Risk or opportunity?

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Here's a challenge question I often put to my risk students:

If you are challenged by your sponsor (or circumstances) to take a risk on a new and unproven technology, process, or supplier/partner for your project, what is your likely attitude
1. Would you be more likely to put it on the risk register to be managed, or
2. To evaluate it as an opportunity to be exploited, shared, accepted, or enhanced?

I make the point: There's no school answer; there's no "right" answer.

A student replied:

• 1) Depends on the inherent risk culture of the company. Is it risk adverse or not? Risk adverse companies I notice tend to more setup up project KPIs whereby it's in the PM's benefit to keep a tight rein on any possible new circumstances and almost treat any deviation as a negative one that must be controlled immediately.
• 2) Support from your project sponsor and overall stakeholders. This probably fits into point 1 above, however is your sponsor okay with the project possibly running over budget /schedule to see the introduction of the new concept or okay for the project to be possibly re-baselined? Do your stakeholders see this as a positive introduction, negative introduction or just plain neutral to the whole thing
• 3) Depends on when the introduction of the circumstance occurs. If the new technology, process... is introduced in the early stage of the project (e.g. project initiation or even planning) I would see it more as an opportunity to be exploited. Otherwise, treat it as a risk and apply it to the risk register.
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To which I replied:
The theme of reward/punishment or risk/payoff that runs through your comments is at the heart of the discussion question.

Your observation seems to be: That PMs are often -- too often perhaps -- scored/rated/rewarded on fidelity to the "input" side of projects. That is, they are scored/rated/rewarded on the volume of resources consumed/invested -- cost, schedule, plant/equipment, hours.

I agree (with the student); this is the way many scorecards are set up and the way many comp plans are drawn. That's too bad. The true value of the project is on the "output" side: Deliverables useful to the business for which the project investment "was worth it". 
 
Thus sponsor attitude is a key factor, as you (the student) note. But is your specific sponsor an investor or a resource manager?

The former takes risks; the latter is averse. The former is more output focused -- results with value; the latter is all about delivering according to the plan -- the plan uber alles.  If an investor, hopefully they are endowed with judgment and wisdom is required on the part of the investor, thus to not preside over the rags--riches-- rags cycle of bust-boom-bust. 

Understanding which risk culture you are a part of is key to your (the student) personal success, though the rogue -- if successful -- is often celebrated for both bravery and foresight... if you have the stomach for it.
 


  

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Shakespeare on risk v opportunity

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Shakespeare had some interesting insight to the dilemma of whether to see an event/condition as an opportunity that defines the future, or a risk that we may well regret:

There is a tide in the affairs of men,
Which, taken at the flood, leads on to fortune;
Omitted, all the voyage of their life Is bound in shallows and miseries....
And, we must take the current when it serves,
Or lose our ventures.

William Shakespeare, "Julius Caesar" 

In hindsight, this is a lot easier said than done. Indeed, we may well recognize a flooding tide... who could miss all the boats being lifted? ... but when is the tide at its flood (maximum lift)? That's a hard one to judge in real time as it happens -- perhaps if we wait, the tide will go a little higher! (if it doesn't ebb)

But, the issue is not really about missing the peak... that happens a lot with no catastrophes. The issue is about missing the whole damn tide event.... not taking a risk when opportunity presents itself.

How many projects are too risk averse to really be successful? I'll bet more than you might imagine... or admit to.

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The moment of opportunity

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There is a tide in the affairs of men.

Which, taken at the flood, leads on to fortune;

 

 

Brutus

Julius Caesar Act 4 

Now in the project business, we might rewrite Shakespeare this way:

There will be opportunities in the lifecycle of projects

Which, taken at their moment, lead on to fortune in the business
 

Of course, we may only be able to put down an option to hold the right to take the opportunity at a future time, perhaps a little off the flood tide, but nonetheless a good deal.

And, options, as a strategy for opportunity, isn't that hard to understand:

• The idea is to put a little down now to preserve the right but not the obligation of doing something later. That is the situation with event chains and rolling wave plans.
• Anything you do or put down might be a throw away if you do not exercise the option. So, your option is sunk cost; it should be a small investment (money or other) compared to the opportunity cost of doing something else.

  

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Risk and opportunity link innovation

This observation from one of my risk management students

I have found that many times that the occurence of a given risk results in the opportunity to solve a problem in a new way. We have developed a number of innovative solutions as a result of one risk occuring that required an innovative solution to mitigate the risk

Craig Ballenger

This is part of the ageless discussion about whether risk and opportunity are two sides of the same coin. Many academics say yes; most practitioners say no. Thus, practitioners have not accepted the leadership of the academics on this topic.

The PMBOK, to cite one reference, puts them together in one chapter. But they are handled completely differently from the perspective of management actions:

PMBOK risk responses:

Accept, transfer, mitigate, and avoid

PMBOK opportunity responses,on the other hand:

Exploit, share, enhance, accept

And, it's not just the PMBOK. Most projects put risk management in it's own stepped process: plan, identify, assess, respond, and then iterate based on results. Most projects put opportunity through some kind of change management and budget prioritization process, often requiring program or portfolio coordination.

Thus, two management paradigms and thus two attitudes about risk vs opportunity.


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Risk or Opportunity management?

What's going on here?

