University of Phoenix Effectiveness of Risk Management Practices Analysis

Risk Analysis, Vol. 31, No. 1, 2011
DOI: 10.1111/j.1539-6924.2010.01470.x
The Effectiveness of Risk Management: An Analysis of
Project Risk Planning Across Industries and Countries
Ofer Zwikael1,∗ and Mark Ahn2
This article examines the effectiveness of current risk management practices to reduce project
risk using a multinational, multi-industry study across different scenarios and cultures. A
survey was administered to 701 project managers, and their supervisors, in seven industries
and three diverse countries (New Zealand, Israel, and Japan), in multiple languages during
the 2002–2007 period. Results of this study show that project context—industry and country where a project is executed—significantly impacts perceived levels of project risk, and
the intensity of risk management processes. Our findings also suggest that risk management
moderates the relationship between risk level and project success. Specifically, we found that
even moderate levels of risk management planning are sufficient to reduce the negative effect
risk levels have on project success.
KEY WORDS: Project management; project success; technology management
Risk management is particularly important in
the project management area, as this discipline involves many organizational functions and their related risks.(16) In addition, projects usually possess
high levels of uncertainty derived from their compressed schedules, inadequate or uncertain budgets,
designs that are near the feasible limit of achievable performance, and frequently changing requirements.(10) For example, Huchzermeier and Loch(17)
identified five types of uncertainty in projects: market
payoff, project budget, product performance, market
requirements, and project schedule. Consequently,
project risk management is considered a core area
in the literature,(18−21) and as a result, many new
tools have been introduced to manage uncertainty in
practice.(22)
Due to its importance, one would expect project
risk management practices to be not only state of
the art, but also highly effective. However, some recent studies have raised concerns regarding the effectiveness of risk management tools in the project
environment.(23−25) The objective of this article is to
further investigate the effectiveness of current risk
1. INTRODUCTION
One doesn’t discover new lands without consenting to
lose sight of the shore for a very long time
—Andre Gide
The global business environment involves high
levels of risk and complexity, which is a necessary
condition for future growth and development. In particular, managers have to cope with several types
of risk, including technological,(1,2) financial,(3−5)
insurance-related,(6) environmental safety,(7) and
regulatory.(8) As a result, risk management is a critical consideration in many business areas, which impacts profitability, efficiency, and sustainability.(9−15)
1
School of Management, Marketing and International Business,
ANU College of Business and Economics, The Australian National University, Australia.
2 Willamette University, OR, USA.
∗ Address correspondence to Ofer Zwikael, PhD, PMP, School of
Management, Marketing and International Business, ANU College of Business and Economics, The Australian National University, Canberra, ACT 0200, Australia; tel: +61-2-61256739; fax:
+61-2-61258796; ofer.zwikael@anu.edu.au.
25
C 2010 Society for Risk Analysis
0272-4332/11/0100-0025$22.00/1
26
management practices to reduce project risk using
a multinational, multi-industry study across different
scenarios and cultures.
At the outset, it must also be stated that this
study focuses on the project planning phase due to
the following reasons: (1) project management literature suggests there are heterogeneous managerial approaches required for different project phases, hence
each project management study should focus on only
one distinct phase to increase salience,(26) (2) planning is a critical phase in project management(27−29)
and a critical tool for uncertainty reduction,(10) and
(3) most risk management practices are performed
during the planning phase of a project.(10,19,30) Project
planning is defined as the establishment of a set of
directions provided in sufficient detail to inform the
project team of exactly what must be done, when it
must be done, and what resources to use to produce
the expected results of the project successfully.(18)
Planning also involves the product concept’s specifications to be translated into design plans,(31) as
well as commercial scale and distribution. It has been
found that project managers invest more effort in
planning when the perceived level of risk is higher,
and these endeavors improve project success.(25)
The next sections include an analysis of current
project risk management practices, an outline of the
theoretical framework and research hypotheses, and
a review of the results of an empirical study conducted in eight industries and three countries.
