Why Risk Management is Crucial to Project & Portfolio Management

7 min read

Risk Management in Project & Portfolio Management aims to limit the impact of adverse events on a portfolio. Portfolio components are dynamic. They’re evolving and shifting every time a project is upgraded, postponed, or manipulated to achieve portfolio balance and strategic fitness. 

Hence, portfolio risk management is a balancing act crucial for portfolio resource managers and everyone involved. 

Risk management for portfolio and project management does not imply that you should avoid threats to achieve success. Instead, it is a crucial part of project management best practices that offer a better grasp of a portfolio’s total risk level so you can take necessary measures to mitigate risks.

A portfolio risk management strategy is necessary when is required at the enterprise level. After all, it only takes one weak link to break a chain and one bad project for an entire portfolio to fall short of reaching the organization’s strategic goals.

Defining Risk Management 

Portfolio risk is any uncertain event or situation that could hurt the portfolio’s objectives. Various factors contribute to portfolio risk, and the impact is not always predictably positive or negative. This necessitates portfolio risk management to reduce uncertainty and limit the damage so that the portfolio is not derailed.

The risk management process includes identifying, evaluating, and mitigating risks. On a project level, that may negatively affect the desired outcomes. The project team members are typically responsible for overseeing the whole process throughout a given project.

Portfolio risk management analyzes portfolio risk to reduce threats to a minimum or desirable level. The purpose is to reduce the negative impact of activities, events, and situations on a portfolio while also capitalizing on future possibilities. 

Portfolio risk management is critical because of the considerable impact a component failure could have on a portfolio. The relevance of the portfolio is only highlighted by the fact that one portfolio component risk might potentially enhance the risk of others.  

Importance of Risk Management in Project & Portfolio Management 

Portfolio risk management is a critical component of a company’s ability to deliver additional business value. Organizations that manage portfolio risk proactively are better positioning to take on more risk, improve portfolio value, and have a greater percentage of project delivery success.

Projects and portfolios allow businesses to safeguard their investments while also balancing their risk levels. Focusing on the risk management process is crucial for organizations aiming to strengthen their portfolio management discipline.

The goal of risk management is to identify risk potentials and develop a game plan to mitigate risks. Risk management is critical during the start-up, planning, and execution phases of a project. Properly managed risks dramatically improve project success.

It is more cost-efficient to minimize risks to prevent them from triggering. To be proactive rather than deal with problems that develop once the risk has been triggered (to be reactive). Risks that aren’t managed properly might easily obstruct a project from meeting its objectives or even lead it to failure.

The impact of the pandemic on businesses and other sectors is a glaring example of why risk management is critical for corporations. Portfolio managers must implement specific project and portfolio risk management strategies to make their companies sustainable against risks in the long term.

Differentiating between Project Risk Management and Portfolio Risk Management

A project or program deals with potential threats that can damage a project. On the other hand, portfolio risk management follows the big picture view in analyzing risks. 

In a project-driven organization, there is simply no place for project failure. On the other hand, portfolio-based firms deliberately seek out suitable risks, knowing that intelligent portfolio risk management can pay off handsomely.

Project problems and risks are generally specific to a program or project. But portfolios factor in the big picture based on the portfolio’s financial value, alignment with strategic objectives, and the balance of the projects and programs.

As the broader concept, portfolio risk management is more challenging than project-specific risk management due to the compounded variables of all the projects under a portfolio.

There is no one-size-fits-all approach for managing a portfolio. What works for one component might not work for another. However, the same risk management approaches may be applicable across similar projects.

Managing The Opportunity Portfolio 

Managing The Opportunity Portfolio is a risk-related process. It helps organizations to increase productivity by identifying and managing project opportunities beyond the initial statement of work. 

In the Opportunity Portfolio, some opportunities may become stand-alone projects, while others may be integrated under the scope of an existing project.

Just like risks, some opportunities are more significant than others, bringing a lot of value. Consequently, bad timing or other constraints might make it tough to seize some opportunities. 

That’s where project portfolio management tools like opportunity logs come in. The records regularly assess the value of opportunities and determine the best moment to take advantage of them.

The techniques for managing opportunity portfolios are similar to those for risk management, except that opportunities may result in positive results for the company. Options fall under possible future events, but they may allow businesses to achieve more or perform better than they had expected. 

Most businesses, firms, and organizations are solely focused on Risk Management or avoiding and eliminating negative consequences. But only the companies with advanced portfolio management techniques use Opportunity Portfolio Management alongside Risk Management to allocate resources for future projects adequately.

Steps in Developing a Risk Management Plan

Managing portfolio risks involves four stages: identifying, analyzing, developing a response, and monitoring and controlling potential threats.

