Ten Approaches to Managing Project Risks: III

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:

Risk Management Risk: I

Risk Management Risk is the risk that a particular risk management plan is deficient. It's often overlooked, and therefore often unmitigated. We can reduce this risk by applying some simple procedures.

Why Scope Expands: II

The scope of an effort underway tends to expand over time. Why do scopes not contract just as often? One cause might be cognitive biases that make us more receptive to expansion than contraction.

Down in the Weeds: I

When someone says, "I think we're down in the weeds," a common meaning is that we're focusing on inappropriate — and possibly irrelevant — details. How does this happen and what can we do about it?

Managing Wishful Thinking Risk

When things go wrong, and we look back at how we got there, we must sometimes admit to wishful thinking. Here's a framework for managing the risk of wishful thinking.

The Risks of Too Many Projects: I

Some organizations try to run too many development projects at once. Whether developing new offerings, or working to improve the organization itself, taking on too many projects can defocus the organization and depress performance.

See also Project Management and Problem Solving and Creativity for more related articles.

Forthcoming issues of Point Lookout

Coming July 25: Exploiting Functional Fixedness: II

A cognitive bias called functional fixedness causes difficulty in recognizing new uses for familiar things. It also makes for difficulty in recognizing devious uses of everyday behaviors. Here's Part II of a catalog of deviousness based on functional fixedness. Available here and by RSS on July 25.

And on August 1: Strategies of Verbal Abusers

Verbal abuse at work has special properties, because it takes place in an environment in which verbal abuse is supposedly proscribed. Yet verbal abuse does happen at work. Here are three strategies abusers rely on to avoid disciplinary action. Available here and by RSS on August 1.

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