2. CURRENT PROJECT RISK
MANAGEMENT PRACTICES
A project is defined as any series of activities and
tasks that have a specific objective to be completed
within certain specifications, have defined start and
end dates, and funding limits.(10) As project managers increasingly have to deal with higher levels of
uncertainty, risk management has become a generic
area in most project management books and in relevant professional associations.(10,19,32−34)
Within this context, project risk is defined as
a “measure of the probability and consequence of
not achieving a defined project goal.”(10) As risk in
projects cannot be fully eliminated, Chapman and
Ward(35) have defined “risk efficiency” as the minimum risk level for a given level of expected performance. Risk management dynamically minimizes
risk levels by identifying and ranking potential risk
events, developing a response plan, and monitoring
actively during project execution.(19)
Zwikael and Ahn
As risk management is highly developed in
project management, most organizations have a formal policy for project risk management,(36) as well
as supportive analytical tools.(10,22,37) These analytics include risk identification tools (e.g., brainstorming, checklists, influence diagrams, cause and effect
diagrams), risk analysis tools (e.g., probability
and impact grids, event tree analysis, sensitivity analysis and simulation, Delphi techniques, expert judgment), risk response tools (e.g., influencepredictability matrix, risk response planning chart,
project risk response planning), and risk evaluation
tools (e.g., decision tree analysis, portfolio management, multiple criteria decision-making tools). Software packages for project risk management are also
available, including @Risk, Risk+, Crystal Ball simulation tool, PERT-Master Project Risk, PERT Master Risk Expert, and Predict.(38) Most of these tools
focus on risk planning processes—risk identification,
analysis, and response development.(19,35,39,40)
Despite the popularity of risk planning tools,
some drawbacks with current risk planning practices
have been identified in the literature in recent years.
They may be summarized as follows:
1. Limited variety of tools used: Although a wide
variety of risk planning tools exists, in practice
most project managers use risk events ranking
as their major or only tool.(9,35,41) For example, the 2008–2009 global financial crisis was
in large part caused by a widespread belief
that securitizing loans reduced the overall risk
in the financial system, which proved to be
misguided.
2. Poor quality of use: Many project managers
perform poorly on some of the most important risk planning processes such as risk identification,(42) as well as the development of
effective strategies.(9)
3. High complexity of existing tools: As size and
complexity of projects increase, the effort required for effective risk planning exponentially rises, making current tools difficult to
use.(42)
4. Low authority of project managers: Typically,
functional managers have the necessary information and authority for most risk planning
processes.(43) This may limit the project managers’ ability to effectively manage risk management processes.
5. Perceived low effectiveness: Risk management is ranked relatively low across studies
The Effectiveness of Risk Management in Projects
identifying “project critical success factors.”(23) Moreover, studies that support
the positive impact of risk management on
project success suffer from limitations (e.g.,
a self-selected sample of members from
“risk special interest groups,” who may not
represent the larger project management
community).(36)
Notwithstanding, risk management has a high
degree of importance in the project environment,
especially during the planning phase. However,
substantial drawbacks exist in current project risk
planning practices. Moreover, as discussed earlier,
the literature does not agree on the role risk management planning has in projects. A major reason for
this is that a limiting “one size fits all projects” approach(69) has been used in these studies, without distinguishing between various project scenarios. To address this research gap, this study analyzes the role of
risk management planning in uncertainty reduction
and improving project success in different scenarios
and institutional contexts, through addressing a series of hypotheses outlined in the next section.
3. RESEARCH HYPOTHESES
Based on inconsistent relationships among risk
levels, risk planning, and project success in various
project contexts found in the literature, the following
research hypotheses may be posited.
3.1. The Impact of Contextual Environment
on the Level of Project Risk
The literature finds significant differences towards risk across countries(44,45) and industries.(46,47)
For example, cultural diversity theory(44,48) identifies differences across countries. As these contextual
variables are relevant in any project analysis, their
effect on the level of project risk will be examined.
For this purpose, the first two hypotheses were developed, which are as follows:
H 1 : The level of project risk varies across countries.
H 2 : The level of project risk varies across industries.
3.2. The Impact of Risk Level on Project Success
High level of project risk is perceived to become
a problem(19) that project managers try to resolve
27
throughout the entire project management process.
Organizations spend significant funds and resources
in risk management based upon the commonly
held belief that high risk levels are an obstacle to
success.(10)
H 3 : Project risk is negatively correlated with
project success level.
