Concepts
To prepare for the PMI Risk Management Professional (PMI-RMP) exam, one needs to comprehend the concept of risk origin and ownership i.e., whether the risk is internal or external. Understandably, each risk can be attributed to either of these categories, which determines its ownership and hence, the strategy to mitigate it.
I. Internal Risks
Internal risks, as the nomenclature suggests, originate from within the organization: they are usually under the direct control of the management. They comprise risks associated with resources (human resources, equipment, etc.), procedures and controls, system failures, mismanagement, and the lapse in complying with business policies.
For instance, natural employee attrition is an internal risk companies must acknowledge. The mitigation strategy here would involve tactics like creating an engaging work environment, employee retention programs, and potential backup plans.
Let’s imagine a software development project where a promising team member resigns unexpectedly. This can increase the risk of project delay as it can take time to find a suitable replacement or reshuffle the existing workload, either of which can disrupt the original project timeline.
| Internal Risks | Ownership |
|---|---|
| Attrition | Human Resource Management |
| System failures | IT Management |
| Mismanagement | Project Management |
II. External Risks
Unlike internal risks, external risks emerge outside the organizational environment and are, therefore, not under the direct control of the project team. They involve risks related to government policies, market volatility, competitors, natural disasters, and more.
For instance, a sudden change in government policy (like the introduction of a new tax law) can potentially increase project costs or decrease its profitability. The project team has no control over this, but they must be proactive and flexible enough to adapt to such changes to minimize any potential damage.
In the case of a construction project, a natural disaster like a hurricane or flood can cause significant project delays and add to the cost. While the project management team can’t prevent such occurrences, having a comprehensive disaster management and recovery plan can help reduce the impact.
| External Risks | Ownership |
|---|---|
| Government policies | Government Agencies |
| Market volatility | Financial Analysts |
| Natural Disasters | Disaster Management teams |
III. Mitigation and Ownership
Ownership in terms of risk management refers to the responsibility of monitoring and mitigating risks. For internal risks, ownership typically resides with the organization’s different management division depending on the nature of the risk.
For external risks, on the other hand, the owners are usually external entities like government bodies or disaster management teams. However, the onus remains on the internal organization to work in collaboration with these entities to minimize the risk impact.
For this, it’s important to establish clear ownership for each risk, internal or external. Doing so will enable prompt and effective decision making while also facilitating accountability in case the risk materializes.
IV. Conclusion
In understanding risk origin and ownership, it’s important to remember that while internal risks are controllable to an extent, external risks require effective anticipation and flexibility in handling. To ace the PMI-RMP exam, a solid grasp of these details, along with the right risk mitigation strategies is critical.
Answer the Questions in Comment Section
True or False: All risks originate from external sources.
- True
- False
Answer: False
Explanation: Risks can have both internal and external origins. Internal risks are usually associated with operational inefficiencies, while external risks could be tied to economic factors or natural disasters.
True or False: Only upper management owns the risk in a project.
- True
- False
Answer: False
Explanation: Risk ownership is not confined to upper management. Any individual who has responsibility for managing a specific risk is considered a risk owner.
Multiple Select: Which of the following are possible origins of risk in a project?
- A. Technical complexities
- B. Market demand
- C. Personnel changes
- D. All of the above
Answer: D. All of the above
Explanation: All of the above-mentioned elements (technical complexities, market demand, and personnel changes) can originate risk in a project, either internally or externally.
In risk management, who typically identifies the risk owner?
- A. The project team
- B. The risk management professional
- C. The stakeholder
- D. The project manager
Answer: B. The risk management professional
Explanation: Although the whole team is involved in risk identification, the risk management professional typically identifies the risk owner.
True or False: Risk ownership is assigned to the person in the best position to handle the risk.
- True
- False
Answer: True
Explanation: Identifying the risk owner is a key step in risk management, with the ownership given to the person best positioned to handle that risk.
Multiple Select: Which of the following can be considered external risks?
- A. Technology changes
- B. Regulatory changes
- C. Market competition
- D. All of the above
Answer: D. All of the above
Explanation: All of these are examples of external risks that could impact a project.
Single Select: Who usually has the responsibility of managing a specific risk?
- A. The project manager.
- B. The risk owner
- C. The stakeholder
- D. The team lead
Answer: B. The risk owner
Explanation: By definition, a risk owner is the person assigned to manage a specific risk.
True or False: The only purpose of identifying a risk owner is to assign blame if things go wrong.
- True
- False
Answer: False
Explanation: Identifying a risk owner is not about assigning blame. It’s about ensuring there is a clear responsibility for managing each risk.
Single Select: At what stage of the risk management process is risk ownership typically established?
- A. Risk identification
- B. Risk analysis
- C. Risk response planning
- D. Risk monitoring and control
Answer: C. Risk response planning
Explanation: During the risk response planning stage, measures are taken to tackle identified risks, including assigning risk ownership.
True or False: An internal risk can stem from factors such as staff changes or process inefficiencies.
- True
- False
Answer: True
Explanation: Internal risks originate from factors within the project or organization, including staff changes, process inefficiencies, and malfunctioning equipment.
Single Select: Which one of the following best describes the risk owner?
- A. The person who is harmed by the risk.
- B. The person who benefits from the risk.
- C. The person who holds responsibility for managing the risk.
- D. The person who initially identified the risk.
Answer: C. The person who holds responsibility for managing the risk.
Explanation: The risk owner is the individual responsible for managing a certain risk until it’s fully mitigated.
True or False: Changes in the regulatory environment can be considered a form of external risk.
- True
- False
Answer: True
Explanation: Regulatory changes are external to the organisation, and cannot be controlled by it, making them an external risk.
Great post! Understanding risk origin and ownership is crucial for effective risk management.
Thanks for the insightful article!
Can anyone explain the difference between internal and external risk origin?
Internal risks originate from within the organization, such as operational failures, while external risks come from outside, like market fluctuations.
In my experience, assigning ownership to risks encourages accountability and prompts timely mitigation actions.
Absolutely! Without clear ownership, risks can be overlooked, leading to potential project failures.
I found this post very helpful for my PMI-RMP exam prep. Thank you!
How do we handle risks that have both internal and external factors?
You have to analyze both aspects and potentially involve different stakeholders to address all the angles.
As a risk manager, I think identifying the origin can help us prioritize which risks to focus on first.
Yes, prioritization becomes easier when you know whether the risk is internal or external.
I would like to see more examples of how to practically assign risk ownership in a project setting.
Sometimes, it’s as simple as assigning it to a team leader or department head, depending on the risk’s impact and scope.