Risk Response Strategies: Transfer and Avoid

As I’ve noted in other posts, a risk is an uncertainty that matters. Some event has a significant probability of occurring, and there will be a significant consequence if it does. A risk represents a threat, and a wise project team endeavors to identify project threats and analyze them so that the probability of occurrence can be reduced or the cost of the consequences reduced. Or both.

Consider the following proverb:

“The early bird gets the worm, but the second mouse gets the cheese.” — David Jakovac

Mr. Jakovac is correct only if the cheese is in a trap; otherwise, the Second Mouse goes hungry while the First Mouse eats his dinner. Thus, the Wise Mouse looks at the context, seeking potential threats and assessing her exposure to them. If the cheese is indeed in a trap, waiting to be triggered, then she has four potential risk management strategies to consider:

  • Mitigate – try to either trigger the trap from a safe distance or find a way to survive the snap
  • Accept – in effect, volunteer to be the First Mouse
  • Transfer – recruit a First Mouse (or possibly a whole tribe of mice)
  • Avoid – look for another food source

After considering the technical limits of the alternatives available for mitigation (little chance of reducing the probability of occurrence) and the fatal consequences of triggering the snap (little ability to reduce the cost of the event), the Wise Mouse will abandon the first two strategies as unworkable. At this point, Ms. Mouse needs to consider the economics of the Transfer and Avoid strategies.

Transfer

Crappy BumperGenerally, a risk is transferred using one of two mechanisms: pooling and delegating. In pooling, a number of parties at risk contribute funds to finance recovery from an event experienced by a member of the pool. If that sounds like an insurance policy, it is. Surety bonds are also a form of risk transfer, commonly used to absorb the impact of non-performance. Currency exchange rates can be a risk, and appropriate financial derivatives are used to partially absorb a loss. In most cases, pooling is about reducing the financial impact of an event, at some initial fixed cost.

The Wise Mouse is considering a delegation strategy. Delegation can take many forms—from sub-contracting to an experienced performing agency to engaging a contingent worker. Crowd-sourcing is a delegation strategy, as is the use of open-source software. Delegation to someone with more expertise is intended to reduce the likelihood of the event, again at some cost. Other times, as in the case of the recruited First Mouse, delegation is about transferring the consequences. Note that some residual risk will usually be present; in other words, some of the consequences will be borne by the Wise Mouse, possibly at the hands of the First Mouse’s mourners.

Avoid

We avoid a risk by accepting the opportunity cost of not doing something. In projects, this can range from taking something out of scope to making adjustments to the project delivery schedule. Depending on the goals of the project and the nature of the risk, we may determine that the remaining value of all-but-this-one-thing still exceeds the adjusted cost, and we may proceed without it.

Of course, if the value no longer exceeds the cost, it may be better to abandon the project. The Wise Mouse is considering exactly that approach.

Certainty is for People With No Imagination

Eats, Won’t Leave, So Shoot!

Leadership requires a willingness to make decisions under conditions of uncertainty. To be certain, you must believe that you have perfect knowledge of the circumstances and absolute control over the outcome. It also requires you to have absolutely no imagination; “Nothing will go wrong.”  These people often go on to win Darwin Awards. The rest of us acknowledge the limits of our understanding and control. We have horrible dreams, and yell at the heroine in the horror film to turn on the damned lights when you enter the room! We often live long enough to reproduce, or at least have roles in the sequel.

Risk management is about improving the quality of decisions made under conditions of uncertainty. It is unrealistic to demand certainty before taking action and foolish to assume that all will go well, simply because you need it to. Identifying and analyzing risks may help reduce uncertainty to acceptable levels, or it may lead to cancellation of a doomed project. In either case, the analysis of the risk and alternative strategies allows a rational basis for decision making.

Title
Risk Response Strategies: Transfer and Avoid
Article Name
Risk Response Strategies: Transfer and Avoid
Description
The economics of the Transfer and Avoid risk response strategies
Author
The Practicing IT Project Manager LLC