Exchange rate differences can positively or negatively affect a project. How to predict this?

Most Croatian companies, especially smaller ones, still plan the risks of new projects by intuition. This is often detrimental to the project, which is why risks need to be managed systematically, paying full attention to both large and small ones. Only with a good risk assessment can one decide whether to embark on a project or abandon it.

Risk management is one of the ten knowledge areas in project management, an area that cannot be overlooked in any project, regardless of its size. A risk is, by definition, something that can negatively or positively affect the project. The probability of a risk occurring is greater than zero percent and less than one hundred percent, and if it occurs, it affects at least one of the project’s objectives. For example, exchange rate differences can positively and negatively affect project goals. In project management, every organization, whether private or public, should effectively incorporate risk management to reduce negative impacts on project objectives. Risks should not be managed haphazardly and partially, which I often encounter in practice on projects led by ‘self-taught’ project managers who frequently overlook many negative impacts and neglect the positive ones.

Risk Register

The first step in risk management is identification. This requires being aware of all factors that affect the project, as well as scenarios and events that may occur. Risks on the project are identified by all team members. Those who are not directly involved in the project can also participate. During identification, it must always be written in the form of ’cause – risk – consequence’. For example, due to time constraints on the project, there is a risk that people will be dissatisfied due to overwork, which may lead them to leave the project, causing delays.

Risks described in this way can be easily sorted; thus, it is easy to see which factor causes the most risks. It is important to note that in this process, their probability or impact is not assessed, but they are recorded in the so-called risk register, a fundamental document for risk management. Once risks are identified, they are qualitatively analyzed. This is a subjective risk assessment. The result of this step is risk exposure, where major risks are identified, which deserve constant attention, and minor risks, which are on the ‘watch list’, but are no less important.

First Analysis and Planning

The project manager is solely responsible for monitoring the risks on that list. For them to be successful, among other things, they need to be qualified, reliable, and composed in order to approach the situation comprehensively, as panic and defeatism in a crisis are often riskier than the problem at hand. After the risk exposure phase, the first analysis is conducted to determine whether the project continues or is halted due to excessive riskiness. The next step is planning how to deal with risks if they occur.

Acceptance. This is a method applied if no other is possible or if any other method is more expensive or time-consuming than the damage the risk will cause. It is usually used for small risks.
Avoidance. This method completely eliminates the risk from the project for risks with a significant impact. For example, there is a risk that a payroll module will not be completed on time in new software (for some reason). The sponsor or key stakeholder agrees that this is not important to the project because they have a good old program for that calculation. This module is removed from the project task, thus eliminating the risk of not completing it on time.
Mitigation. This is the most commonly used method. Procedures are planned to reduce the probability, impact, or both. For example, assigning a more experienced programmer to a task reduces the probability of delay from three to two.

In the case of positive risks, we will take advantage of them in the case of, for example, positive exchange rate differences. Outsourcing. Instead of writing code in-house, where there is not enough expertise, which poses a risk of being full of errors, a more experienced company is hired to do it. This way, the risk is transferred to them.

Identifying Triggers

In this process, two more important things need to be done. The first is that a trigger must be defined for each risk in the register. This is an early sign that the risk will occur or has occurred. The second thing is that each risk must have its ‘owner’ determined. This is the person who must monitor ‘their’ risks (thus keeping an eye on the triggers) and act according to the plan set for those risks. After this process, a final decision is made about the continuation of the project. If the project is still, despite all actions and reduced probabilities and impacts, too risky, it is halted. If it continues, reserves (in money and days) for known risks are planned. This reserve is an integral part of the budget. A reserve for unknown risks is also determined. It is important to communicate about risks effectively and systematically to ensure that knowledge about managing them is applied effectively. This is one of the key factors in project management, but also one of the most important provisions of the PMI (Project Management Institute) branch in Croatia.

For this reason, we are organizing the PMI Forum; this year’s will be held from November 11 to 13, 2015, at the Conference Center of the Antunović Hotel in Zagreb. During the forum, a ceremonial award for Project of the Year will be presented to encourage the culture of project management in the community.