Ten Approaches to Managing Project Risks: I

Discussing risk in general terms is always difficult, because many professions have their own ways of thinking about it. For now, let's regard risk as the chance of losing an asset. We measure the chance as a probability. We measure the asset in units of value.

If the probability of loss in a given time interval is P, and the value of the asset is V, the expected value of loss in that time interval is PV. In a large number of identical trials, our average loss per trial would be PV.

Sound decisions about enterprise resources do consider risk. For example, in estimating a project budget, we might consider the possibility that one of our suppliers might deliver a subsystem three months late. To manage this risk, we might reserve resources to deal with it if it occurs. If the cost of dealing with this event is V, and the probability of it occurring is P, then the reserves required are PV.

That's one example of a strategy for dealing with a risk. Fortunately, it isn't the only strategy available, and in many cases we can do much better. Here's Part I of a summary of the possible strategic options for dealing with risk, emphasizing ineffective (but very common) approaches.

Denial

Those in denial are those who reject the reality of the risk event.

Slogan: "That'll never happen. You're such a worrier!"

Advantage: Denial lets Those in denial are those
who reject the reality
of the risk eventus feel that preparation is unnecessary, because there's no risk. It can be a comforting illusion, especially for those reluctant to allocate resources to managing risk.

Danger: If the risk event occurs, we're unprepared. Worse, we can become disoriented when we find that our view of the world is fiction.

Shock

Shock happens when we're blindsided by the unexpected.

Slogan: "OMG, nobody could've anticipated that."

Advantage: If the unexpected doesn't happen, we can remain in a state of blissful ignorance.

Danger: If the unexpected happens too late for us to take remedial action, disaster is possible.

Acceptance

Acceptance is the strategy for those who don't want to prepare.

Slogan: "That might happen. We'll deal with it then."

Advantage: It requires no advance resource allocation. If the risk event doesn't occur, no resources are expended.

Danger: It can lead us to believe that we have less need for resources than we actually do. Acceptance is a prudent strategy only when PV is very small.

Chaos

This approach happens when we're so distracted by immediate events that we cannot plan for future risks.

Slogan: "Heavens! We've been meaning to plan for that. We clean forgot!"

Advantage: By focusing our resources elsewhere, we do accomplish some tasks. Without a risk plan, allocating resources to risk management becomes unnecessary.

Danger: If risk events arrive before we can allocate resources to risk planning, the risk response can be inadequate, and full-scale disaster is possible.

We'll continue next time with three more risk management strategies.   Next issue in this series   Top    Next Issue

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