Risk category: Difference between revisions
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'''[[Risk]] category''' is defined as a group of possible causes of risk. Risk categorization is the important step in [[Risk management|Risk Management]] and allows classifying risks into appropriate categories in order to [[plan]] further steps to take for each of these categories Properly prepared risk categorization might have big influence on further steps of effective counteracting of the risk. | '''[[Risk]] category''' is defined as a group of possible causes of risk. Risk categorization is the important step in [[Risk management|Risk Management]] and allows classifying risks into appropriate categories in order to [[plan]] further steps to take for each of these categories Properly prepared risk categorization might have big influence on further steps of effective counteracting of the risk. | ||
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==Risk categories based on Work Breakdown Structure== | ==Risk categories based on Work Breakdown Structure== | ||
Taking into consideration area of the project, we can list following categories: | Taking into consideration area of the project, we can list following categories: | ||
# Operational risks | # [[Operational risks]] | ||
# Budget risks | # Budget risks | ||
# Schedule risks | # Schedule risks | ||
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Risk categories based on PMBOK Guide<ref>C. L. Pritchard 2015, p.13</ref>: | Risk categories based on PMBOK Guide<ref>C. L. Pritchard 2015, p.13</ref>: | ||
* '''External Unpredictable''', e.g. unplanned regulatory changes | * '''External Unpredictable''', e.g. unplanned regulatory changes | ||
* '''External Predictable''', e.g. inflation, safety | * '''External Predictable''', e.g. [[inflation]], safety | ||
* '''Internal''' (Non Technical), e.g. Procurement Process Delay | * '''Internal''' (Non Technical), e.g. Procurement Process Delay | ||
* '''Technical''', e.g. Productivity limitations | * '''Technical''', e.g. Productivity limitations | ||
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==Examples of Risk category== | ==Examples of Risk category== | ||
* '''Financial Risk''': This is a risk that a company faces when it invests in new projects or markets, or when it takes on additional debt. It can include the risk of losses due to changes in exchange rates, interest rates, commodity prices, or equity prices. Examples of financial risk include credit risk, market risk, liquidity risk, and operational risk. | * '''Financial Risk''': This is a risk that a [[company]] faces when it invests in new projects or markets, or when it takes on additional debt. It can include the risk of losses due to changes in exchange rates, [[interest]] rates, commodity prices, or equity prices. Examples of financial risk include credit risk, market risk, [[liquidity risk]], and [[operational risk]]. | ||
* '''Strategic Risk''': This is the risk associated with making strategic decisions, such as launching a new product or entering a new market. It can include the risk of making the wrong decision or failing to properly implement a decision. Examples of strategic risk include competitive risk, technology risk, reputational risk, and legal risk. | * '''Strategic Risk''': This is the risk associated with making [[strategic decisions]], such as launching a new [[product]] or entering a new market. It can include the risk of making the wrong decision or failing to properly implement a decision. Examples of [[strategic risk]] include [[competitive risk]], technology risk, reputational risk, and [[legal risk]]. | ||
* '''Compliance Risk''': This is the risk that a company will not comply with applicable laws and regulations. Examples of compliance risk include the risk of fines and penalties for failing to comply with laws and regulations, or the risk of having to restate financial statements due to an accounting mistake. | * '''Compliance Risk''': This is the risk that a company will not comply with applicable laws and regulations. Examples of compliance risk include the risk of fines and penalties for failing to comply with laws and regulations, or the risk of having to restate financial statements due to an accounting mistake. | ||
* '''Operational Risk''': This is the risk associated with the day-to-day operations of a business. Examples of operational risk include the risk of a system failure, supply chain disruption, or data breach. | * '''Operational Risk''': This is the risk associated with the day-to-day operations of a business. Examples of operational risk include the risk of a [[system]] failure, supply chain disruption, or data breach. | ||
==Advantages of Risk category== | ==Advantages of Risk category== | ||
Risk categorization has many advantages when it comes to managing risks. Here are some of them: | Risk categorization has many advantages when it comes to managing risks. Here are some of them: | ||
