A business organization has to manage both business risks and project risks. But there is a significant difference between the two. Let’s try and gain some insights into what distinguishes a business risk from project risk.
When you talk about risk in the context of business, it could be anything that has the potential of threatening the generation of profits at the predetermined target levels. Business risks could be quite dangerous for the long-term sustainability of the business.
Business risks are largely about the decisions related to products and services offered in the market. When a company decides to manufacture and sell a specific product, there is always a risk with regards to the product not working as well as the company had expected. Sometimes marketing campaigns fail to sell a product. Other examples of business risks are changes in raw material costs, changes in shipping charges, new technological developments and so on.
To put it very simply, business risks are typically more general as compared to project risks. Also, they would have an impact on nearly all aspects of the business.
Classification of Business Risks
Business risks can be placed in two broad categories:
- Pure Risks: negative scenarios over which a company has zero control
- Speculative Risks: possible outcomes (positive or negative) of decisions and actions
An alternative categorization of business risks could be as follows:
- Internal risks: related to events occurring within the organization
- External risks: related to events happening outside of the organization
Project risks are different from business risks in the sense that they refer to an uncertain condition/event that may affect one or more project objectives.
When estimating project risks, several people may end up listing all possible risks that could have an impact on the project. However, it is vital to do a careful assessment and see clearly whether you’re listing specific project risks or common business risks. In the latter case, the list would be unmanageably lengthy.
In other words, a business risk may be misinterpreted as a project risk. For example, key team members exiting the project/organization or going on a long sick leave should ideally be categorized as a business risk. It is not in the immediate risk management realm of the project and would be better handled by the HR department as part of the overall business process. In other words, this type of risk needs to be assessed under general business risks.
As far as project management is concerned, risk management usually aims at identifying and analyzing potential project risks and minimizing their impact on project progress. A project manager, along with his team, can begin reviewing each project task on the project schedule and look for areas of uncertainty. For example, risks could be related to the adoption of some new technology or the lack of adequately experienced staff.
No project is risk-free and while there are plenty of uncertain events that could hamper the success of a project, these need to be correctly distinguished from common business risks.