In Part I and Part II, we explored five ineffective strategies and two somewhat more effective strategies for managing risk. In this Part III, we complete our little catalog with three of the more effective strategies.
- Transformation
- Transformation strategies entail exchanging the risk or risks in question for a different risk or risks. After the transformation, the asset at risk might be different, or it might be imperiled in a different way, or both. For example, if we're traveling from A to B, and two routes are available, Route 1 might be more congested, while Route 2 might be more hazardous. If we take Route 1 we might lose time; if we take Route 2 we might lose the vehicle and its passengers.
- Slogan: "That risk vanishes if we use this alternative approach, but then we would have to deal with this other risk instead."
- Advantage: If we can't deal with risk event A, but we can deal with risk event B, then we can proceed with confidence if we take an approach in which risk event A cannot occur, but risk event B might.
- Danger: Dealing with risk usually entails estimation. Our estimates can be wrong, either because of the errors inherent in estimation, or because we mislead ourselves.
- Compensation
- In compensation strategies, we arrange that if the risk event occurs, we make up for it somehow.
- Slogan: "If we take these steps, then these good things will happen if the risk materializes."
- Advantage: In compensation strategies, we
arrange that if the risk event
occurs, we make up
for it somehowEven if we can't sufficiently limit the probability or size of the loss, we can proceed with confidence, because the net value of the compensation minus the expected value of the loss is acceptable. - Danger: We might be so emotionally committed to proceeding that we overestimate the value of the compensation.
- Transfer
- In transfer strategies, we arrange to have some other person or organization (the counter party) bear the consequences of the risk. When the transfer is by mutual agreement, the parties usually exchange some resources as well. Purchasing insurance is an example of a risk transfer strategy.
- Slogan: "If we do this, then we don't have to deal with that risk. They will."
- Advantage: Transferring risk to another party can relieve us of the burden of planning for the risk. The sum of both the resources required for such planning and the expected value of the loss can exceed the cost of transferring the risk.
- Danger: The counter party might not be strong enough, or ethical enough, to cover the loss. When counter parties are coerced into accepting the risk, their reliability can be dubious. Be certain that the transfer is real.
Project risk is inherently imprecise, both numerically and conceptually. By far, the greatest risk is the risk of overlooking or misunderstanding a significant risk, including this one. Ironically, I have never seen it mentioned in a risk plan. First in this series Top Next Issue
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Related articles
More articles on Project Management:
- Restarting Projects
- When a project gets off track, we sometimes cancel it. But since canceling projects takes a lot of courage,
we look for ways to save them if we can. Often, things do turn out OK, and at other times they don't.
There's a third choice, between pressing on with a project and canceling it. We can restart.
- On the Risk of Undetected Issues: I
- In complex projects, things might have gone wrong long before we notice them. Noticing them as early
as possible — and addressing them — is almost always advantageous. How can we reduce the
incidence of undetected issues?
- Wishful Thinking and Perception: I
- How we see the world defines our experience of it, because our perception is our reality. But how we
see the world isn't necessarily how the world is.
- Wishful Interpretation: I
- Wishful thinking comes from more than mere imagination. It can enter when we interpret our own observations
or what others tell us. Here's Part I of a little catalog of ways our wishes affect how we interpret
the world.
- Planning Disappointments
- When we plan projects, we make estimates of total costs and expected delivery dates. Often these estimates
are so wrong — in the wrong direction — that we might as well be planning disappointments.
Why is this?
See also Project Management and Problem Solving and Creativity for more related articles.
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- Rescheduling is what we do when the schedule we have now is so desperately unachievable that we must let go of it because when we look at it we can no longer decide whether to laugh or cry. The fear is that the new schedule might come to the same end. Available here and by RSS on May 22.
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