Tuesday, April 16, 2013

Opportunity v Threats (again)

I was stunned by a paragraph in a recent 'briefing' -- "Opportunities are the Same as Threats" -- from the 'Risk Doctor' telling us that threat and opportunity are the same thing, except for a minus ( - ) sign in the impact column.

The proposition was stated thus:
The secret to effective opportunity management is to recognise that an opportunity is the same as a threat, apart from the sign of the impact . Once we see this similarity, the way to address opportunities becomes obvious. We can take the standard risk process which we already use for threats, and apply it to opportunities, with simple modifications to recognise that we are dealing with positive upside risks
My take: Not exactly!

In some situations the six step risk management process described in Chapter 11 might be applicable to opportunities, but most of the time the sponsors, funding, and impact to the baseline or the business scorecard are so remarkably different that a different management paradigm -- SMEs, tasks, workflow, approvals/trade-offs -- is invoked and applied. That said, the opportunity responses in PMPBOK 11.5.2 are still reasonable and applicable, even to a different paradigm than the risk management paradigm.

And, I'm not talking about the simple difference of having a risk register vs an opportunity register. That's just a  matter of the database schema -- schemas don't change the facts/estimates/forecasts. You can use one register if you want -- I teach my risk classes using one register for both; the case study for my students has both opportunity and risk.

Allow me this digression: in my risk management classes, I instruct on how to link/map PMBOK 11.5.2 risk responses to opportunity responses by having a common field on which to join. Then, if you want to map between registers, it's a simple matter of joining the registers on the common field. (If you know SQL and relational theory, then you know that if want a many-many relation between separate registers, you'll need a third register that is used as the common place to join)

The larger issue in my mine, unspoken in the Risk Doctor's briefing, is that opportunity and risk are quite different psychologically. One might hope that psychological factors shouldn't drive different managemenet paradigms, but they do because unique factors enter the frame. A simple minus sign ( - ) does not fix this. (And the 'Risk Doctor' knows all of this; he was a co-author of the rather decent book: "Understanding and managing risk attitude" which covers this very material)

If everyone were rational and objective, immune to bias and especially the effects of the non-linearities of utility, we would not have these issues:
  • Foremost, Prospect Theory -- an advanced variant of simple expected utility -- tells us that there are profound psychological differences in the way we approach an opportunity vs a threat; that these differences are quite material; and these psychologies lead to quite dramatic decision and planning non-linearities that are quite difficult to calibrate. Fear -- representing risk -- is simply not the flip side of joy -- representing opportunity.

  • Second, even though the PMBOK is correct to suggest quite different responses to opportunity as compared to risks, (See Chapter 11, para 11.5) these different responses not just a matter of a minus sign ( - ); it's a matter of how opportunities are handled differently because they are often a change in the baseline or even a change in the business plan.

    One simply does not go about changing baselines for opportunity like one responds with planning contingencies to risks from the risk register. There are usually quite different governance paradigms reflecting quite different cultural attitudes about risk vs opportunity.

    At this point, some of you may be thinking: Opportunity or change? Are they same, different without a distinction, or really different? I put my ideas in a recent posting. The way I use 'opportunity' brings sales and marketing into the frame; 'change' may not. Thus, there may be quite different paradigms even between opportunity management -- commonly thought of as external to the project -- and change management commonly thought of as internal to the project

  • And, finally to the anecdotal evidence: in my risk management courses I put this question (risk vs opportunity) to my students. The overwhelming response -- from hundreds of students across the world and industry and government -- is that the two are not handled as just the opposite sign of the other. Indeed, among those that have a formal risk management process, only a few include opportunity in the mix.
What about this idea that I hear a lot from my students?: 'Every opportunity entails risk'. Yes, that's certainly the case. Every opportunity is in the future, the future is uncertain, and uncertainty brings risk. That's why I counsel my risk students to avoid silos between risk and change management, and between risk and opportunity management.

And what about this?: 'Taking a risk is just exercising an option for opportunity'. Yes, that's valid also. Just as in finance where options are a common strategy for managing opportunity without obligation, the same can be applied to projects, setting up the possibility (but not the obligation) of exercising an option to take advantage of  situation/condition/event if it happens (Berra, Y: if you see a fork in the road, take it!)

The RISK DOCTOR responds: See the posted comments for the RD's response.

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