Introduction

Almost every project that is proposed to be taken has some sort of risk associated with it because of the presence of element of uncertainty, provided the proposed project is not trivial in nature. A project risk is primarily made of two parts i.e. the probability of anything going wrong and its negative impact on the project. Risk can be difficult to spot but it can be managed effectively using the concepts and tools of financial management. It is not necessary that a project has to face a single risk. Rather, there can be range of risks involved in any particular project such as strategic risk, supplier risk, operational risk, competitive risk, fiscal risk, legal risk, regulatory risk and most importantly financial risk. Therefore, prioritisation of risk is one of the most critical part of risk management process.  An appropriate management of risk enables a manager to recognise and understand the risks involved in a project.

Critical analysis of concept of risk

Risk is a broad subject as it is present in every aspect of the project since the beginning till the end of the life of project.  Considering the negative side of risk it is assumed as the unlikely unwanted outcome of any activity. However, the concept of risk is highly synthetic in nature and in context of project management it can linked to unforeseen events, uncertainty or the variability in relation to different parameters of different projects. The term risk can be interchangeably used with the tem uncertainty in project management topics (Raz, Shenhar, & Dvir, 2002). However the terms have their own concepts and hence they vary in their respective meanings. Risk generally occurs when a project manager has a complete knowledge and information about the exact probabilities of the occurrence of unfavourable events, while uncertainty presents when there is a lack of required knowledge and probabilities. Ward & Chapman (2003) suggested that use of empirical data and statistics can be used to predict the risk but that cannot be used to predict the uncertainties of the project. Risk may cause the actual performance project deviate from the planned performance. The occurrence of unfavourable events is the prime risk of any project as it can adversely affect the project objectives due to its negative exposure to the unfavourable events and their probable consequences. Risk also takes place when the known probabilities of can be attached to a set of possible consequences of a decision. In clear terms, risk is the probability of deviation of actual return from the planned (expected) return. It can also be defined as an uncertainty in relation to occurrence of loss. Losses are the negative returns of the project.  A project incurs losses when it is not able to generate sufficient cash inflows to cover its cash outflows.

However on the other side of the risk theory, it is a generally accepted fact that a project that involves higher risk has a potential of higher returns. Returns are the profits on the investments made in the project. At the proposing stage of project, no one can predict the exact things related to the project that are going to happen in future there is always a some degree of risk is involved in the project whether the project owner likes it or not. The risk tolerance capacity of a project increases its opportunity to grow (Kwak & Stoddard, 2004). Typically, a risk can have numerous possible sources from within and outside environment of the project. But, primarily these three factors affect the project’s functioning and growth. They are economic, industrial and company factors. The general economic factors includes inflation, recession etc. Industrial factors include entry of new rivalry firms, intense competition, decline in the demand etc. Individual factors cover the internal events or activities such as destruction of plant and equipment, technological obsolescence etc. however there is a wide range of risk that a project can be exposed to.

A project may involve various types of risks which are categorised independently on the basis of the impact of their realisation on the functions of business and the environment in which it is being operated. The following is the general list of risk a project may have to face:

• Strategic risk: This is the risk related to the business strategy and affects its successful implementation by the project manager.
• Operational risk: It affects the internal ability of the project to carry out its basic operations.
• Competitive risk: It is the risk imposed on the project due to the existence of rival firms in the industry to which such project belongs to.
• Reputational risk: It is the risk that a particular event or activity on part of project manager or project management team will erode the value of the business due to the loss of public image and faith.
• Financial risk: A project may have to incur losses when it is not able to generate sufficient cash inflows to cover its cash outflows.
• Legal and regulatory risk: A project might have to face to legal implications because of its activities. Also, the introduction of new and stringent laws and regulations by various regulatory bodies for the industry to which the project or business belongs to or to the project in particular can impose risk of legal interventions (Ennouri, 2013).

Literature Review: Risk Measurement and Ranking Process

As per Edwards & Bowen (2013) it is critical to understand the difference between risk measurement and risk management. Conceptually risk measurement is the key part of risk management. As per Meredith & Mantel (2011) risk measurement is a passive activity while the risk management is an active process and therefore it involves actions and various quantitative calculations. Further, risk management takes the benefits of risk measure for the allocation of risk to the different assets to undertake risk monitoring and refinement process. Heldman (2010) argued that risk management is the continuous process which covers all the phases of the project. Further it is an integral part of process of decision making process by implementing the decisions through risk acceptance and alteration. It is the important process to ensure that the main aim of project management is achieved by achieving the overall project goals within the prescribed time and cost. According to Harrison & Lock (2017) in order to measure and rank the risk involved in the project, the project manager can use different risk analysis methods. These methods can be both qualitative and quantitative. Following is the list of few methods:

Qualitative risk assessment methods

• Risk probability and impact analysis
• Risk data quality assessment
• Risk categorisation
• Risk urgency assessment
• Expert judgement

Quantitative risk assessment methods

• Sensitivity analysis
• Expected monetary value analysis
• Decision tree analysis
• Monte Carlo analysis

A business impact analysis (BIA) can be used to measure the degree of risk and its impact on the overall performance of the project activities. This analysis is undertaken using the BIA matrix. Since this matrix is used to assess the risk involved in a particular business or project it is also termed as Risk Assessment Matrix. Under this matrix all the potential risks of a project are placed on the basis of two major criteria that are being discussed below:

• Likelihood: It is the probability of occurrence of a particular risk.