* It allows for better understanding of risks. By breaking down risks into categories, it is easier to identify common characteristics and causes among them, which can be useful for further analysis. | * It allows for better understanding of risks. By breaking down risks into categories, it is easier to identify common characteristics and causes among them, which can be useful for further analysis. | ||
* It enables better risk control. Risk categories are a great way to identify which risks need to be addressed with priority and which can be left for later. | * It enables better risk control. Risk categories are a great way to identify which risks [[need]] to be addressed with priority and which can be left for later. | ||
* It helps to create more efficient risk management plans. Risk categories can help to identify which actions need to be taken for each category and how to allocate resources efficiently. | * It helps to create more efficient [[risk management]] plans. Risk categories can help to identify which actions need to be taken for each category and how to allocate resources efficiently. | ||
* It provides a framework for effective communication. By categorizing risks, it is easier to discuss the risks with others and explain the impact and severity of each category. | * It provides a framework for [[effective communication]]. By categorizing risks, it is easier to discuss the risks with others and explain the impact and severity of each category. | ||
==Limitations of Risk category== | ==Limitations of Risk category== | ||
Risk categorization has some limitations which should be taken into consideration when creating a risk management plan. Some of the limitations of risk categories include: | Risk categorization has some limitations which should be taken into consideration when creating a [[risk management plan]]. Some of the limitations of risk categories include: | ||
* Risk categorization can be subjective, depending on the individual or team performing the categorization. It is important to ensure that the categorization is done objectively and that all risks are assessed and categorized fairly. | * Risk categorization can be subjective, depending on the individual or team performing the categorization. It is important to ensure that the categorization is done objectively and that all risks are assessed and categorized fairly. | ||
* The categories used may be too broad or too narrow, which can lead to the risk being incorrectly categorized or not identified. | * The categories used may be too broad or too narrow, which can lead to the risk being incorrectly categorized or not identified. | ||
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==Other approaches related to Risk category== | ==Other approaches related to Risk category== | ||
Risk categorization is only one of the approaches to manage risks. Other approaches include: | Risk categorization is only one of the approaches to manage risks. Other approaches include: | ||
* Risk Identification - identifying all potential risks associated with a given project or business. | * Risk [[Identification]] - identifying all potential risks associated with a given project or business. | ||
* Risk Analysis - analyzing the probability and impact of each risk identified. | * Risk Analysis - analyzing the probability and impact of each risk identified. | ||
* Risk Mitigation - developing strategies to reduce the likelihood or impact of a risk. | * Risk Mitigation - developing strategies to reduce the likelihood or impact of a risk. | ||
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* Risk Reporting - providing regular updates on the status of risk management activities. | * Risk Reporting - providing regular updates on the status of risk management activities. | ||
In conclusion, risk categorization is an important step in risk management, however it is only one of the approaches that can be used to manage risks. Other approaches such as risk identification, analysis, mitigation, monitoring and reporting are also necessary for effective risk management. | In conclusion, risk categorization is an important step in risk management, however it is only one of the approaches that can be used to manage risks. Other approaches such as [[risk identification]], analysis, mitigation, monitoring and reporting are also necessary for effective risk management. | ||
==Footnotes== | ==Footnotes== | ||
<references /> | <references /> | ||
{{infobox5|list1={{i5link|a=[[Risk management methodology]]}} — {{i5link|a=[[Risk evaluation]]}} — {{i5link|a=[[Business risk management]]}} — {{i5link|a=[[Capital planning]]}} — {{i5link|a=[[Total risk]]}} — {{i5link|a=[[Risk management process]]}} — {{i5link|a=[[Risk response]]}} — {{i5link|a=[[Risk treatment plan]]}} — {{i5link|a=[[Feasibility analysis]]}} }} | |||
==References== | ==References== | ||