3.3. The Interaction Between the Level of Project
Risk and Risk Management Planning on
Project Success
Most studies have analyzed project risk planning
efforts and project success with limited consideration
of project risk level. Of note, Zwikael and Sadeh(25)
found that for different levels of project risk, project
managers decide to invest varying levels of effort
in risk planning, which increases monotonically with
perceived project risk. As a result, the last hypothesis
focuses on the moderating effect that risk management planning has on risk levels and project success.
This hypothesis may be expressed as:
H 4 : Risk management planning moderates the relationship between levels of project risk and
project success.
4. RESEARCH FRAMEWORK
This study investigates the impact of risk level
on project success and the moderating effect of risk
management planning on this relationship. Specifically, the hypotheses suggest mediating and moderating effects of project risk level, country, and
industry typology on these relationships, which are
operationalized in the following section.
4.1. The Research Model
To investigate the above hypotheses, the research model includes two parts: (1) contextual
variables, which explore the effect of industry and
country on the level of project risk; and (2) “risk
management planning” as a moderating variable for
the relationship between “project level risk” and
“project success.” This model is expressed in Fig. 1.
The dependent variable of this study, “project
success,” is traditionally measured using the
“golden” or the “iron” triangle, defined as the
project being completed on time, within budget,
and to specification.(19,49) However, this approach is
criticized as it represents the operational mindset,
28
Zwikael and Ahn
Risk
management
planning
Country
Industry
H1
H2
Level of
project riskError!
H
Project success:
1.
Schedule overrun
2.
Cost overrun
3.
Project performance
4.
Customer satisfaction
H4
3
which is influenced by the “get the job done” approach.(50) As a result, several studies support the
inclusion of “customer satisfaction” as an additional
dimension of success.(10,36,49,51−53) Consequently,
in this research, four project success variables are
used as dependent variables: schedule overrun,
cost overrun, project performance, and customer
satisfaction.
As noted, two contextual variables were also included in the model—industry and country—as they
may impact the level of project risk at the beginning
of the project.(44,45) Finally, “risk management planning” is a potential moderating variable in exploring
the relationship between risk level and project success. Risk management planning includes the identification, scoring, and ranking of risk events that may
hinder project success, as well as the development of
a mitigation plan.
This research framework, however, includes several limitations. The study focuses solely on the
“planning phase” of a project. The justification for
using the project phase as a unit of analysis is its relative importance, as well as the potential confounding
effects from different managerial behaviors observed
during different project phases.(26,54) In addition, we
focused on this important phase through multiple
foci by including a range of developed and developing countries, as well as across several industries.
Finally, regression analyses will be used throughout
this article for both continuous and scale variables,
instead of ordered probit analyses that provide no
better approach in this case.(70)
4.2. Data Collection
We collected data through questionnaires to: (1)
gather information from a large number of projects
across industries and countries, (2) increase contact
with senior managers, (3) expand geographic coverage, and (4) guarantee anonymity to participants
Fig. 1. The research model.
(particularly important when managers are asked to
report on project failure).
The objective of the questionnaire was to collect
data regarding processes executed in projects, as well
as the success of their projects. In the questionnaires,
project managers were asked to estimate the frequency of use of project risk management planning,
using a 1–5 Likert scale, for their most recently completed projects. In order for the project managers to
make accurate estimates, the relevant risk management planning tools were introduced to all participants in this research as subprocesses that comprise
the variables under investigation. Project managers
were also asked to identify their industries among a
list of seven coded choices.
Although the independent variables were collected from project managers, the dependent variables were collected from their supervisors to avoid
“same source bias.” Hence, the four dimensions of
“project success” were reported by the supervisors of
project managers, measured as follows:
1. Cost overrun was measured in percentage deviation versus the original plan.
2. Schedule overrun was measured in percentage deviation versus the original plan.
3. Project performance, referring to achieving
project scope targets, was measured on a scale
of 1 (low performance) to 10 (high performance).
4. Customer satisfaction was measured on a
scale of 1 (low customer satisfaction) to 10
(high customer satisfaction).
In accordance with previous studies,(25,43) the
wide scale for the last two variables was selected to
allow a clear distinction between successful and unsuccessful projects.