On the basis of likelihood of the risk occurrence, risk can be categorised in following terms:

• Definite (scaled as 3): It is the risk that has almost a certainty of showing up during the execution of the project. In percentage terms, a risk that has more than 80% or more chances of occurrence will be placed under this category.
• Likely (scaled as 2):  A risk that has more than 60 but less than 80% likelihood of occurrence can be categorised in this area.
• Unlikely (scaled as 1): This category is majorly for the rarest and exceptional risks that have even less than 10% of likelihood of occurrence.
• Consequences: The severity of impact of the risk and the extent to which it can cause damage (Rabechini Junior & Monteiro de Carvalho, 2013).

Further on the basis of consequences of the risks, risk can be classified as well as ranked. Following is the list in which risk can further be classified on the basis of the severity of its impacts.

• Trivial/ Insignificant (scaled as 1): The risks that can cause the damage that is nearly negligible to the total functioning and progress of the concerned project.
• Minor (scaled as 2): When the risk can cause damage to some extent but such extent is not significant enough.
• Major (scaled as 3): The risk which has consequences which are significant enough that they can lead to large amount of loss. Such risks are quite critical in nature.

• Catastrophic (scaled as 4): The risks that have the potential to turn the project completely unproductive. These types of risks demand highest priority during the process of risk management.

3 x 1= 3	3 x 2= 6	3 x 3= 9	3 x 4= 12
2 x 1= 2	2 x 2= 4	2 x 3= 6	2 x 4= 8
1 x 1= 1	1 x 2= 2	1 x 3= 3	1 x 4= 4

                                                                X axis

• X axis: Consequences
• Y axis: Likelihood of occurrence

The above used grids can be further extended in accordance with the criteria chosen by the project manager. Depending upon the values of the above used grids, risk could be assessed in the following manner:

• Values from 8 to 12 can be termed as catastrophic risks.
• Values from 6 to 8 can be termed as major risks.
• Value 3 can be termed as Minor risk.
• Value 1 or 2 can be termed as Trivial.

However, the quantitative methods of risk measurement and ranking can be discussed as below:

Sensitivity analysis can be used to determine the risk factor involved in the capital budgeting decisions regarding a project (Gourieroux, Laurent & Scaillet, 2000). It involves checking the project’s sensitiveness to the changes in various input variables such as change in number of units, minimum required rate of return, price per unit, variable cost per unit, number of years of useful life, salvage value etc. This analysis does not measure the risk involved in a particular project rather it determines how the changes in each input parameter influences the project’s performance in terms of NPV. The degree of sensitiveness of the project will determine its capability to take up any risk on account of uncertainty. According to Miller & Waller (2003) scenario analysis is another classic example of capital budgeting technique to assess the risk of a project. It is used to determine the expected value of a project’s investment in the best, worst and base case scenario. It helps in examination of the risk of the investment by identifying what exactly the returns of the project in the worst scenario when nothing go favourable and as per the plans. Sometimes risk of the project plan can also be evaluated on the basis of simulation analysis where probabilities to each of the possible case is given and the total impact is checked to check whether the overall results are equal to expected results (McNeil, Frey & Embrechts, 2015). Decision tree can also serve as the effective tool of analysing and managing the risk of a project. This method involves two steps for risk evaluation of a project (Dey, 2002). First is to identify the different possible scenarios of a project and secondly determining their respective probabilities. It shows changes in the worth of the project when the possibility of various scenarios of project changes. Various other tools such as certainty equivalent, risk free adjusted rate of return can be analysed to measure the risk of the project. Further, there are various statistical ways of measuring the risk involved in the investment plan. Standard deviation is the absolute measure of risk and it measures the deviation of actual returns from the expected return. Coefficient of correlation is the relative measure of investment’s risk and hence it can also help in analysing the risk.

