During the 1990s, as a result of growing globalisation, complexity and competition in the business environment, risk management developed as a core competency for each part of an organisation.
At the heart of a successful infrastructure project is a robust plan. Risk analysis investigates the cause and effect of risk in terms of what might go wrong with the plan compared to expectations and risk management determines what should be done about this. In this context, opportunities are as significant as risks and the process should seek to capture the benefits of opportunities not just the obviation of threats.
Significant benefits flow if risk management assessment is undertaken within plan because this will maximise the level of certainty that an infrastructure project will succeed.
The risk management process involves several key steps which apply at particular phases in the life of an infrastructure project:
Proposal definition
Risk analysis
Response planning
Implementation
Review and modification
Proposal definition The first step in infrastructure risk management is to establish clear objectives to cover finance, performance and other matters.Conflicting objectives, which frequently occur between parties working on infrastructure projects, are spotlighted. Conflict recognition provides an opportunity to acknowledge underlying differences while formalising common objectives: a key feature in developing an appropriate risk allocation strategy.
Having established agreed objectives, clear and recognisable criteria by which they can be measured are developed. For example, tangible milestones may be established to measure performance against time.
Risk analysis
Risk analysis investigates cause and effect of risk in terms of what might go wrong compared to expectations while risk management determines what to do about this. In this context, the process should also seek to capture the benefits of opportunities not just the obviation of risk.
Risk analysis provides a number of significant benefits:
. clarification of factors affecting project outcomes
. focusing management effort on risks of greatest impact and opportunities of greatest benefit
. development of understanding between the parties involved
. recognition of key reporting features
. understanding of change to risks over project life
. time and financial contingencies based on analysis rather than rule of thumb
Risk identification methods range in technique. Experience at Evans & Peck Management is that workshop groups, comprising informed participants from varied backgrounds, are the most effective means of achieving comprehensive risk identification.
The next step, risk assessment, estimates the likelihood of the risk arising (probability) and the consequences of each risk (impact).
Various analytical techniques are available, but there are two main alternatives:
Risk assessment - Description
Qualitative - Ranks risks in terms of severity in terms of probability and impact
Quantitative - Calculation of severity of risk by measuring probability and consequences of risk using statistical techniques including sensitivity analysis, event tree analysis, probability analysis and systems simulation modelling
Response planning
In responding to identified risk, participants in the infrastructure project may adopt one or more of the following strategies:
Response strategy - Description
Risk avoidance - A strategy to circumvent unacceptable risk posed by the project
Risk reduction - Action to eliminate sources of risk or minimise probability of loss should risk emerge
Risk transfer - Responsibility for risk shifted to another party better able to control it
Risk sharing - Apportions risk exposure where formula for sharing can be agreed
Risk retention - Risk cannot be avoided or costs of avoidance not worthwhile
Impact mitigation - Minimisation of consequences of risk with effort to manage impacts
Selection of the best response involves considerations of "the total cost of risk" and value for money: the benefits of implementing a response must outweigh the cost of doing so.The outcome of response planning is generally a management plan and a risk action schedule. Often these are in the form of simple action statements that specify the activities necessary to meet the risk event. For major risks, the schedules are developed to enable successful risk management over time.
Implementation
The key to risk management is the implementation of action schedules and the allocation of management resources to where they can have the most impact on project outcomes.
The plan must provide mechanisms to provide project participants with appropriate and timely information so they may:
. take appropriate corrective action to pre-empt effect of disruptive factors
. recognise and seize opportunities
. realistically modify expectations in the face of uncontrollable risk
Review and modification
As the infrastructure project develops, the focus changes from strategic to operational concerns and, accordingly, the risk dynamics change. If a risk management strategy is to remain relevant, it must be under constant review.
Generally, for an infrastructure project to proceed, participants must have confidence that the rewards exceed the risks. Also, these parties provide a range of expertise and resources to the project, probably have varying objectives and carry different risks. Risk management clarifies the allocation of responsibility between the parties.
Fundamentally, risk management provides a pro-active plan to deal with events and circumstances and assists focus attention and effort on areas with the greatest potential to affect project outcomes.
Peter Gemmel is a partner with Evans & Peck Management, one of Australia's largest infrastructure management consultants
Disclaimer
The purpose of this database is to provide a full-text record of all articles that have appeared in the CDJ since February 1997. It is aimed to assist in the research and reference process. The database has a full-text index and will enable articles to be easily retrieved.It should be noted that information contained in this database is in pre-publication format only - IT IS NOT THE FINAL PRINTED VERSION OF THE CDJ - therefore there might be slight discrepancies between the contents of this database and the printed CDJ.