The unit of analysis was a project, and the research population included projects from selected
industries and countries. The sampling design of
The Effectiveness of Risk Management in Projects
projects guaranteed a sample that reflected the various industries where projects were undertaken in
each country.(45,56) The questionnaire was administered during the 2002–2007 period to project managers and their supervisors in seven different industries (communications, construction, engineering,
government, production, services, and software) and
three diverse countries (New Zealand, Israel, and
Japan). These countries were selected to represent
different cultures (Asian and Western), country sizes
(population of 4–7 versus 130 million), and geographic locations. The questionnaire was available in
English, Hebrew, and Japanese, all of which were developed and translated by native speakers.
Initial data collection involved project managers
who are members of the Project Management Institute, which supported this study in all targeted countries. Notwithstanding, recognizing the danger of this
type of data collection as a sole source, the other half
of questionnaires were collected from organizations
selected and personally visited by the research team.
For that reason, the research team assembled organization names from a variety of local sources to ensure that the research sample included firms of different sizes, multiple industry sectors, and varying levels
of project risk. Further, the two groups were compared to ensure they were broadly representative of
the study population.
The research team sent e-mails and/or called
senior managers of target organizations, and asked
them to participate in a self-administrated study.
Managers were assured of anonymity, data confidentiality, and that only aggregated data would be reported. A project was included in the final data analysis only if at least 80% of questionnaire items were
answered. All analyses in this study have been conducted using SPSS v17.
In all, 701 valid questionnaires were collected
across three countries—301 in New Zealand, 275 in
Israel, and 125 in Japan. The average project duration was 11.9 months, with a standard deviation
of 9.2 months (ranging from 2 months to 6 years).
The number of questionnaires from each industry
broadly represented the share of these industry sectors in each of these economies,(45) hence this sample may be seen as representative of each of these
countries. Each industry or country was represented
by 50–301 projects to allow enough data for further
analysis. One exception was the construction industry, which was underrepresented in this sample. Although this is not an obstacle for hypotheses testing per se, the small sample size did not allow us to
29
make definitive conclusions about the construction
industry.
5. RESULTS
To place the results in context, we first present an
international and cross-industry comparison of perceived risk levels, use of risk planning practices, and
project success.
5.1. The Use of Risk Planning Practices
and Project Success
The use of risk planning practices can represent
the importance of risk management, as perceived by
project managers. Descriptive statistics in Table I include the mean, standard deviation, and F statistics
to compare industries and countries.
As can be seen from Table I, most project managers use risk management tools, with an average
as high as 3.92 (in New Zealand) and 3.63 (in engineering projects), on a 1–5 scale. “Project success”
scores, as estimated by the project manager’s supervisor using the four variables provided, show that Israeli projects face higher schedule and cost overruns,
as compared to other countries. Japanese projects,
while excelling in meeting targeted schedules, do
not deliver all objectives to customers. New Zealand
projects perform relatively high in all dimensions.
Reasons for these differences are not the focus of
this article; however, various studies suggest that cultural differences between Japan and Israel,(45) as well
as across countries globally,(48,55) may be helpful in
assessing aggressive versus conservative goal setting
behavior.
In addition, F-tests indicate a significant effect
of both country and industry on all study variables.
These initial results strengthen the importance of the
hypotheses focusing on the contextual environment
of a project noted earlier.
5.2. Hypotheses 1 and 2—The Impact of Contextual
Environment on the Level of Project Risk
The first two hypotheses posit that the level of
project risk varies across industries and countries.
