Monday, June 25, 2012

Risk exposure

And then what?!
Robert Gates
US Defense Secretary

It has been reported that Robert Gates routinely asked that question when being briefed on a new opportunity. He likely understands that "risk is the price paid for opportunity". Gates may have been thinking about this:

Decisions in the face of uncertainty deal with these questions (the big Three)
  • Are all the facts and estimates in the frame?
  • Is the information understood for its function, features, and performance?
  • Are the consequences known and understood?

Facts come from history; estimates are about the future (there are no facts about the future, after all)
Consequences is another word for exposure. Is the risk exposure understood? Perhaps it is if you internalize these ideas:
1. All risk events are not going to happen, or happen to the degree you estimate, so the total risk exposure on the risk register (sum of all costs,or schedule) is overstating the risk to the project

2. If you have benchmark data on the probability of occurrence, you can weight the event values by the benchmark data; however, if there is no benchmark data (what we call calibrated data), then there is no point guessing and then multiplying probability by likelihood.... that's just multiplying two guesses, and what's the point of that?.

3. Without benchmark data, you can label each risk qualitatively with a high, medium, low possibility of occurrence. While these are also a guess, the guess has a broader range and is more likely to cover the real possibilities. Thus, you can then look at the risk exposure in each broad category

4. Based on experience and intuition (learned responses) you can choose which events to keep an eye on, and which events may be mitigated by some strategy

5. You can plan buffers and reserves to absorb the unmanaged (low) risks

6. Risk attitudes--and thus risk estimates--are temporally biased: the future is more optimistic than the present for the same challenge.

Sponsors, with their longer business timeframe, are more optimistic than the project manager; thus, sponsors understate risk. But the corollary is that PMs tend to overstate the risk. Thus, there is a constant tension. Project managers are the ultimate manager of this tension!