Being “risk-averse” often means trying to completely eliminate risk, which is counter-productive and often impossible. Good managers embrace risk. Why? Because they know that setting up a proper risk management program up front can ultimately save time, money, and avoid potentially serious program execution problems. Think of it as building “sweat equity” into the investment.
In a recent post we described four approaches to handling risk: avoid, transfer, accept and control. When employed appropriately, these approaches can greatly increase chances for program success.
Here we’ll look at why you should consider (and sometimes embrace) risk, and how to build risk mitigation into your team’s plans.
In practical terms, risk is the potential that an event, chosen action or activity (including the choice of inaction) will lead to a loss (an undesirable outcome). It is typically expressed in terms of the chance something will happen (Probability), and the consequences if it does (Impact). For Program Managers (PMs), the impact usually leads to additional time and money to complete the activity, task, or project. When risk management is applied, however, several things work in the PM’s favor:
- Risk is in the future;
- Risks can therefore be identified in advance;
- A mitigation plan can be created to reduce the probability and impact to a level acceptable to both the PM and the stakeholders.
Risks are Real
Even Federal agencies with risk-averse cultures are susceptible to risk. For example, decision makers may avoid taking too many chances and expect new initiatives to reflect their mindset– they don’t take too long to deliver, and don’t cost too much. In the quest to please decision makers and receive approval to proceed, it is possible to unconsciously inject a little too much optimism into meeting certain deadlines, cost, or performance targets. This is how risk creeps into a project. Inaccurate cost and time estimates or overly optimistic performance requirements will lead to unexpected cost growth and schedule slippages.
Effective risk management begins with a thorough understanding of what it will take to get from where we are to where we want to be. It all starts with asking, “What could happen?” Consider these points on how to make it work:
- Don’t wait until the plan is almost complete – make sure risk is considered at the very beginning and in every phase of an endeavor so that uncertainty doesn’t lead to certain disaster.
- Consider risk when: writing the business case; developing an analysis of alternatives; writing the requirements; developing the plan; creating the work breakdown structure; building the schedule; estimating the cost; obtaining approval; executing the plan; monitoring and controlling the work.
- Involve your whole team in the process and be sure to encourage honesty and openness in both directions of communications.
- Review lessons learned from similar efforts, and talk to subject matter experts when identifying risks.
- Have everyone review plans and estimates. Ask: Do they make sense? Are they reasonable? Have we forgotten anything? What could go wrong? What can we do about it?
- Prioritize the risks to make management more efficient.
- Make risk management a regular part of meetings; the initial learning curve may be steep, but over time it will become second nature.
Not All Risk is Bad
With a deep understanding of the process – risk can actually be fun! Naval hero John Paul Jones said long ago, “Those who will not risk cannot win.” Smart organizations use ongoing market research to stay current on technologies, methods, and processes, and are willing to innovate to stay ahead of their competition, or to counter their threats. The Federal Government took a risk by enacting the Federal Acquisitions Streamlining Act of 1994 to lower the barriers to purchasing and using commercial, off-the-shelf items, and the Federal Acquisition Streamlining Act of 1996 to remove the traditional oversight requirements. Taken together, these acts permitted the Government to realize millions of dollars in savings by procuring commercial systems and components that are every bit as good as the highly tested, military-specified versions.
Risk-taking and risk aversion are complimentary, and both must be factored in from the very beginning of a project. Facing risk head on in a project is exciting, and seeing it pay off is very rewarding. Calculated risks can lead to improvements and risk management can thwart the dangers, saving time and money.
How do you approach risk in your organization?