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Christian has a PhD in Business Management and an MA in Accounting & Financial Management
The business world is ruthless.
If you want to succeed as a business through continual growth and market dominance, you have to take risks. But risks are scary...and you want to play it safe. The lack of knowledge concerning what will happen and the other unknown variables in life can leave a bit of a sour taste in your mouth, but there are ways to manage the risk and create a contingency plan to deal with the potential risks when they surface.
Risk can be defined in multiple ways because risk is prevalent in every aspect of life. For this lesson, we'll define risk as the danger involved in any situation, whether known or not. Companies can lose money, market share, and other types of resources due to risk.
Many times they will use a chart to map out the risks that can potentially harm the company. As companies plan for, execute around, and manage risks as they happen, they often will use a risk matrix as a visual aid to better see how risks affect operations. The matrix applies probability reasoning to certain events to determine the level of risk. The risk matrix provides a risk rating, which combines severity and likelihood of a risk happening to calculate the rating.
ABC, Inc. is a company that provides construction management and contracting to commercial construction projects. These projects are the result of contractual agreements between ABC and outside parties that are looking to build a commercial real estate building or complex. ABC contracts with Property Partners LLC to build a 100-unit apartment complex. During the planning phase of the project, ABC must determine the risk involved in the project and how to plan adequately for the probability of the risk happening. They also include with the project plan a risk contingency plan to deal with the problems if they surface.
Let's first look at variance risk. Variance is a common metric used in business to calculate risk. This metric can be used to determine if a project is over or under budget. Variance is the measurement of the spread between numbers in a set. For example, if ABC expects to spend $10,000 on labor on the project, they should calculate a variance risk, meaning that they expect the true cost of labor to be $10,000 plus or minus a calculated amount of variance.
The risk involved presupposes that there will be a variance in multiple factors. In this example, we used labor costs for the project. Management can reliably calculate the variance in labor costs to effectively manage the risk of a variance in those labor costs. This variance will be added to the project plan along with other variance measurements.
Now let's look at contingency risk. Contingency is a future event that has the possibility of happening but cannot be predicted with certainty. For example, ABC will determine that the upcoming winter flu season will negatively affect their labor hours because there is a chance that many workers will get the flu. They will assign this as a contingency to the project plan and the risk that the labor hour losses will delay the project. This delay is also part of the contingency. In order to address the risk, ABC must assess the need to add additional time requirements to the scope of the project to cover the contingency.
It's impossible for management to perfectly determine contingency risk in a project. There are many unforeseeable circumstances that cannot be predicted. Management must determine the level of risk involved in the event of a contingency and plan appropriately for the occurrence.
Now let's look at unknowns. Unknowns are events in a project's duration span that management was unable to foresee as a risk event. These can include weather patterns, environmental unknowns on the project, or personnel unknowns. Let's say, ABC begins the project, and the apartment complex is almost done. It begins to rain and ends up raining for a week straight. All of a sudden, the ground opens up, and the apartment complex falls into a sink hole that no one knew existed. This ends up a serious problem and could derail the project completely back to square one.
With the various factors that affect the risk level of a project, management must include a risk contingency plan into the project plan. This will enable management to determine the potential risk involved, create alternative solutions to fixing the problem if it should occur, and monitor the progress of the project to watch for trends that could lead to the execution of the risk contingency plan.
A contingency plan requires multiple steps for any project. These steps include:
These steps will aid management in the proper implementation of a risk contingency plan and help them deal with the probability of risk occurrences during the project. The risk matrix is continually updated to determine the ongoing threat from risk addressed in the risk contingency plan.
Risk is the danger involved in any situation, whether known or not. A risk matrix is a visual aid to better see how risks affect operations. Variance is a common metric used in business to calculate risk. Contingency is a future event that has the possibility of happening but cannot be predicted with certainty. Unknowns are events in a project's duration span that management was unable to foresee as a risk event. With the various factors that affect the risk level of a project, management should include a risk contingency plan, which will will enable management to determine the potential risk involved, create alternative solutions to fixing the problem if it should occur, and monitor the progress of a project to watch for trends that could lead to the execution of the risk contingency plan.
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Business 312: Advanced Operations Management13 chapters | 76 lessons | 10 flashcard sets
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