Table I compares the average level of risk across
the three study countries, and then the seven industries. We used an F-test to analyze whether differences in means were statistically significant. Results
allowed us to reject the first two null hypotheses and
conclude that the level of project risk varies across
industries and countries that participated in this
30
Zwikael and Ahn
Table I. Differences in Risk Level, Intensity of Risk Management Planning, and Project Success Across Industries and Countries
(Standard Deviation Values in Parentheses)
N
Countries
New Zealand
301
Israel
275
Japan
125
Fa
Industries
Engineering
88
Software
212
Production
62
Construction
20
Communications
87
Services
50
Government
Fb
143
Level of
Risk
(1–10)
Risk Management
Planning
(1–5)
Schedule
Overrun
(%)
Cost
Overrun
(%)
Project
Performance
(1–10)
Customer
Satisfaction
(1–10)
6.89
(1.87)
6.49
(1.96)
6.60
(2.07)
3.03∗
3.92
(1.33)
2.77
(1.25)
2.88
(1.19)
74.02∗∗∗
10.37
(10.96)
28.29
(20.37)
7.40
(13.13)
115.87∗∗∗
8.22
(14.56)
21.74
(15.99)
6.41
(16.61)
65.88∗∗∗
8.05
(1.54)
8.08
(1.33)
5.55
(2.00)
133.16∗∗∗
8.03
(1.35)
8.16
(1.19)
5.58
(1.74)
64.58∗∗∗
7.11
(1.68)
6.52
(1.84)
6.71
(2.21)
7.71
(1.66)
6.78
(1.95)
6.39
(2.05)
6.56
(2.05)
2.10∗
3.63
(1.43)
3.02
(1.31)
3.06
(1.18)
3.00
(1.12)
3.47
(1.21)
3.62
(1.31)
3.32
(1.38)
3.53∗∗∗
13.52
(16.47)
19.43
(20.57)
14.01
(13.69)
5.10
(5.14)
16.26
(16.36)
11.86
(16.14)
22.06
(19.36)
4.70∗∗∗
13.42
(23.00)
15.74
(18.37)
10.39
(13.78)
5.10
(5.34)
11.59
(11.94)
11.45
(16.02)
15.46
(15.44)
2.08∗
8.45
(1.02)
7.03
(2.05)
6.98
(2.05)
8.39
(1.50)
8.07
(1.47)
7.82
(2.03)
7.69
(1.67)
8.76∗∗∗
8.30
(1.02)
7.58
(1.64)
7.18
(1.60)
8.40
(1.35)
8.22
(1.20)
7.68
(1.58)
7.87
(1.43)
5.46∗∗∗
∗p
< 0.05; ∗∗ p < 0.01; ∗∗∗ p < 0.001; significant results in bold.
indicates the difference between countries.
b F-value indicates the difference between industries.
a F-value
study. Specifically, higher levels of perceived risk are
estimated in New Zealand, compared to lower levels
in Israel and Japan. Among industries, engineering
and construction projects have the highest levels of
perceived risk, while projects in the service industry
have the lowest.
5.3. Hypothesis 3—The Impact of Risk Level
on Project Success
The next hypothesis assumes that projects with
higher levels of risk succeed less than projects with
lower levels of risk. An analysis of correlations
among all project variables was conducted and is presented in Table II.
We found the correlations between risk level and
all four project success measures were low and insignificant. These results suggest that risk levels do
not directly affect project success in all project scenarios, which leads us to further investigate whether
a moderating variable may influence this relationship.
5.4. Hypothesis 4—The Interaction Between Level
of Project Risk and Risk Management Planning
on Project Success
This section investigates whether different levels of risk management planning moderate the negative impact risk has on project success. We conducted a two-way ANOVA test with split median
of “risk level” and “risk management planning,” and
the interaction between them. We also confirmed the
results with split-mean to replace split-median. For
each analysis, a different success measure was used as
the dependent variable (schedule overrun, cost overrun, project performance, and customer satisfaction).
Table III presents the results of these analyses, including F values, number of observations, and degrees of freedom for each model.
We found that the interaction between risk level
and risk management planning was significant for
three project success measures (cost overrun, project
performance, and customer satisfaction). Moreover,
all four models were found to be significant. It was
The Effectiveness of Risk Management in Projects
31
Table II. Pearson Correlations Among the Study’s Continuous Variables
Level of risk (1–10)
Risk management planning (1–5)
Schedule overrun (%)
Cost overrun (%)
Project performance (1–10)
Customer satisfaction (1–10)
∗p
Mean
SD
6.67
3.29
18.59
14.22
7.60
7.82
1.95
1.32
24.18
22.91
1.83
1.48
Risk
Management
Planning
0.20∗∗∗
Schedule
Overrun
Cost
Overrun
Project
Performance
Customer
Satisfaction
−0.02
−0.20∗∗
0.01
−0.28∗∗∗
0.67∗∗∗
−0.02
0.13∗∗
−0.08∗
−0.09∗
−0.02
0.11∗∗
−0.12∗∗
−0.09∗
0.72∗∗∗
< 0.05; ∗∗ p < 0.01; ∗∗∗ p < 0.001; significant results in bold.
