A structural equation modeling approach for assessing external and internal risk factors in projects

The success parameters for any business project are on time completion, within specific budget and with requisite performance. Risks are part and parcel of any project that hinders achieving project goals. Managing risk is the systematic process of identifying, analyzing and developing responses for possible risks. Although enterprises appreciate the benefits of managing risks, formal risk management techniques are rarely used due to lack of knowledge and doubts on the suitability and effectiveness of these techniques. This chapter demonstrates an effective technique of analyzing risk in projects that uses structural equation modeling (SEM). Although SEM has been used across the management science disciplines, applications of SEM in analyzing risk are scant. We have used simulated data from a hypothetical case to demonstrate the effectiveness of the method. The proposed method helps measure impact of both internal and external critical risks of projects so as to prioritize their mitigation before they occur.