Identifying Risks

Identifying Risks is the first step of portfolio risk management, which helps determine where hazards occur or originate from to assess them adequately. The majority of possible threats to a project or portfolio can be classified as external, internal, structural, or execution risks.

  • External Risks: These risks may come from competitors, changes in financial markets, political events, regulations, natural events, etc. These risks are managed by gathering and analyzing relevant data. Organizational data is then used to compare against high performers and peers, and whatever variances are found are then translated as either an opportunity or a threat.
  • Internal Risks: Management decisions, shifting strategies, corruption, corporate/ organizational realignments, redistribution of funding,  bankruptcy, breach of integrity, etc., are internal risks. Every aspect of an organization’s internal environment that can impact portfolio risk management is considered an internal risk.
  • Structural Risks: These incidents and situations make it difficult for an organization to manage its portfolios according to established structures. Failure to align these structures, which define how a business runs and performs, may result in an inadequate portfolio risk management plan. Therefore, structural hazards may impact the portfolio risk management of an organization. Constantly shifting strategies and overreaching ambitions put any portfolio at risk, making structural efficiencies such as effective portfolio governance and best practices crucial in portfolio risk management.
  • Execution Risks: These risks can come from the execution of a portfolio or one of its components. Execution risks come as a test of an organization’s ability to manage change, coordinate, and oversee to fulfill its mission and strategic objectives in portfolio risk management. Therefore, it should also consider the risks associated with interactions between portfolio components. Since execution risks may vary from organization to organization, managing these risks also requires company-specific methods and risk management techniques.

Analyzing Project & Portfolio Risks 

After identifying the risks, the next step is to analyze them and develop responses to monitor or control the risks.

Identified project and portfolio risks may be analyzed in many ways- through cost-benefit analysis, statistical modeling, sensitivity analysis, etc. The risks are prioritized and addressed based on the analysis results and possible impact on portfolio performance. Portfolio-level risks are the top priority. 

Hence, after analyzing project risks, project resource managers and portfolio management team members should develop options and respond to those threats. The risk responses help plan out ways to mitigate the impact of hazards on expected performance. Lastly, the established risk management policies have monitored these risks and controlled them, using various PPM tools and project portfolio software. 

Determining Portfolio Risk Tolerance 

Determining an organization’s Risk Tolerance or attitude toward the effects of risks, whether positive or negative, is another crucial aspect of the portfolio risk management plan. A portfolio can thus be classified as either a risk-tolerant or a risk-averse portfolio. 

The ability to diversify types of risk through a comprehensive and varying range of investments is one of the core ideas of project portfolio management ppm. Like the principles of finance, greater risk comes with a higher rate of return, while lower-risk brings a lower rate of return. 

A company’s risk tolerance is determined by assessing project riskiness, measuring the relative contribution of each project or the overall portfolio, estimating resource capacity, and defining project and portfolio maturity.

A risk-tolerant company is willing to take more significant risks to increase the effect and probability of positive outcomes. Despite the dangers, such companies don’t back down from the possibilities of moving into new markets or making substantial investments in new product development. On the other hand, a risk-averse firm goes for a risk-free portfolio, despite lesser returns.

Risk tolerance assessment in portfolio management helps assess and prioritize potential projects. While some organizations can afford to take on high-risk ventures, others are risk-averse with their projects. Therefore, accurately evaluating the risks associated with each project in a portfolio and the company’s overall risk tolerance is key to making prudent project decisions.

Executing the Risk Management Plan

Planning and executing an overall Risk Management Plan integrates all the previous steps of identifying, analyzing, and evaluating project & portfolio risks and possible ways to avoid or mitigate them. 

The overall risk management plan weighs out alternate approaches for achieving goals when associated risks that may hinder achieving those project objectives have been identified. These contingency plans equip organizations with workarounds for anticipated project risks and obstructions. 

Next comes the budget allocation for the contingency plans. Where risk-tolerant portfolios require bigger budgets for their contingency plans, smaller budgets are allocated for risk-averse projects or portfolios. 

Final Thoughts

Portfolio risk management protects portfolio value and allows portfolio managers to proactively control the portfolio’s risk level, allowing businesses to tackle more risk and thus enhance overall portfolio value successfully. To effectively manage the portfolio, companies must first figure out their risk tolerance and quantify it. 

Some companies and industries are more risk-tolerant than others, making risk management procedures vary from organization to organization. Measuring the portfolio risk for your company and proactively managing the risks boosts delivery success and the organization’s portfolio value.

One Thought On “Why Risk Management Is Crucial to Project & Portfolio Management”

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