The risk context describes the institutional and individual environment, attitudes and behaviours that affect the way risk arises and the way it should be managed.
The risk context is a complex system. It is affected by individuals, groups (such as the project management team), stakeholders, host organisations, clients and the broad external environment.
Fundamental to understanding the context are the concepts of risk attitude and risk appetite.
Risk attitude is an individual's or group’s natural disposition towards uncertainty and is influenced by their perception of risk. Perception is itself influenced by many factors, including conscious and subconscious reactions to risk. Risk attitude will affect the way people develop responses to risk and the way they react if a risk event occurs.
The risk attitude of a group or individual is often described in one of three ways:
- risk averse, where risk is avoided;
- risk seeking, where risk is actively sought;
- risk neutral, where risk is neither actively sought nor avoided.
A risk averse attitude may be useful in some situations (e.g. local government) but detrimental in others (e.g. an entrepreneurial, technology start-up company). Conversely, risk seeking is a positive attribute in some situations but unsuitable in others.
Understanding risk attitude can help P3 managers by giving insight into why some situations are considered more risky than others, and why individuals or groups behave in certain ways when confronted with risk.
Risk appetite is the amount of risk an individual, group or organisation is prepared to take in order to achieve their objectives to take risk in a given situation, influenced by their propensity to take risk and/or the organisational risk culture.
A P3 manager needs to understand the risk appetite of the stakeholders. In the definition phase of a life cycle the development of a solution to meet requirements will be heavily influenced by the stakeholders’ risk appetite. Some ways of meeting requirements may be delivered quickly or produce high returns but also involve high levels of risk. These would be acceptable to risk-seeking stakeholders but not to those who are risk averse.
The P3 manager also needs to understand the risk attitude of the team members and ensure that they are managed in a way that is compatible with the stakeholders’ risk appetite.
Many projects will derive their risk appetite from their host programme, portfolio or organisation. The project manager must understand the context in which the project is to be delivered and handle project risk accordingly.
Where a project involves multiple organisations, the project manager will need to balance the needs of different groups of stakeholders. For example, where a project is being delivered by a contractor on behalf of a client, there may be different appetites for risk. The contractor may be risk averse to protect profit on the contract, whereas the client may be risk seeking if there are opportunities to increase the value of the project’s output.
The programme management team must ensure that the acceptable level of risk for the programme is reflected in the management of project risk. This does not mean that every project will need to have the same risk appetite, but the projects must be structured and balanced with the overall acceptable level of risk in mind.
In delivering an organisation’s strategic objectives, a portfolio will take on the same risk appetite as the host organisation. The organisation’s risk appetite may allow for some high-risk ventures to be initiated, provided they are balanced by low-risk ventures.
Techniques such as risk efficiency are useful in ensuring that the overall risk of a portfolio does not exceed an organisation’s appetite for risk.