Risk category

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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 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

Organizational, e.g. unclear organizational objectives

  • Resources
  • Fundings
  • Prioritization
  • Project Dependencies

Project Management, e.g. poor budget planning

Risk categories based on Work Breakdown Structure

Taking into consideration area of the project, we can list following categories:

  1. Operational risks
  2. Budget risks
  3. Schedule risks
  4. Business risks
  5. Technical environment risks
  6. Information security risks
  7. Programmatic risks
  8. Infrastructure risks
  9. Quality and Process risks
  10. Resource risks
  11. Supplier risks
  12. Technology risks
  13. 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.

Other approaches related to Risk category

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

  1. ↑ Project Management Institute 2013, p.560
  2. ↑ Project Management Institute 2013, p.317
  3. ↑ C. L. Pritchard 2015, p.16
  4. ↑ 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

Author: Natalia Kobos

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