Risk management strategy for the new project involving development of new technology

In the present case where the project of introduction of new technology in the market is being considered to be taken up by the project management team within 6 months’ time frame. Since the development of new technology has required the participation and efforts of international team therefore it can be said that the new technology development will involve huge capital investments. It will not only involve the payment of professional fees to be paid to the experts participating in the technology development, but also there will be huge expenditure required for the purpose of  research and development activity as an entirely new technology is proposed to be introduced in the market. Further, necessary tools and equipment will be required to carry out the development of proposed technology. The proposed project demands high investments to be made and hence it will involve higher financial risk that whether such expenditures will be recovered by the project or not. Also, as an entirely new technology has to be introduced in the market, there are other risks associated with the project such as legal risks, competitive risk etc. Therefore, it is the absolute responsibility of project manager to undertake a proper risk management strategy that aligns with the objectives of the project. To formulate a successful strategy, the project manager has to carry a series of steps such as risk identification, risk analysis or evaluation, risk reporting or risk response and risk monitoring (Kerzner & Kerzner, 2017).

Risk identification

The identification as well as analysis of the risk involved in the project is performed throughout the life of project. To identify the risk involved in the project of development of new technology can be identified using following methods and approaches:

• Gathering of information: The information from various possible sources (internal and external) that cast possibility of risk occurrence. This will include taking up of surveys about the relevance of new technology in the market (Lyons  & Skitmore, 2004).
• Application of SWOT analysis: This will involve identification of the threats available in the market to the new technology and the potential impacts of such threats (Raz & Michael, 2001). A new technology may have to face certain regulatory threats such as it might result in production of toxic products that are harmful for the environment and its several constitutes. Therefore it might be banned in certain areas.
• Use of expert judgement: It is possible that the project manager does not have the complete expertise of use and other features of technology and for this purpose they might have to appoint the experts and professionals to identify the risk involved in the project.

Risk Analysis

Soon after the potential risk is identified, a proper risk assessment procedure must be undertaken to evaluate the intensity of all the possible risks. This can be done by formulating the risk assessment matrix for the new technology. This matrix uses the probability and impact of risk to rank the risks. On the basis of ranks all the risks can be prioritised (Cervone, 2006).

Risk evaluation

Once the risk is categorised and ranked at the previous stage, its impact on different stakeholders of the project must be evaluated. The project of technology development may have a number of stakeholders such as its experts (international team), provider of finance (banks and financial institutions), government (regulators of environment), users of technology (producers or manufacturer), suppliers of tools and equipment required to develop the technology, project management team (employees and their supervisors) etc. Therefore, it is necessary for the project manager to evaluate the impact of risk on the key stakeholders of the company If these stakeholders of the project are not given due consideration at the time of risk evaluation, they may disturb the performance of the project (Kutsch & Hall, 2010).

The risk evaluation will help the project manager in allocation of the valuable resources and time among those risks which have high probability of occurrence and potential of severity.

Risk Responses

Planned responses are always better al-least for the risks that are already identified because it promotes taking up of actions that are prudent, rational and cost effective. Strategies must be formulated to deal with the project risk. There can be various threats imposed on the new project in the form of negative risks (Raftery, 2003). Also, there can be several opportunities available in the outside environment for the new technology development such as grant of subsidies and concessions by government to the technology developers. These opportunities are the positive risks to the proposed project. The project manager has to design response to all the possible risks whether negative or positive (Newton,  n.d.).

For the negative risks following responses can possibly be taken:

• Avoid: If the impact of the risk is zero or negligible, then it must be avoided without wasting time, efforts and cost on removing those risks.
• Transfer: It involves shifting the burden of risk to the third party. For example: the developers of technology must take an insurance of their premises and equipment used to carry out the technology development process.
• Mitigate: It involves taking requisite early actions to decrease the probability and the impact of risk. For example: choosing fire and water proof tools and equipment for the new technology development process so that any fire or flood does not affect its process (Carbone & Tippett, 2004).
• Accept: It is the most common strategy as it involves maintaining a contingency reserve in necessary aspects  such as time, economics and other resources so that even if the risk occurs then the entire set up can be taken to other place to continue the operations.

For the positive risks following responses can possibly be taken:

• Share: Sharing a positive response will include sharing of ownership with other parties by forming joint ventures, partnerships etc.
• Enhance: It involves deployment of additional resources to a particular activity of technology development process (Barkley, 2004).

Once it is clear as to how to respond to the risk it becomes necessary for the project manager to continuously monitor the project risk management strategy for its successful execution throughout the life of the project.

Conclusion

From the above report, it is quite clear from the above discussion that a low risked project has a low growth opportunity. A project with higher risk has the opportunity to earn higher returns and vice-versa. Therefore, it is of utmost importance for the project manager to critically evaluate the risk involved in the project before initiating such project using an appropriate risk management plan and strategy. A suitable risk management strategy will not only enable the project managers with identification of potential risks to the project rather it will facilitate them to take appropriate actions to prevent and reduce the risk to the maximum possible extent.

References

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