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* OGC (2009), [https://www.academia.edu/7608654/Managing_Successful_Projects_with_PRINCE2_2009 ''Managing Successful Projects with PRINCE2''] The Stationery Office | * OGC (2009), [https://www.academia.edu/7608654/Managing_Successful_Projects_with_PRINCE2_2009 ''Managing Successful Projects with PRINCE2''] The Stationery Office | ||
* [[Project management|Project Management]] Institute (2013), [https://www.pmi.org/pmbok-guide-standards/foundational/pmbok ''A Guide to the Project Management Body of knowledge|Body of Knowledge (PMBOK Guide) - 5th Edition''], [[Project management|Project Management]] Institute, Inc., Pensylwania | * [[Project management|Project Management]] Institute (2013), [https://www.pmi.org/pmbok-guide-standards/foundational/pmbok ''A Guide to the Project Management Body of knowledge|Body of Knowledge (PMBOK Guide) - 5th Edition''], [[Project management|Project Management]] Institute, Inc., Pensylwania | ||
* Pritchard C. L. (2015), [https://books.google.pl/books?hl=pl&lr=&id=soyZBQAAQBAJ&oi=fnd&pg=PP1&dq=pmbok+risk+management&ots=LTyvokP0Xk&sig=sb9POTeiUwmu38yU-d4UOxTiExA&redir_esc=y#v=onepage&q=pmbok%20risk%20management&f=false | * Pritchard C. L. (2015), [https://books.google.pl/books?hl=pl&lr=&id=soyZBQAAQBAJ&oi=fnd&pg=PP1&dq=pmbok+risk+management&ots=LTyvokP0Xk&sig=sb9POTeiUwmu38yU-d4UOxTiExA&redir_esc=y#v=onepage&q=pmbok%20risk%20management&f=false ''Risk Management: Concepts and Guidance, Fifth Edition''] CRC Press | ||
* Su L. (2012), [http://www.ppdoc.com/p-9134.html ''WBS-based Risk Identification for the Whole Process of Real Estate Project and Countermeasures. Proceedings of the 2012 National Conference on Information Technology and Computer Science''] CITCS 10.2991/citcs.2012.19 | * Su L. (2012), [http://www.ppdoc.com/p-9134.html ''WBS-based Risk Identification for the Whole Process of Real Estate Project and Countermeasures. Proceedings of the 2012 National Conference on Information Technology and Computer Science''] CITCS 10.2991/citcs.2012.19 | ||
[[Category:Risk management]] | [[Category:Risk management]] | ||
{{a|Natalia Kobos}} | {{a|Natalia Kobos}} | ||
Latest revision as of 03:54, 18 November 2023
Risk category is defined as a group of possible causes of risk. Risk categorization is the important step in Risk Management and allows classifying risks into appropriate categories in order to plan further steps to take for each of these categories Properly prepared risk categorization might have big influence on further steps of effective counteracting of the risk.
There are two main ways to categorize organization risks[1]:
- categorizing by source of the risk by using the Risk Breakdown Structure (RBS) method
- categorizing by the project scope by using the Work Breakdown Structure (WBS) based method
or other ways, e.g. (project stage, root causes)
The main purpose of risk categorization is determining areas of the project, which are most subjected to the causes of uncertainty.
Risk Breakdown Structure
Risk Breakdown Structure (RBS), hierarchically presented specification of given risks divided into 4 main categories and multiple subcategories which are specified by areas and causes of identified risks. The Risk Breakdown Structure was developing in time. For different type of projects there can be different Risk Breakdown Structures appropriated[2].
Example of Risk Breakdown Categories and Subcategories for typical project[3]:
External, predictable or unpredictable e.g. legal challenges,
Technical, e.g. technology shifts
- Technology
- Requirements
- Complexity and Interfaces
- Quality
- Performances and Reliability
Organizational, e.g. unclear organizational objectives
- Resources
- Fundings
- Prioritization
- Project Dependencies
Project Management, e.g. poor budget planning
- Planning
- Controlling
- Estimating
- Communication
Risk categories based on Work Breakdown Structure
Taking into consideration area of the project, we can list following categories:
- Operational risks
- Budget risks
- Schedule risks
- Business risks
- Technical environment risks
- Information security risks
- Programmatic risks
- Infrastructure risks
- Quality and Process risks
- Resource risks
- Supplier risks
- Technology risks
- Technical and architectural risk
Other risk categories
Risk categories based on PMBOK Guide[4]:
- External Unpredictable, e.g. unplanned regulatory changes
- External Predictable, e.g. inflation, safety
- Internal (Non Technical), e.g. Procurement Process Delay
- Technical, e.g. Productivity limitations
- Legal, e.g. customer lawsuits
Examples of Risk category
- Financial Risk: This is a risk that a company faces when it invests in new projects or markets, or when it takes on additional debt. It can include the risk of losses due to changes in exchange rates, interest rates, commodity prices, or equity prices. Examples of financial risk include credit risk, market risk, liquidity risk, and operational risk.
