (2012) defines projects risks as unpredictable factors that affect a project in its different stages of development. These definitions are sided towards the negative implications of a risk. Although, many scholars have leaned on the desirable effects of risks in their endeavours to define project risks, some researchers concur with the two-fold outcomes of a risk (Carvalho & Junior 2013). Project risks also encompass desirable outcomes of a risk. Carvalho & Junior (2013) advance that a project risk is an uncertainty whose occurrence can have a downside effect (opportunities) or an upside effect (threats) on the success of a project. Similarly, the occurrence of project risks have significantly influence the project development. This state of affairs requires implementation of robust project management procedures to control such effects (Gheorghe 2012).

Gheorghe (2012) defines project risk management as a process that involves identification, evaluation, analysis, and formulation of mitigation measures to control risks that face a project. In project management, many practitioners are concerned with mitigating the likelihood of occurrences of uncertain events that are likely to affect the accomplishment of the project objectives (Gheorghe 2012). According to Arias and Stern (2011), projects that are in progress are faced with many uncertainties such as inability to meet deadlines, financial shortages, and unnoticed managerial incompetence among others. Therefore, successful accomplishments of projects require execution of appropriate alleviation measures to curtail project risks. From this point of view, the concept of project risk management is based on measures that are initiated to mitigate possible threats that obstruct project development (Podean, Benta, & Mirceana 2010).

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According to Thamhain (2013), project risk management encompasses processes that deal with control of uncertainties. However, since these uncertainties are unknown, their outcomes are also unknown. In this perspective, project risk management can be defined as a process that focuses on extenuation of threats that face a project whilst harnessing opportunities that arise due to occurrence of the project risk. However, these definitions depend on vulnerability of analysts and scholars to focus on either downside and/or upside effects of the project risk (Thamhain 2013). Nonetheless, it is important to account for both threats and opportunities that characterise project risks in the process of project risk management.

According to Bonaimé, Hankins, and Harford (2014), financial risk refers to volatility of variable returns. It is unpredictability of actual returns due to deviation from the expected returns. Arena and Arnaboldi (2013) reveal that financial risks are classified into two categories namely internal risks and external risks. Internal financial risks are caused by risk factors that emerge from within the firm. On the other hand, external financial risks are brought about by uncertainties that are experienced in external business environments (Arena & Arnaboldi 2013).

According to Wu & Seco (2009), financial risk management refers to use of financial instruments to manage financial risks. Management of financial risks involves recognition and measurement of the foreseeable extent of financial risk in an attempt to establish appropriate control plans. However, Alexander (2005) posits that financial risk management is a broad process that encompasses identification of market, credit, and operational risk factors, assessment, measurement, monitoring, and reporting of suggestive measures to counter financial risks.

Arena and Arnaboldi (2013) posit that financial risk management should intergrate non-financial aspects that escalate occurrence of financial risks. Analysis of credit risk and market risk can be achieved through art and scientific management interventions that are applied in most financial markets (Sages & Grable 2010). However, Stulz (2005) posits that financial risk management entails processes that enable moderation of uncertainties. According to this definition, management of financial risks includes mitigation of threats whilst capitalising on opportunities. In the light of this concept, financial risk management should involve analyses of the two-fold effects of financial risks. Therefore, alleviation of unwanted outcomes enhances cost reduction. This situation results in attainment of optimal capital structure whilst focusing on upside effects of risk to enhance scrupulous decision-making processes that pertain to future financial extrapolations (Malandrakis 2014).

References

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Arena, M & Arnaboldi, M 2013, ‘Risk and budget in an uncertain world’, International Journal of Business Performance Management, vol. 14 no. 2, pp.166-80.

Arias, J & Stern, R 2011, ‘Review of Risk Management Methods’, Business Intelligence Journal, vol. 4 no. 1, pp. 51-78.

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Aron, R, Clemons, E & Reddi, S 2005, ‘Just Right Outsourcing: Understanding and Managing Risk’, Journal of Management Information Systems, vol. 22 no. 2, pp. 37-55.

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Măzăreanu, V 2011, ‘Understanding risk management in small 7 stepsYoung’, Economists Journal, vol. 9 no. 16, pp. 75-80.

Podean, I, Benta, D & Mirceana, C 2010, ‘Overlapping Boundaries of the Project Time Management and Project Risk Management’, Informatica Economica, vol. 14 no. 4, pp. 156-63.

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