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Risk Response (#6 in the series How To Effectively Manage Project Risks)
By Michael D. Taylor

Risks may be viewed as negative or positive. Negative risks are those that might impact the ability to reach project goals. Positive risks are those that can be exploited, as opportunities, for positive benefits.

Responses to negative risks may include the following:

Transfer the risk. PMBOK describes this as a risk transference that requires shifting the negative impact of a threat to another party. Buying fire insurance is an example of risk transference. If the insured house is destroyed by fire, the impact falls on the insurance company, not the owner.

Avoid the risk. Changing the scope, schedule, or available resources of a project may result in risk avoidance. Other risks may be avoided by relaxing or clarifying product requirements, obtaining additional information, or bringing in more skilled personnel.

Reduce the risk. If risks cannot be completely avoided they may be reduced (mitigated) by the same means as avoidance but having a lesser effectiveness.

Share the risk. Risks may be shared between two parties where both participate in the impact of an actual risk condition. Using share ratios in cost-plus or fixed-price incentive contracts is a common way to share the negative impacts of risks.

Increase risk tolerance. When risk responses cannot completely eliminate a threat a tolerance for some residual effects must be accepted.

Accept the risk (do nothing). In some cases risks cannot be avoided, mitigated, transferred, or shared. In such cases potential risk impacts must be accepted. This is usually the most inferior response to project risks.

Product Modeling. Modeling a new product early in the project will determine if its requirements can be met. If this is demonstrated prior to the final acceptance of a new product’s design, significant risk impacts can be avoided.

Responses to positive risks (opportunities) may include the following:

Exploit the Risk. This strategy takes advantage of risk uncertainties that might be turned into benefits. For example, it may be possible to not only meet a customer’s expectations but to go beyond them. This extra effort may present obstacles but if it is achieved it may produce a higher degree of customer satisfaction and cause the customer to keep coming back for more business.

Share Ratios. As described previously, share ratios can be used to place the impacts of negative risks on two parties; however, they can also result in a benefit to both parties under contract when actual project costs fall below target costs. Customers reap the benefit of well-managed subcontracts, and subcontractors reap the benefit of achieving a higher fee.

Enhance the Risk. Enhancing a risk involves the pursuit of activities that might produce a greater return-on-investment. This is accomplished by strengthening or maximizing the chances for a positive benefit.

MICHAEL D. TAYLOR, M.S. in systems management, B.S. in electrical engineering, has more than 30 years of project, outsourcing, and engineering experience. He is principal of Systems Management Services, and has conducted project management training at the University of California, Santa Cruz Extension in their PPM Certificate program for over 13 years, and at companies such as Sun Microsystems, GTE, Siemens, TRW, Loral, Santa Clara Valley Water District, and Inprise. He also taught courses in the UCSC Extension Leadership and Management Program (LAMP), and was a guest speaker at the 2001 Santa Cruz Technology Symposium. His website is www.projectmgt.com.

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