- Strategic Risk: This is the risk associated with making strategic decisions, such as launching a new product or entering a new market. It can include the risk of making the wrong decision or failing to properly implement a decision. Examples of strategic risk include competitive risk, technology risk, reputational risk, and legal risk.
- Compliance Risk: This is the risk that a company will not comply with applicable laws and regulations. Examples of compliance risk include the risk of fines and penalties for failing to comply with laws and regulations, or the risk of having to restate financial statements due to an accounting mistake.
- Operational Risk: This is the risk associated with the day-to-day operations of a business. Examples of operational risk include the risk of a system failure, supply chain disruption, or data breach.
Advantages of Risk category
Risk categorization has many advantages when it comes to managing risks. Here are some of them:
- It allows for better understanding of risks. By breaking down risks into categories, it is easier to identify common characteristics and causes among them, which can be useful for further analysis.
- It enables better risk control. Risk categories are a great way to identify which risks need to be addressed with priority and which can be left for later.
- It helps to create more efficient risk management plans. Risk categories can help to identify which actions need to be taken for each category and how to allocate resources efficiently.
- It provides a framework for effective communication. By categorizing risks, it is easier to discuss the risks with others and explain the impact and severity of each category.
Limitations of Risk category
Risk categorization has some limitations which should be taken into consideration when creating a risk management plan. Some of the limitations of risk categories include:
- Risk categorization can be subjective, depending on the individual or team performing the categorization. It is important to ensure that the categorization is done objectively and that all risks are assessed and categorized fairly.
- The categories used may be too broad or too narrow, which can lead to the risk being incorrectly categorized or not identified.
- Risk categories may not adequately reflect the complexity of the risks in a particular situation, and thus may not provide enough information to effectively mitigate the risk.
- Risk categories may not be comprehensive enough to cover all possible risks. It is important to consider all potential risks when creating a risk management plan.
Risk categorization is only one of the approaches to manage risks. Other approaches include:
- Risk Identification - identifying all potential risks associated with a given project or business.
- Risk Analysis - analyzing the probability and impact of each risk identified.
- Risk Mitigation - developing strategies to reduce the likelihood or impact of a risk.
- Risk Monitoring - regularly tracking risks and their progress towards resolution.
- Risk Reporting - providing regular updates on the status of risk management activities.
In conclusion, risk categorization is an important step in risk management, however it is only one of the approaches that can be used to manage risks. Other approaches such as risk identification, analysis, mitigation, monitoring and reporting are also necessary for effective risk management.
Footnotes
- ↑ Project Management Institute 2013, p.560
- ↑ Project Management Institute 2013, p.317
- ↑ C. L. Pritchard 2015, p.16
- ↑ C. L. Pritchard 2015, p.13
| Risk category — recommended articles |
| Risk management methodology — Risk evaluation — Business risk management — Capital planning — Total risk — Risk management process — Risk response — Risk treatment plan — Feasibility analysis |
References
- APM (2004), Project risk analysis & management (PRAM) guide (2nd ed.) High Wycombe, Bucks, UK: APM Publishing
- OGC (2009), Managing Successful Projects with PRINCE2 The Stationery Office
- Project Management Institute (2013), A Guide to the Project Management Body of knowledge|Body of Knowledge (PMBOK Guide) - 5th Edition, Project Management Institute, Inc., Pensylwania
- Pritchard C. L. (2015), Risk Management: Concepts and Guidance, Fifth Edition CRC Press
- Su L. (2012), WBS-based Risk Identification for the Whole Process of Real Estate Project and Countermeasures. Proceedings of the 2012 National Conference on Information Technology and Computer Science CITCS 10.2991/citcs.2012.19
Author: Natalia Kobos
