Risk Management, Theory, View from the Top

The Risk of Risk Management: Why it feels so wrong to do what’s right

When unplanned events arise, there are severe repercussions for the projects you are accountable for. Yet, project risk management typically has an unpleasant connotation.Trying to sell executives on risk management is like taking the role of an insurance salesperson, dwelling on the negative potentialities that might not even happen. There are enough “real” uncertainties and issues that exist right now in any project; how are you going to convince executives to spend their money on risks that have a limited chance of happening?

The insurance salesman in Groundhog’s Day grates on Bill Murray’s character until he finally punches him.

The reality is that nobody is enthralled by any of the four potential outcomes of “insuring” themselves against risk, which are:

No insurance; hope nothing happens
No insurance; something goes wrong
Insurance; nothing goes wrong (cost is sunk)
Insurance; something goes wrong (no one is excited over filing a claim)

Outcome #1 is the most tempting because, when you are lucky enough to “achieve” it, it is the least costly. However, this option leaves you personally and professionally exposed to disaster.

But proper risk management also doesn’t involve you do not have to spend premiums to chase away gremlins under the bed. The investment involved to preempt every risk in every project in the portfolio is impractical. You must determine your tolerance for risk, then prioritize the risks with a mitigation plan based on impact and probability.

To continue with the insurance analogy, losing your home would be a disaster (high impact), but if you live in the Northeastern US, you still may waive an added premium to protect against tornadoes and earthquakes. The probability is too low to be worth much investment. Conversely, you’re less inclined to insure a $50 electronics purchase because the worst-case-scenario is low impact.This approach exposes you to a 5th outcome: that disaster still strikes even though you have paid a premium to prevent it. When a high-impact, low-probability risk is realized, there will be tough questions to answer.This reinforces the axiom that effective project management requires making tough decisions and making stands against the status quo. If you could simply manage based on your gut, then far more managers in far more organizations would get it right much quicker; it’s the shrewd few who have the courage to stand by the right decisions–even when they don’t feel right–that separate themselves as the truly effective managers.

This is why most organizations give into temptation and opt to roll the dice. But regularly relying on achieving Outcome #1 isn’t just risky; when you take on enough risk, the odds eventually compound to the point that they will catch up to you. You are simply biding your time until something inevitably goes wrong at some point.So if your organization truly can’t afford the worst-case-scenario (and most organizations can’t), a well-thought-out approach to risk management is critical to organizational success–even if it doesn’t always feel quite right.