Five benefits of formal Risk Management are:
1) Defining ways to deal with risk2) Consistency3) Allowing for contingencies4) Common reference for audit and assurance5) Sponsoring organisations have clear perspective of risk have clear perspective of risk
1) Defining ways to deal with risk is one of the benefits of risk management. It identifies who is responsible for dealing with the risk (risk owner), what are the actions that can be taken to mitigate the risk, and in case of risk occurrence what will be the impact on project baselines (time, cost, quality and benefits). For example, identified risk is for the delay of the supply of the overseas material, risk owner is the procurement engineer and mitigation action is to issue early purchase order.
2) Consistency is another benefit for formal risk management. People are using the same forms and are following the same procedures (in other words, people are doing things in the same way). One can easily get the risk log form from an old similar project and review it to make sure that none of the risks is ignored. That is useful as it minimizes the chances for errors and maximizes the benefits of lessons learnt. For example, in previous project the risk log sheets included the risk of currency change which was not considered in this project.
3) Allowing for Contingencies is one more benefit for formal risk management. It ensures that proper allowances for contingencies are quantified on basis of the identified risks. That is important in case if risk occurs. Then, these allowances in time and cost will be released in agreement with the Sponsor and project base lines will be updated to reflect the impact on cost and time. For example, manufacturing of the overseas material was delayed, contingency is released to use air freight for shipping the material in lieu of sea freight.
4) Common reference point for Auditing and Assurance is one of the benefits for formal risk management. Risk management plan and risk log sheets are embedded in the PMP. They are reviewed and approved along with the PMP during the definition stage. Any updates to the risk log sheets will have to be carried out through controlled configuration management process. Both documents (PMP and Risk management documents) will be subject to routine audits and assurance together. For example if risk log sheet is updated during the development phase in the project, then the document revision will be raised and that will be reviewed by the auditors.
5) Sponsoring organisations having clear perspective on risk is another key advantage for the formal risk management. Senior management in the organisation will have visibility on the possible risks. That enables them to take proactive actions towards mitigating the risks or at least minimizing their impact on the business. For example, in one project majority of the equipment will be purchased via Euro. Increase in Euro rates is anticipated as major risk that will knock the project budget. Senior managers in the organisation decided transferring the full cost for the equipment into Euro at the early beginning of the project.