• Venture capitalists put their money at risk and successfully backed a start-up called Facebook
• Jon Corzine took a risk on European soverign debt and went bankrupt, but John Paulson and George Soros took similar risks during the financial crisis and made billions.
• General Bernard Schriever couldn't risk a failure of the fledgling ICBM program, so he developed the Titan and the Atlas concurrently using different designs
• General Samuel Phillips couldn't risk missing a presidential schedule for the moon landing, so he ordered an unprecedented test program to flight test the Apollo multistage rocket as one stack rather than test each stage independently.

Are these examples of risk management, opportunity management, or some combination? And, by the way, is there a difference, and even so, does it matter?

In other words, is "taking a risk" risk management, or opportunity management?
And, is this posting about counting angels on the head of a pin, or is there a worthy point to be made?

Actually, I say there is, in this respect:

• Taking a risk is usually understood to mean taking advantage of an opportunity, an event out of the ordinary, or an event that is off the strategic path. If it works out, the "risk takers" get rewarded, in some proportion to the risk taken: more risk, more reward. If it doesn't work out, either the risk takers are punished, or at the least not rewarded.

• Managing risk is usually understood to mean preventing an untoward outcome that might derail a course of action or unfavorably impact an outcome.  If it works out, the risk managers are rewarded according to the project success, not according to the impact avoided. In other words, successful failure avoidance is not rewarded directly; reward is only indirectly through whatever incentive was placed on project success.

And, in the project domain, project managers, as a matter of routine, are expected to be successful. Rewards are modest, given the expectations. Stakeholders who "take a risk" and are successful are usually much more handsomely rewarded.  This is not a sour grapes argument, just a discourse about risk and reward vs. opportunity and reward.

Dr Edmund Conrow is an academic, an author, an advisor to defense programs, and a skeptic of opportunity management (at least in the project domain, and domains are important because some concepts don't port well between domains).

But, Conrow provides us with a simple but useful definition of opportunity management: "In simple terms, it's a change in direction of the status quo that will leave us--we believe--in a better place than is currently anticipated". And, he says, to purse an opportunity requires "....allocation or reallocation of resources...".

I agree with Edmund: opportunity is a change in direction; and my corollary is: risk is a threat to not changing direction.

In an article written in 2008 in the DoD publication AT&L for March of that year, entitled "Opportunity Management", Conrow disses the idea that risk and opportunity are more or less opposite sides of the one idea that there are events in the life of a project that will push it off track--risk being a unfavorable outcome, and opportunity being a favorable outcome.

Conrow is not an opportunity denier; far from it. He advocates opportunity management in the sense of a search for alternatives, but not after the baseline is committed. Once committed, the baseline is to be managed to hit its targets until some formal baseline change is initiated and approved.

But, is a planned make/buy decision that is deferred until circumstances are more clear an exercise in opportunity management or risk management?

He sets aside, rightly so in my mind, the idea that project managers deliberately ignore four opportunity possibilities advanced by opportunity advocates, saying most competent managers maintain 360 awareness of these types of opportunities:

1. Opportunity to improve the baseline when there are otherwise no risks
2. Opportunities that are the inverse of a risk to baseline
3. Opportunites that arise from the interactions of risks to the baseline, and
4. "Pure opportunites" unrelated to, or different from, the baseline plan

Bottom line: taking a risk and managing risk are different; they both belong in the project manager's domain. The former is a change management agenda; the latter is a baseline maintenance agenda. There's room for both, as there should be.

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Opportunity or risk?

Opportunity or risk?

Not to be too dry, let's nevertheless acknowledge that the 'official' definition of risk, as given by PMI PMBOK, is that a risk is an event or condition that could have either a negative or positive impact on project objectives. And, if you follow the thread in the PMBOK gloassary, 'opportunity' is the name given to the positive impact thread. Now, the ISO 31000 standard for risk management does not go quite as far, defining risk as an uncertainty that affects project objectives

So, what is opportunity? Risk, or just a postive effect? And, does it matter, really?

Well, yes, actually it does, for these reasons:

a. Risk has it's own register of possible and probable events and conditions, largely not in the performance management baseline (PMB).  Thus, most risks are 'off-baseline'.  And the reason is simple: risks are generally thought of as threats to project success, PMI's glossary not withstanding.  The point of risk management is to mitigate threats to the PMB.

b. Opportunities, equally off-baseline, usually mean a change in scope.  Thus, whereas an opportunity may thought of as scope creep, the general disposition is to accept worthwhile opportunities, not mitigate against them.

c. Incentives generally follow success, but risks are not about success.  Thus, risks are not about incentives.  Money tends to focus the mind, so focus is often not on the risk register.  On the other hand, an opportunity may bring with it not only success but reward for foresight

d. Opportunities naturally find their way into the change management system, and are usually dealt with in an entirely different workflow from the risk management system. 

The PMBOK, in Chapter 11, offers four response ideas for risks: avoid, accept, transfer, and mitigate. 

The PMBOK offers a different list for opportunities: exploit, share, enhance, and accept.

However, when discussing this recently with my risk management students, one came up with three others that I think are quite clever:

IGNORE because it was out of scope; INFORM the outside party that it impacted so they can run with it; or INCLUDE in the project because it was a better way to achieve the project objectives.

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