Risk-based Learning

Revision as of 17:01, 21 February 2022

Developed by Gudrun Gudnadottir, February 2022

Abstract

Every day we confront several kinds of risks and must make calculated decisions about how to handle them. A calculated risk is a chance made after thorough assessment of the possible consequences. We are taking a calculated risk when we act knowing that the potential reward is significantly greater than the potential loss if the activity fails. Taking a risk forces us to develop. When we stay inside the boundaries of our comfort zones, our progress slows. We need to take risks and put ourselves in circumstances we've never been in before if we want to progress. Learning from risks is one of the most essential things a person or organization can do. The more risks you take, the better you will get at avoiding them. ^[1]

This article begins by providing an overview of risk-based thinking through an introduction to the concept of risk-based. Following that, it explores the significance of risk-based learning in organizations. Risk-based Project Management is addressed in depth, as well as its application to detect risks. Finally, the limits of risk-based learning are emphasized.

The Big Idea: An Introduction

Risk-based Thinking

The definition of risk-based from the Cambridge Business English Dictionary is:

1. “Done or calculated according to how much risk is involved.” ^[2]

Risk-based thinking is something we all practice on a daily basis. For example, if you want to go for a walk, you check the weather forecast to choose what to wear so you don't get too cold or warm. Risk-based thinking takes into account both the existing situation and the potential for change. Risk-based thinking in project management is crucial for determining risk levels and taking measures to address identified risks. Risks exist in all systems, processes, and functions. The use of risk-based thinking ensures that these risks are identified, considered, and monitored throughout the design and implementation of the quality management system. ^[3]

What is Risk-based Learning?

The meaning of the term risk-based learning is to learn and understand the risks that are involved in a project and make decisions based on the information. The higher the risk associated with a certain area of a project, the more effort needs to be put into learning all information about that area as possible. The potential of having the capacity to make informed decisions in order to minimize needless risks in projects is a fundamental reason for creating and adopting risk assessment systems. To do so, one must first understand about potential risks and how to manage them. Risk-based learning assists in the identification, assessment, and evaluation of possible risks. ^[4]

Application

Risk-based Project Management

Risk is an inevitable component of project management. A project risk is any unanticipated event that may occur during a project that may have a negative or positive impact on the project's objectives. ^[5] Risk arises when there is a chance of multiple outcomes and the final outcome is uncertain. ^[6] Risk-based project management uses risk-based thinking to learn how to manage the risk and uncertainty that comes with each project. When uncertainty is decreased, if not totally removed, the project's value is preserved and predicted results are attained. ^[1]

It is critical to assess the effect of risks, since failure to do so may result in a loss of understanding of the overall impact on project objectives such as scope, time, cost, and quality. As a result, it is critical for each project organization to establish an effective risk management strategy. Implementing a project team culture ensures that the project progresses as planned, with the fewest unexpected events. ^[7]

What is a risk in project management?

There are four main factors that needs to be considered when determining what is a risk in project management: ^[7]

1. Risk Identification

Risk identification is the process of determining what could happen that will have an impact on your project. Risks should be recognized and addressed as early as possible in the project. Risk identification occurs throughout the project life cycle, with a focus on major milestones. Some risks will be obvious to the project team while others will require more effort to identify, but will still be predictable. ^[7]

2. Risk Analysis

Risk analysis entails evaluating how project goals and objectives may alter as a result of the risk event's influence. Once the risks have been identified, they are analyzed to determine the qualitative and quantitative impact of the risk on the project so that suitable measures may be performed. To analyze risks, the probability and impact of the risks need to be determined. ^[7]

Probability:
Probability refers to the likelihood of a risk occurring. To analyze risks, the following guidelines are employed:

• High probability – (80 % ≤ x ≤ 100%)
• Medium-high probability – (60 % ≤ x < 80%)
• Medium-Low probability – (30 % ≤ x < 60%)
• Low probability (0 % < x < 30%)

Impact:
Risk analysis entails determining how the risk event's impact will affect project outcomes and objectives.

• High – Catastrophic (Rating A – 100)
• Medium – Critical (Rating B – 50)
• Low – Marginal (Rating C – 10)

3. Risk Exposure

Risk Exposure, also known as Risk Score, is calculated by multiplying the Impact Rating by the Risk Probability. The colors signify the amount of urgency in risk response planning and are used to establish reporting levels as is shown in Figure 1.

