Methods to identify risks present for different types of projects

Welcome to Project Risk Identification!

Hello there! As you progress through CB1 – Business Finance, you’ll find that evaluating a project isn't just about crunching numbers like Net Present Value (NPV) or Internal Rate of Return (IRR). Before we can calculate anything, we need to know what could go wrong (and what could go right!).

In this chapter, we are going to explore the methods used to identify risks. Think of yourself as a detective—your job is to uncover every possible threat to a project's success before the company invests its hard-earned money. Don't worry if this seems a bit "theoretical" at first; it's one of the most practical skills an actuary or business manager can have!

What is Risk Identification?

Risk identification is the process of finding, recognizing, and describing risks that could affect a project. If you don't identify a risk, you can't manage it. It is the first and arguably most important step in the Risk Management Cycle.

Quick Review: Remember that a risk isn't just a "bad thing." In finance, risk is the uncertainty of an outcome. It could mean the project performs worse than expected, but it could also mean it performs differently than planned.

Method 1: Brainstorming

This is often the starting point for most project teams. Brainstorming involves gathering a group of people (with different backgrounds and expertise) to generate a huge list of potential risks in a free-thinking environment.

How it works:
1. A facilitator leads the session.
2. Everyone throws out ideas—no matter how unlikely they seem.
3. No ideas are criticized during the session to keep the creativity flowing.
4. The list is then categorized and refined later.

Example: Imagine a company building a new wind farm. Brainstorming might bring up risks like "unusually low wind levels," "protests from locals," or "a shortage of specialized cranes."

Key Takeaway:

Brainstorming is great for getting a wide range of perspectives, but it can be influenced by "groupthink" if one person dominates the conversation.

Method 2: Checklists

Checklists are lists of risks based on historical data and knowledge from similar projects completed in the past. If a company builds bridges frequently, they likely have a "standard list" of things that usually go wrong.

Common Mistake to Avoid: Don't rely only on checklists! While they are great for catching common risks, they might make you "blind" to new or unique risks that haven't happened before.

Memory Aid: Think of a pilot’s pre-flight checklist. It ensures they don't forget the basics, but they still need to keep their eyes open for unexpected weather!

Method 3: The Delphi Technique

This is a favorite in the IFoA exams! The Delphi Technique is a way to reach a consensus among a group of experts anonymously.

The Step-by-Step Process:
1. A group of experts is selected.
2. A questionnaire is sent to each expert individually.
3. The experts return their answers (anonymously).
4. A summary of the responses is created and sent back to the experts.
5. The experts review the summary and can change their minds based on what others said.
6. This repeats until the group reaches a consensus.

Why use it? Because it is anonymous, it prevents "dominant personalities" from forcing their opinions on others, and it prevents junior experts from feeling intimidated by senior ones.

Did you know?

The name "Delphi" comes from the Oracle of Delphi in Ancient Greece, who was famous for predicting the future!

Method 4: Interviews

Sometimes, the best way to find out what might go wrong is to simply ask the people involved. Interviews are one-on-one conversations with project stakeholders, subject matter experts, or experienced employees.

Example: If you are evaluating a project to implement new accounting software, you should interview the IT staff (who know the technical risks) and the accountants (who know the operational risks).

Method 5: SWOT Analysis

You might have seen this in other business subjects. SWOT stands for:
• Strengths (Internal)
• Weaknesses (Internal)
• Opportunities (External)
• Threats (External)

In project evaluation, we focus heavily on Weaknesses and Threats to identify risks. However, Strengths and Opportunities help us understand if the project is worth the risk in the first place.

Method 6: PESTLE Analysis (Categorizing External Risks)

When looking at risks outside the company's control, we use the PESTLE framework. This ensures we don't miss any "big picture" risks.

P - Political: Changes in government, tax policy, or trade tariffs.
E - Economic: Interest rates, inflation, or exchange rate fluctuations.
S - Social: Changes in consumer tastes or demographics.
T - Technological: New inventions making your project obsolete.
L - Legal: New health and safety laws or employment regulations.
E - Environmental: Climate change or carbon taxes.

Quick Review Box:

Which method to use?
• Use Checklists for routine projects.
• Use Delphi for complex, unique projects where experts disagree.
• Use PESTLE to make sure you've looked at the "outside world."
• Use Brainstorming to get a team engaged and thinking creatively.

Common Mistakes Students Make

1. Confusing Risk Identification with Risk Analysis: Identification is just finding the risks. Analysis (which comes later) is about calculating how likely they are and how much they will cost.
2. Being too vague: Saying "the project might fail" is not a risk identification. A good risk identification is specific, like "the cost of raw steel might rise by more than 10%."
3. Forgetting "Upside" Risk: Remember, some risks are opportunities! For example, a project might finish earlier than planned, which is a risk (a deviation from the plan) but a positive one.

Summary Checklist for Your Revision

Make sure you can explain these key terms before moving on to the next chapter:
• The Brainstorming process and the role of the facilitator.
• The Checklist method and its reliance on historical data.
• The Delphi Technique and why anonymity is its superpower.
• SWOT and PESTLE as frameworks for organizing your thoughts.
• The importance of using a combination of these methods rather than just one.

Keep going! You're building the foundation for being a great risk manager. The more you practice identifying risks in these notes, the easier the exam questions will feel!