Risk Versus Risk

One of the most critical processes in managing projects are those addressing project risks.  Some writers go so far as to call risk managent 'project management for adults'.  The implication being that if you’re not doing risk management in your project, then you’re just a kid, you haven’t grown up yet, and have no place among grown-ups (I agree with this view, by the way).

When asked what risk is, quite a few will give an answer that goes something like: 'a risk anything that can go wrong.'  In this view, a risk is something that can go wrong, and therefore risk management is about addressing those things that can go wrong.

But there is another, less commonly known, view of risk.   In this view, risk is something uncertain that may affect the project.  Not something necessarily bad, but something uncertain. 

Let's suppose you are planning a picnic for tomorrow.  Being an adult, you have prepared a risk management plan (your picnics may be boring, but they are predictable).  You have an entry for weather in your risk plan.  In the first view of risk, you look at the weather and look for something that could 'go wrong' that could negatively affect your picnic.  Is it going to rain tomorrow?  If there's a chance of rain, what can we do to mitigate the effects of this rain on the picnic? Perhaps bring an umbrella.  Perhaps plan to hold the picnic nearby an accessible shelter, to make escaping from the rain easier.

In the second view, we look at the weather not as something that is the harbinger of something that can go wrong, but simply something uncertain.  So there's a 50% chance of rain.  Let's prepare for that eventuality.  But there's also a 50% chance of no rain. Let's also prepare for that happy eventuality as well -- perhaps plan to go to a place with a nicer view if the weather clears up.

With this second view, risk is not simply viewed as about bad circumstances that can happen, but simply about all uncertain circumstances. Circumstances which can indeed turn out bad (and whose effects we should be ready to address), but which can also turn out good (which we should be ready to take advantage of).

In the first view, we simply prepared ourselves for the worst.  But in the second view, we also prepared ourselves for the best.

Assumptions

Until we develop the ability to see the future, projects and programmes will have to be run in the face of uncertainty.

In the absence of complete information, assumptions will have to be made. Otherwise decisions cannot be made and activities will stall. At least some of these assumptions are documented in the projects. In the more badly run projects, the assumptions are there uncritically reviewed. Because a project is proceeding as if these assumptions are valid, it is critically important to review the assumptions.

You are trying to cross a bridge and making the assumption that the floor is sound. You have several choices: make the assumption, and proceed to walk normally as if the assumption is correct. You can also make the assumption, keeping in mind that you could be wrong, and proceed with caution, testing every step to see if the assumption holds. You can also, before, proceeding, inspect the bridge, and gather more information about the assumption. How likely is the assumption to be correct? How likely is it wrong? Apart from
physical inspection you can observe the environment. Are locals crossing the bridge? Are there local experts who know if the bridge is sound?

Because the assumptions are the 'floor' on which the programme will be proceeding, it is critical to review these assumptions to see how sound they are. These assumptions should be looked at with the following filters:

• Are they complete? Are these the only critical assumptions?
• Are they valid? Are we making assumptions about things that are not already known to be false?
• Do we have a plan for reviewing the assumptions at a later date, when we may have more information and able to verify or reject the assumptions.
• Have we identified the risks that will arise if the assumptions on which we are proceeding are proven false?

ERM is an Integrative Approach to Risk Management

Risk management as traditionally practiced in organisations, tended to be silo-based.  Risks originating from one area is expected to be managed in that area which is assigned the responsibility for managing, while risks originating from another area is managed by that area. 

One reason Chapman gives as to why this approach developed is our tendency to compartmentalise. Our analytical mindset approach to problem solving leads us to split things into their basic components, to make them easier to manage. 

Over the years, there have been growing recognition that the silo-based approach is flawed.  The impact of risks span across silos -- a breakdown in manufacturing leads to impacts well beyond the manufacturing department.  Mismanagement of risk in one silo affects other silos, which may not be prepared for that risk because they had assumed that other area was managing that risk.  

ERM is a new approach to managing risk.  The thrust is of ERM is the integrative management of risks, understanding the interdependencies, their impacts, and areas where they can be leveraged so that addressing a single cause can prevent multiple risks.

Reference: Chapman, Robert. Simple Tools and Techniques for Enterprise Risk Management 2006.