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Blog post 25 Jan 2022

What are Stakeholders and Why are They Important?

What are Stakeholders and Why are They Important?

In this article, we will go over:

  • What are stakeholders and their two types,
  • Explain details of stakeholder analysis such as how to identify stakeholders, differentiate important stakeholders and sort them into the matrix
  • And finally, talk about three steps for successful stakeholder management.

What is a Stakeholder?

Stakeholders are people who have, in one way or another, an interest in and are impacted, whether positively or negatively, by the current project. An individual or an organisation can represent stakeholders. They hold an important role in the project as they greatly influence it, 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 with the smooth functioning of a project.

A stakeholder's influence is the strongest at the beginning stages of a project. Seeing as there are often changes during the life cycle of a project, stakeholder's engagement drops once the progress takes momentum. This is because at that point the price of altering the 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 in order to ensure that the project meets their needs the best it can and is favourably accepted.

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

Types of Stakeholders

Types of stakeholders

The project stakeholders can be separated into two types- internal and external stakeholders, depending on their position to the organisation or 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 is actually a client 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 which then results in them becoming a subject of many different influences which may affect the project. Unless the "client" takes a very strong stance, there is no way of avoiding the influence of different stakeholders that are participating.

This makes the decision-making process much more complex. The "representative" has to negotiate with stakeholders about stakeholder interests. Generally, this representative act like a filter - all the information passes through them from stakeholders to the project management team members and back. Finding the right solution is difficult when you have to satisfy the goals of most individuals that have an interest in the project as well as prevent those whose goals weren't met from obstructing it.

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

External Stakeholder

External stakeholders are people or organisations who are not part of the client organisation but have an interest in the project regardless. Mostly, this type of stakeholder includes investors, suppliers, customers, regulatory authorities (such as planning authorities and special regulatory authorities), local community, government and press and media as they have a great influence on the way the project is perceived.

This type of stakeholder also includes shareholders. So let us make a simple distinction between those two 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 made an investment in it, while a stakeholder has an interest in the performance of an organisation for reasons other than stock performance or appreciation. This often means that stakeholders have a greater need for an organisation's actions to bring success long term.

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 community and others who have a stake in the organization. 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 done 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 interest in the project might change depending on each project phase. The project execution is affected by these potential stakeholders and determining their stakeholder impact and how much they want to be involved will help with minimising potential risks of sabotage and having better outcomes. That is a short explanation of the importance of stakeholder analysis. Further, it consists of three steps: identifying stakeholders, prioritising stakeholders and finally, understanding them. These three steps are later crucial for successful stakeholder management.

Identify stakeholders

potential stakeholders infographics

The first step is to identify stakeholders because in order to manage them you have to know who the potential stakeholders are. With the help from the team list them all out. Once stakeholders are identified, they should then be placed in one of the groups so a stakeholder register can be developed. That register is meant to contain information on stakeholders and later on help to manage the various stakeholder groups. The result of being able to differentiate between key stakeholders and other stakeholders is why you need to identify stakeholders.

This is the stage where we should make initial contact with each stakeholder. Providing the introductory information on the project should help establish a good relationship. 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. The dynamics of the project will require regular communication. Therefore it is crucial to start right.

Prioritize stakeholders

graph on power interest grid

The next step in stakeholder 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 key decision-makers 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 better understand them.

This grid is divided into four quadrants based on their vertical and horizontal axis position, representing power and interest. Before placing any stakeholder in one of the four quadrants, you should try to answer the 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 don’t show significant interest in the project. They are important, yet they will not be at the centre of the project manager’s attention. However, they should not be overlooked and dismissed. The best strategy is to monitor them. The goal here is to prevent the low power, low-interest stakeholders from taking a negative stance towards 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 that they do not lose their 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 influence a lot, and, unfortunately, not pleasing them may result in delays or even failure of the project. The best way to engage with them is to ensure that 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 they may be of 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 focus of the project manager should be on this particular group, devoting time and attention to building a stronger relationship.

Understand stakeholders

Knowing who to prioritize 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 are their expectations for the project, what they consider a successful project, how will they be affected by a project's outcome (be it positive or negative), etc. These are just some of the examples which help you find out 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 is helpful for predicting 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 is done, the stakeholder analysis is complete. Strategic management should be using the results gathered from the analysis to form the basic stakeholder management and communication strategy for the successful project.

How to manage stakeholders

Managing stakeholders is the process that occurs every day during the project. It involves communicating and working with stakeholders 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 project management team members should do 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 later on helps you minimise the risks of their disagreement and last-minute alteration that are contributing to cost problems. This is especially true for key stakeholders who hold a lot of influence and can even try to sabotage the project. On the other hand, the project managers should not fall into a trap of indulging every stakeholder's want as that puts the project's success at risk.

2. Use effective communication

stakeholder communication plan matrix

The previously mentioned involvement would not be possible without a proper communication plan. 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 as we know who has the most power to influence the project's outcome.

3. Document each stakeholder’s roles and needs

stakeholders roles and needs matrix

And finally, all of the above information should be recorded on a spreadsheet. Having all the information about each individual project stakeholder helps you be on top of everyone's role and responsibilities during each project phase. A clear understanding of a project plan helps keep everyone on the same page.

This register will help you keep track of priorities and ensure that you’re always driving the project in the right direction and 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 for building relationships as well. Fostering good relationships is necessary in the project management world and, engaging with influential groups increases the chances of success.

So, a short answer to the question "Why are stakeholders important?" is for achieving better outcomes, whether it’s education, connection, engagement or profit. 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:

key points described in analysis and management

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