Table III. Two-Way ANOVA for the Interaction Between Level of Risk and Risk Management Planning on Project Success (F values)
Level of risk (L)
Risk management planning (P)
Level of risk × risk management planning (L × P)
F
N
df
∗p
Schedule
Overrun
(%)
Cost
Overrun
(%)
Project
Performance
(1–10)
Customer
Satisfaction
(1–10)
0.03
18.01∗∗∗
1.69
8.45∗∗∗
666
3; 662
4.81∗
59.33∗∗∗
8.29∗∗
20.39∗∗∗
651
3; 647
7.85∗∗
2.16
10.09∗∗
3.41∗
670
3; 666
14.90∗∗∗
8.85∗∗
17.59∗∗∗
6.41∗∗∗
670
3; 666
< 0.05; ∗∗ p < 0.01; ∗∗∗ p < 0.001; significant results in bold.
also found that risk management planning does not
always impact project success, as it depends upon the
level of project risk.
To understand the nature of the interaction between risk level and risk management planning, a
graphical representation is suggested in Fig. 2. The
graphs illustrate the effect of two levels of project risk
(with a median of 7) on project success when different levels of risk management intensity are practiced
(low intensity vs. a combined medium/high category,
as was suggested by a previous analysis). Each graph
uses a different project success measure.
The graphs suggest that if only low risk management planning effort is invested, project success levels reduce as the level of risk increases (e.g., higher
cost overrun and lower customer satisfaction). This
analysis represents the net impact of risk on success,
with only minimal risk management effort made to
mitigate risk. However, when a medium or high level
of risk management planning is practiced, an increase
in the level of risk no longer reduces project success
rates. Of note, a significant change in success is observed as the level of risk management planning increases from “low” to “medium” (and even before it
reaches “high”).
6. DISCUSSION
Projects involve risk by nature. As found in this
study, the level of perceived risk varies among industries and countries. Reducing the level of risk
is extremely important in projects, and indeed results of this study suggest that project managers often use risk management planning practices, consistent with previous studies.(10,22,36,56) Specifically,
we found that risk management planning efforts
are effective only when the level of project risk is
medium-to-high. In projects with low risk levels, risk
management planning is ineffective and may be unnecessary, also consistent with previous studies.(25)
This indicates that project managers who oversee
high-risk projects preferentially invest more planning
effort in an attempt to cope with risk.
6.1. The Level of Risk Across Industries
and Countries
As project characteristics vary according to the
context they operate in, we found that the level
of perceived project risk differs across industries
and countries. The cultural diversity literature can
32
Zwikael and Ahn
(a) Impact on schedule overrun
(c) Impact on project performance
(b) Impact on cost overrun
(d) Impact on customer satisfaction
Fig. 2. The interaction between risk level and risk management planning on various project success dimensions.
explain the different attitudes across cultures toward
uncertainty.(44,48) For example, the GLOBE study(48)
analyzed, among its nine dimensions, the level of
uncertainty avoidance for each country. It suggests
that among the selected countries of this study, New
Zealand has the highest level of uncertainty avoidance. This indicates that New Zealanders strive more
to avoid uncertainty by reliance on social norms, rituals, and bureaucratic practices to alleviate the unpredictability of future events. Results of this study
show that findings from the cultural diversity literature are also relevant in the project context. We
found that projects in New Zealand have a higher
perceived level of risk and, as a result, a heightened focus on risk management practices. In countries with lower levels of uncertainty avoidance (i.e.,
Japan and Israel), the perceived levels of project risk
were lower and, as a result, less effort in risk management planning was invested. This suggests that culture affects the way risk is perceived and operationalized in projects.
Different levels of risk were also found across
industries, which may be explained by the different nature of projects across industries. Industries
and companies also vary widely in their relative
degree of innovation and risk. From a legitimacy
The Effectiveness of Risk Management in Projects
theory based view, the “liability of newness” may increase perceived risk levels and project management
activities.(59) Consider, for example, the biotechnology industry, which is perceived to possess high
levels of product and regulatory risk.(60) Another
explanation may lie with the fact that perceived
levels of risk are associated with the experience
and maturity of the project manager, organization,
and industry. Maturity models, which evaluate the
overall effectiveness of organizational processes,(57)
have found that construction and engineering organizations have the highest levels of maturity.(47,56,58)
Consequently, this study found that these industries
deal effectively with high levels of risk to complete
projects with higher levels of success, compared to
other industries. This means that these organizations
comprehend the unique approach required for each
initiative.
