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Volume 14, Issue 49;   December 3, 2014: Ten Approaches to Managing Project Risks: Part III

Ten Approaches to Managing Project Risks: Part III

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Project risk management strategies are numerous, but these ten strategies are among the most common. Here are the last three of the ten strategies in this little catalog.
Phoenix caissons being towed to form a Mulberry harbor off Normandy, June 1944

Phoenix caissons being towed to form a Mulberry harbor off Normandy, June 1944. The Normandy coast has few natural harbors, and for that reason, among others, the German command regarded it as an unlikely site for a landing. They expected an assault at or near one of the harbors on the French coast, which they therefore fortified heavily. Recognizing the high risk of an attack at or near a harbor, the Allies chose to transform that risk into the risks associated with a beach landing. They then dealt with those risks, in part, by engineering artificial harbors, constructed from chains of caissons like those shown here, which they towed from the English coast and sank off the beaches of Normandy. This approach is a clear example of risk transformation. Photo courtesy U.S. Department of the Navy.

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 somehow
Even 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  Go to top Top  Next issue: On the Risk of Undetected Issues: Part I  Next Issue

How to Spot a Troubled Project Before the Trouble StartsProjects never go quite as planned. We expect that, but we don't expect disaster. How can we get better at spotting disaster when there's still time to prevent it? How to Spot a Troubled Project Before the Trouble Starts is filled with tips for executives, senior managers, managers of project managers, and sponsors of projects in project-oriented organizations. It helps readers learn the subtle cues that indicate that a project is at risk for wreckage in time to do something about it. It's an ebook, but it's about 15% larger than "Who Moved My Cheese?" Just USD 19.95. Order Now! .

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