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What are Stakeholders and Why are They Important?

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30 Jun 2023

In this article, we will go over:

  • The details of stakeholder analysis, such as identifying and differentiating important stakeholders and sorting them into the matrix.
  • The three steps for successful stakeholder management.

What is a Stakeholder?

Stakeholders are people who have an interest in and are impacted, whether positively or negatively, by the current project. An individual or an organisation can represent stakeholders. They exert significant influence on the project, and no project can succeed without their presence and input.

The keyword when it comes to stakeholders is engagement. A project manager should work towards the best engagement of stakeholders possible. Working together with stakeholders will ensure healthy relationships and good communication, which will help the project function smoothly.

Importance of stakeholders

A stakeholder's influence is the strongest at the beginning stages of a project. As there are often changes during the life cycle of a project, stakeholder engagement drops once the project gains momentum. This is because, at that point, the price of altering the project's direction or stopping it completely becomes high and unprofitable. But this does not mean they just give up on the project, as their engagement rises again near the end of it. That is why it is important to manage stakeholders' expectations to ensure that the project meets their needs the best it can and is favourably accepted.

Influencing stakeholders can be a nightmare, as a considerable number of them have different levels of involvement, requirements, power, and vested interest in manipulating the project. This is why there are two types of stakeholders.

Types of Stakeholders

Types of stakeholders : Internal stakeholders and External stakeholders

The project stakeholders can be separated into internal and external stakeholders, depending on their position in the organisation or their status reports to a client.

Internal Stakeholder

Managing the internal stakeholders is often more problematic than managing the external ones. Usually, it is difficult to even identify who a client is, as that "client" is more of a representative of an entire client organisation. This person has the difficult task of juggling a whole range of requirements coming from the client organisations, resulting in them becoming a subject of many different influences that may affect the project. Unless the "client" takes a very strong stance, there is no way of avoiding the influence of different stakeholders and government agencies that are participating.

This complicates the decision-making process, as the "representative" has to negotiate with stakeholders and their interests. Generally, this representative acts like a filter - all the information passes through them from stakeholders and government entities to the project management team members. Finding the right solution is difficult when you have to satisfy the goals of most individuals interested in the project and prevent those whose goals weren't met from obstructing it.

Internal stakeholders could be anyone within the organisation. Most commonly, internal stakeholders are the eventual users of the project, but they could also be representatives like managers, other employees, trade unions, and so on. They all have a stake in the project and can affect it directly or through indirect influence.

External Stakeholder

External stakeholders are people or organisations outside of the client organisation but still interested in the project. This type of stakeholder mostly includes investors, suppliers, customers, regulatory authorities (such as planning authorities and special regulatory authorities), the local community, government, other organisations, and the press and media. They all greatly influence how the project is perceived.

This type of stakeholder also includes shareholders. Let us make a simple distinction between those terms: shareholders are always stakeholders in an organisation, but stakeholders are not always shareholders. A shareholder owns a part of an organisation through shares of stock, meaning he invested in it. At the same time, a stakeholder is interested in an organisation's performance for reasons other than stock performance or appreciation. This often means they have a greater need for an organisation's task management actions to bring long-term success. This is where we should also mention stakeholder theory, as it is one of the main considerations in the study of business ethics. Stakeholder theory is a view of capitalism that stresses the interconnected relationships between a business and its customers, suppliers, employees, investors, local and community members, and others who have a stake in the organisation. The theory argues that an organisation should create value for all stakeholders, not just shareholders.

One of the main problems of managing external stakeholders is the sheer number of people involved and the fact that their levels of power and interest differ remarkably. That is why having a stakeholder analysis can help significantly with stakeholder management.

How to do a stakeholder analysis

The stakeholder analysis can be used to understand the stakeholder environment and determine the key stakeholders, which will help us to prioritise management resources. For each project, there are many interested "customers" or investors whose interests in the project might change depending on each phase. The project execution is affected by these potential stakeholders.

Determining their stakeholder impact and how much they want to be involved will help minimise potential risks of sabotage and produce better outcomes. That is a short explanation of the importance of stakeholder analysis. Further, it consists of three steps: identifying the major stakeholders, prioritising them, and understanding them. These three steps are crucial for successful stakeholder management.

Identify stakeholders

what is stakeholder in business

The first step is to identify stakeholders because you have to know the potential stakeholders in order to manage them. With help from the team, list them all out. Once stakeholders are identified, they should be placed in one of the groups so a stakeholder register can be developed. The register is meant to contain information on stakeholders and help manage the various groups. Simply put, identifying stakeholders allows you to differentiate between key stakeholders and others.

Once they are identified, initial contact should be made with each stakeholder. Providing introductory information on the project will help establish a good relationship, as they might wish to express their opinions and views on the project and the process of its execution phase. They will express the ways they wish to be contacted and which information is of interest to them, and the dynamics of the project will require regular communication. Therefore, it is crucial to start right.

Prioritise stakeholders

graph on power interest grid

The next step in the stakeholder prioritisation analysis is to decide what level of power and interest each individual project stakeholder has to influence the project. Prioritising is important because it helps with the understanding of who the primary stakeholders are as well as where to invest your resources. For this step, it's helpful to have the stakeholder analysis matrix as it offers a way of grouping stakeholders, enabling us to understand them better.