Figure 1: Impact-Probability Matrix (own figure, based on ^[7])”

4. Risk Occurrence Timeframe

The timeframe in which this risk will have an impact is identified. ^[7]

How to learn from risks

It is important for organisations to grow and learn from past experiences and mistakes that have been made. In order to do that complete transparency and accountability is needed. To learn, the following procedures must be followed in the organization:

• Distribute best practices throughout your organization. For this to happen, your organization's culture must be one of openness, with managers acting as co-dependent participants in the risk environment. Workers from the operational side of the business, as well as employees whose input is often ignored, such as the audit, finance, human resource, and risk management teams, must be included in this partnership. ^[8]

• Create a governing system. This is an essential component of the firm's operational risk management program. Governance encourages cultural honesty and openness while requiring responsibility from every employee, operating unit, and support function. ^[8]

• Identify, gather, and monitor a balanced collection of important performance indicators or metrics that assist leaders in identifying and mitigating control concerns. ^[8]

Limitations

Annotated bibliography

1. Dikmena, I., Birgonula, M.T., Anacb, C., Tahc, J.H.M. and Aouadd, G. (2008). Learning from risks: A tool for post-project risk assessment. Automation in Construction, 18(1), 42-50.

In this paper, a learning-based approach is proposed for risk management (RM). In order to implement this approach in practice, a tool has been developed to facilitate construction of a lessons learned database that contains risk-related information and risk assessment throughout the life cycle of a project. The tool is tested on a real construction project.

2. Lavanya, N. & Malarvizhi, T. (2008). Risk analysis and management: a vital key to effective project management. Paper presented at PMI® Global Congress 2008—Asia Pacific, Sydney, New South Wales, Australia.

This conference paper describes the structured Risk Management method used by Nokia Siemens Networks to avert crisis situations and incorporate lessons learned from previous missteps. It emphasizes that effective and early risk assessment and management ensures project objectives are met, resulting in lower rework costs.

References

1. ↑ ^{1.0 1.1} Pira, P. (2019). Life's Short. Take More Risks. Retrieved from https://www.forbes.com/sites/forbesbooksauthors/2019/08/23/lifes-short-take-more-risks/?sh=62ff41f12ad5 on February 20th 2022.
2. ↑ Cambridge University Press. (2022). risk-based adjective. Retrieved from https://dictionary.cambridge.org/dictionary/english/risk-based on February 13th 2022.
3. ↑ International Organization for Standardization. (2015). RISK-BASED THINKING IN ISO 9001:2015. Geneva, Switzerland: https://committee.iso.org/.
4. ↑ Dikmena, I., Birgonula, M.T., Anacb, C., Tahc, J.H.M. and Aouadd, G. (2008). Learning from risks: A tool for post-project risk assessment. Automation in Construction, 18(1), 42-50. Retrieved on February 13th 2022 from https://doi.org/10.1016/j.autcon.2008.04.008
5. ↑ project-management.com. (2022). Common Types of Risk in Project Management 2022. Retrieved from https://project-management.com/types-of-risk-in-project-management/ on February 13th 2022.
6. ↑ Williams, T. (2017). The Nature of Risk in Complex Project. Risk Institute, University of Hull, 48(4), 55-66. Retrieved on February 13th 2022 from https://doi.org/10.1177/875697281704800405
7. ↑ ^{7.0 7.1 7.2 7.3 7.4 7.5} Lavanya, N. & Malarvizhi, T. (2008). Risk analysis and management: a vital key to effective project management. Paper presented at PMI® Global Congress 2008—Asia Pacific, Sydney, New South Wales, Australia. Retrieved from https://www.pmi.org/learning/library/risk-analysis-project-management-7070 on February 19th 2022.
8. ↑ ^{8.0 8.1 8.2} Rael, R. (2012). Smart Risk Management: A guide to identifying and calibrating business risks. New York, NY: American Institute of Certified Public Accountants, Inc. Retrieved from https://onlinelibrary-wiley-com.proxy.findit.cvt.dk/doi/pdf/10.1002/9781119449430 on February 19th 2022.