6.2. The Impact of Risk Level on Project Success
Building on prior studies that established the relationship between project risk level and project success, a major contribution of this study to the literature is the investigation of the moderating effect
of risk management planning. This study found that
when no or low levels of risk management planning
are invested in a project, the level of risk is negatively
correlated to project success. That is, higher risk levels reduce project success rates. Thus, these results
suggest that risk management provides effective processes to reduce uncertainty and improve project success rates. This finding challenges previous studies
that showed risk management tools are effective only
when unforeseeable uncertainty and complexity are
low.(62)
6.3. Project Risk Management Practices
In this study, risk management planning was
found to be an effective process to reduce the impact of risk levels on project success rates. However,
as the literature has identified some drawbacks with
current risk management practices, this section suggests possible implications for future research and
practice.
According to most project management methodologies,(19,33,34) risk management is defined as a separate project management area. For example, the
Project Management Body of Knowledge (PMBOK)
defines risk management as one of the nine project
knowledge areas, alongside other topics such as
33
scope, schedule, quality, and cost management.(19)
The fact that risk management is isolated from other
project management processes may prevent project
managers from integrating risk management effectively. A typical example under current project risk
management methodology is for a technical team
to reduce technological risk during the software implementation phase by increasing training content.
However, these changes are not always integrated
by the financial manager into the project budget or
by the human resources department into the training plan, as these are different project areas and
teams. Hence, one may posit that integrating risk
management with other project management and organizational practices will contribute to project success. This is suggested because in some project contexts, risk management is perceived as a separate
activity that is not directly related to the broader
organizational processes, as arises from this study’s
findings:
1. In countries with low levels of uncertainty
avoidance, project managers place lower importance on risk management and hence do
not always follow required processes.
2. In industries with low levels of maturity,
project managers do not frequently perform
the risk management process.
Additional support for integrating risk management into other project and organizational areas can
be found in the literature. For example, although
most project management textbooks devote a separate chapter to risk management, Meredith and
Mantel’s(18) widely used textbook presents risk management content throughout the book. They assert
that “the fact that risk and uncertainty are inherent in all aspects of a project life cycle led us to
incorporate discussions of risk management when
they were relevant to the problem in hand.”(67) Cleland and Ireland(32) and others(22,62) with similar approaches, together with the results of this study,
strengthen the idea of integrating “risk management” with other project management areas and organizational groups.
To support the future development of a new “integrated risk” approach, some key constituents have
been identified from the literature.(63) These include
collaboration and coordination to integrate risk at
the project, organizational, and system levels of analysis. Studies have shown, for example, that large,
complex organizations use strategic focus to evolve
systems and processes to fulfill their target customer
34
needs. The focus in this case is that risk can impede
innovation and increase the risk that a series of small
errors will eventually lead to a catastrophic organizational failure. Achieving a narrow functional focus while simultaneously maintaining broad organizational awareness is a key antidote for this type of
corporate myopia. In practice, however, this is a difficult balance to achieve precisely because team and
individual “integration is an on-going accomplishment and partly because rules, orders, directives,
procedures, checklists, and instructions are largely
static tools, ill-fitted to meet the ever-changing requirements of a dynamic system.”(67,68)
Based on these principles of integration, core
principles of an integrated risk management approach, suggested in these findings and based
on the authors’ experience, are provided in the
following.
6.3.1. Integration of Risk Management with Other
Project Management Processes
6.3.1.1. The current practice. The project management literature identifies several knowledge areas
(e.g., scope, schedule, cost, quality) of which risk
management is one. For example, the PMBOK(19) includes nine knowledge areas, including risk management. This means that risks are identified and analyzed at the project level.
6.3.1.2. A drawback with current practice. As has
been described in this article, the added value of decisions derived from risk management analysis is low in
immature organizations. Responses aimed at reducing the level of risk generally have a low impact when
they are not simultaneously implemented across various aspects of a single project’s activities.