This grid is divided into four quadrants, with the vertical and horizontal axes representing power and financial interest, respectively. Before placing any stakeholder in one of the four quadrants, you should try to answer two key questions:

  • How much influence does the stakeholder hold?
  • How much interest does the stakeholder have in the project?

Eventually, all stakeholders should fall into one of the four categories:

1. Low power, low interest

Some stakeholders hold little power and are not interested in the project. They are important but will not be the focus of the project manager's attention. However, they should not be overlooked and dismissed.

The best strategy is to monitor them. The goal is to prevent the low-power, low-interest stakeholders from taking a negative stance toward the project. That is why regularly reaching out is a good idea with these stakeholders.

2. Low power, high interest

Some stakeholders may not have as much power and influence on the project, yet they are very interested. Keeping them informed will ensure they do not lose interest and remain positive towards the project. Again, regular communication will keep them engaged and interested.

3. High power, low interest

High-power yet low-interest stakeholders are very important for a successful project. They may have significant influence, but, unfortunately, disappointing them may result in delays or even failure. The best way to engage with them is to ensure they are satisfied. Satisfying the high-power project stakeholders can lead to their increased interest in the project.

4. High power, high interest

This is the most important group of stakeholders. Besides holding power, they are already interested in the project and could be a great asset to it. It only makes sense to engage these key stakeholders in the process and consult with them regularly.

While none of the four stakeholder groups should be overlooked, the company and project manager should focus on this particular group by devoting time and attention to building a stronger relationship.

Understand stakeholders

Knowing who to prioritise helps managers understand which stakeholders to focus on. This means the "main players" should get meetings or interviews where the discussion is led on the following topics: what their expectations are for the project, what they consider a successful project to be, and how they will be affected by a particular project part's outcome (be it positive or negative). These are just some examples that help you determine whether there are any anticipated conflicts of interest with other stakeholders that you need to be aware of.

Another benefit is getting to know their interpersonal preferences and building relationships with them. While doing this, try to pick up on political, cultural, or environmental cues. This helps predict how the key stakeholders will interact with each other and with other stakeholders. Knowing this information is helpful for future decision-making processes.

Once this step of the project charter is done, the stakeholder analysis is complete. Strategic management and project team members should use the results gathered from the analysis to form the basic stakeholder management and communication strategy for a successful project.

How to manage stakeholders

Managing stakeholders is a process that occurs every day during the project. It involves communicating and working with them to meet their needs and expectations, address issues, and foster appropriate project stakeholder involvement. The main benefit of this process is that it increases support and minimises resistance from stakeholders.

For stakeholder management, project managers are using the information gathered during stakeholder analysis. There are three actions that senior management team members should take once they understand which stakeholder approach and project plan to use.

1. Involve stakeholders throughout the project

Stakeholders are a part of the project from its beginning to its end, no matter what level of involvement they want. For that reason, keeping them up-to-date ensures they feel valued. This way, you are constantly in touch with their wants, needs, and expectations, which helps you minimise the risks of their disagreement and last-minute alterations contributing to cost problems.

This is especially true for key stakeholders who hold a lot of influence and can even try to deter project success. But remember that not all stakeholders have these intentions, and project managers should not fall into the trap of indulging every stakeholder's wants, as this puts the project's success at risk.

key stakeholder communication plan matrix

2. Use effective communication

The mentioned involvement would be impossible without a proper communication plan for the project's progress. The communication plan describes a strategy for providing the right information to the right people in their preferred format. This plan describes which methods, formats, and technologies should be used for stakeholder communication. In other words, it ensures the process is functioning smoothly.

For this, we are using the knowledge gathered from identifying stakeholders, as we already established their preferred communication ways and noted which information is of interest to them. Matrix is also useful for a communication plan with project sponsors, as we know who has the most power to influence the project's outcome.

3. Document each stakeholder’s roles and needs

Project stakeholder roles and needs matrix

Finally, all of the above information should be recorded on a spreadsheet. Having all the information about each project stakeholder helps you be on top of everyone's roles and responsibilities during each project phase. A clear understanding of typical stakeholders in a project plan helps keep everyone on the same page.

This register will help you keep track of priorities as the project progresses and ensure that you're always driving the project in the right direction while keeping the right people informed at the right times.

Why Are Stakeholders Important?

To sum it up - without stakeholders, there would be no projects. Engaging project stakeholders can bring many benefits to the project. They can get involved in the decision-making process and influence the organisation's actions in a way that is helpful to the project management team.

Stakeholders' investment can be a valuable source of information, not only for education but also for building relationships. Fostering good relationships is necessary for project management, and engaging with influential groups increases the chances of success.

And what is the best way to engage with stakeholders? Let us quickly recap the importance of stakeholder analysis and stakeholder management processes in project management:

stakeholder analysis

Now that you are familiar with the importance they have for the project, you might wish to improve your stakeholder relations. To help with that, the Institute is offering our Stakeholder Management and Communications course. This course focuses on teaching you how to manage interests and expectations and have the best possible stakeholder engagement.

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