Risk Management – Beyond Mitigation
I have a tremendous pet peeve that I am going to share with you – it’s the misunderstanding of risk by managers around the world. We are currently working on a number of projects at work, and are paying close attention to the risks associated with them. I could practically make a drinking game of the phrase “what is your mitigation strategy?” – except that players would be completely drunk within 15 minutes of the start of the meeting.
What is my issue? Mitigation is only 1 of 4 strategies that you can employ when dealing with risk. So rather than creating a column in your worksheet labeled “Mitigation” you really need 2, one for “Strategy” and one for “Action Plan”. The action plan is the implementation of the strategy. So what goes in the Strategy column? You have 4 choices:
Take for example your house – one of the risks of home ownership is that a fire could start and wipe away your house and all of your belongings. We could employ any of the above techniques to our home ownership example (and in fact, usually apply multiple).
- Avoidance – you could decide not to buy a house at all. No risk of fire then!
- Transference – this is what most people do – they buy insurance! They have transferred the financial risk of a fire to an insurance company. Note that not all of the risk has been transferred, there is usually a deductible involved in the case of a claim event. This provides an incentive to the insured to work to minimize the risk of said event.
- Mitigation – You could build your house out of non-flammable materials (an igloo, maybe) or flame retardant materials. You could also install fire sprinkler systems. These are examples of mitigation techniques designed to lessen the impact of a fire.
- Acceptance – You could just accept the risk and live your life. This probably isn’t the best approach when it comes to owning a home, but note that even with an insurance policy, you are accepting a certain amount of risk based on the deductible.
I may be overstepping my bounds here, but the other aspect to risk management to understand is that not all risks are bad. In fact, if some turn into issues, they may actually present opportunities to the person or company experiencing them. The recent financial crisis in America is a good example of a risk (extension of credit to borrowers tightening) that presents an opportunity for many. Companies may have implemented a strategy of having significant cash reserves in order to mitigate the risks of not being able to get loans. They now find themselves in the unique position of having a stockpile of cash to use to purchase land (maybe they want to expand their production facilities) or provide loans to other cash strapped companies who are issuing bonds.
Ok – I’ll get off my soap box for now. If I’ve piqued your interest and you want to become a more informed manager of risk, check out the book Enterprise Risk Management: From Incentives to Controls. These techniques apply to projects, programs, companies and even your own personal life.