6.3.1.3. A suggested principle. An “integrated
risk” approach might combine the “risk analysis”
paradigm into various project management processes. As a result, risk assessment would occur not
only at the project level, but also on the single activity level (e.g., analyzing the risk related to resources,
knowledge gaps, duration of uncertainty, or cost
of an individual activity). Although this practice is
commonly conducted by many project managers, it
should also be reflected in formal methodologies,
processes, and procedures to enhance institutional
capacity.
Zwikael and Ahn
6.3.2. Increasing the Formal Involvement
of Functional Managers
6.3.2.1. The current practice. Project managers are
responsible for all risk management processes related to their project, whereas functional managers
hold most of the power in immature organizations.
6.3.2.2. A drawback with current practice. In many
cases, necessary information about potentially risky
events and best available technical solutions lies with
the functional manager, rather than with the project
manager. For example, the engineering department
manager usually has more information than the
project manager with regards to technological risks
involved with the development of a new product.
6.3.2.3. A suggested principle. Risk management
may be practiced and integrated by functional managers. Functional managers may have more authority in decision making, which is related to risk management practices, because they have the requisite
knowledge and experience with related risks, and
they are the ones who are responsible for executing
these tasks.
6.3.3. Integration of Risk Management with
Stakeholder Management
6.3.3.1. The current practice. Risk is typically managed by a small group of people leading the project.
In immature organizations, moreover, risks are
sometimes hidden from the view of some project
stakeholders.
6.3.3.2. A drawback with current practice. A limited
number of opinions may cause the organization to
miss efficient solutions to cope with potential risk
events and/or seize new opportunities.
6.3.3.3. A suggested principle. Risk management
planning may involve relevant team members and
project stakeholders in an open forum. Decisions
that are a result of such discussions may improve project outcomes and customer satisfaction.
However, care should be exercised to ensure that
conflicting perspectives of multiple stakeholders are
discussed openly and analyzed systematically, for example, using a systems thinking approach for stakeholder management.(64−66)
The Effectiveness of Risk Management in Projects
In summary, these risk management principles,
which integrate several projects, teams, and knowledge areas, can be further developed to enhance
organizational effectiveness in project contexts of
countries with low uncertainty avoidance and industries with low project maturity levels. These principles may improve the integration of risk management
practices with other project areas, as well as improve
the involvement of project stakeholders, functional
managers, and senior executives—toward ensuring
that risk management becomes an overall organizational effort.
7. CONCLUSIONS
Building on diverse findings in the literature regarding the effectiveness of project risk management,
this study found that risk management practices
moderate the effect of project risk on project success in multiple project scenarios. Although risk
levels reduce project performance, effective risk
management planning was found to moderate this relationship. As a result, we sometimes face high-risk
projects that are completed more successfully than
projects with low levels of perceived risk.
This study also found that environmental context determines the level of perceived project risk.
Specifically, we found that the perceived level of risk,
and hence risk management planning, are lower in
countries characterized by low levels of uncertainty
avoidance (e.g., Japan and Israel) in cultural diversity
terms, and in industries with immature project management practices (e.g., production). On the other
hand, we found the perceived level of risk, and
hence risk management planning, are higher in cultures with higher levels of uncertainty avoidance
(e.g., New Zealand) and industries with higher levels
of project maturity (e.g., engineering). Although we
used multiple foci to increase the robustness of our
findings, generalization of these results may require
additional studies on a wider cross-section of countries and industries. For example, countries cultural
diversity studies(48) have identified as having low uncertainty avoidance levels (e.g., Russia, Argentina,
and Italy) may also focus less on risk management
practices.
In summary, principles suggested in this article—
integrating risk into various project management
processes, adding the responsibility for risk management to functional managers, and discussing risks
with relevant team members and project stakeholders in open forums—may be useful for organizations
35
operating in countries with low levels of uncertainty
avoidance and industries with low project management maturity, as means to mitigating risks and enhancing value.
ACKNOWLEDGMENTS
The authors would like to gratefully acknowledge the Area Editor, Karen Lowrie, and the anonymous reviewers for their excellent guidance and
encouragement. All views and errors are ours. The
authors would also like to acknowledge the support
from the Victoria University of Wellington in New
Zealand.
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