Understanding Risk: The Project Management of Boarder Millionaires
By Waleed Abughazaleh,
September 15th, 2016
At the age of eleven, I became very wealthy when I spent a summer in Turkey. Tested with the confidence of a budget that exchanged for thousands of Turkish Liras, my friends and I dreamt of an escape across Europe that would rival the plot of a James Bond sequel. This fantasy came to an abrupt end when we realized that the cost of everything was the same – if you understood currency exchange rates.
Today, I fully understand the concept of exchange rates and have intertwined it with concepts utilized by economists, as well as risk, project and financial managers. Economists often provide a plethora of reasons as to why currencies inflate prices of goods. But the reason always boils down to one simple concept: “if everyone, including an eleven year old, may easily acquire a sum of money, then the purchasing value of that sum decreases.” Similarly, riskless investments do not provide significant returns.
Humans are risk averse. For this reason, it is easy to forget that the only way to generate a higher return is to take on risk. Since we cannot generate a significant return without added risks, it is clear that how well you manage your risks in your personal or professional life will define your success.
In the project management world, risk is defined as a probable event with a consequence that would interfere with the expected economic return of the project. This event may occur, thus there is a probability defining the chance of occurrence. This event is also defined by an impact on one or multiple aspects of the project – the consequence.
Complications within execution, delays in permitting, lower worker productivity, weather events, supply chain hurdles, staff skill level, currency exchange rates, transportation costs or changes in the economy are just a few examples of risk events. From independent oil corporations to large financial institutions, all businesses are subjected to risk events. Improper understanding of such risks can diminish profitability or ultimately lead to insolvency.
Risk management is a continual process, and the strength of risk management implementations is most visible in periods of low economic conditions. Fat margins can conceal serious management problems during an economic boom.
Above all, the caliber of your management team, and their ability to discover, analyze and handle these risks defines the strength of a company’s future and its reputation for creating value. Unlike the economic discovers of eleven-year-old travelers, I believe that project risks should never be a surprise. Proper risk planning can ensure that you realize your project goals, on time and on budget.