Risk efficient boundary CG

solution areas

Expected cost

Figure 3.4—An illustrative opportunity/incompetence boundary

Relative to the APM and PMI approach to the definition of risk, the key to the difference is treating opportunities and threats—or events, conditions, and circumstances—as sources of uncertainty that cause risk, rather than as risk in themselves. A holistic and integrated approach to risk management requires this perspective, and risk management without it is severely crippled, be it project risk management, safety management, or any other form of risk and uncertainty management.

'Risk' as defined here has a downside variability focus, but opportunities as well as threats are seen as part of the uncertainty that needs to be managed source by source to the extent that decomposition of sources of uncertainty is useful. To maintain an opportunity management perspective it is useful to revisit Figure 3.2 in the augmented form of Figure 3.4.

The basic idea is to move away from relatively inefficient plans like A in Figure 3.4 toward more risk efficient points like B and hopefully to points like E. If achieved, such moves should be interpreted as captured opportunities, comparable with that identified in Example 3.1, with the RMP facilitating the hunt and the capture. Examples 1.1 and 1.2 also illustrate this kind of opportunity hunt and capture. Approaches to the project involving plans with a cost and cost risk profile like point A will be in an 'incompetence region' if it is reasonably obvious that they involve significant risk inefficiency in overall project management terms. The 'opportunity region' represents potentially feasible improvements in plans that are not obvious. They require an effective RMP to identify them. The location of the opportunity/incompetence boundary and the extent of the opportunity region will always be subjective and debatable. But its existence can be conceptually useful. It helps to maintain a focus on upbeat opportunity management when the RMP is effective. And it puts into perspective an RMP that is crippled by a failure to address risk efficiency in terms of a holistic and integrated approach to project management in toto.

We can never be sure our plans are risk efficient. However, we need to search systematically for risk efficient improvements, with a clear understanding of what we are looking for; otherwise, we will never find them. This implies that the form of risk management selected must be geared to a search for opportunities to improve risk efficiency—to do things better in the risk efficiency sense. If a project's plans are already very effective and efficient in general terms, usually what is involved is identifying where extra money or other resources expended upfront will reduce later uncertainty, risk, and overall expected cost, but more fundamental lateral thinking may be key. Example 1.2, turning a threat into an opportunity by managing potential delays in a way that improved the project's cash flow, is a good example. If a project's plans are not risk efficient, any lack of effectiveness and efficiency in general terms will reveal itself as risk inefficiency. Diagnosis of potential changes to base or contingency plans to improve risk efficiency is the central purpose of effective project risk management. Consideration of risk efficient choices in Example 3.1 motivated BP to adopt formal risk management on a worldwide basis for all significant or sensitive projects as indicated earlier. Improvements in risk efficiency are what they were looking for.

In terms of the old adage 'an optimist always sees a glass as half-full while a pessimist sees it as half-empty', the opportunity/incompetence boundary is a half-way mark. Most people and most organizations tend to be optimists about their abilities. Most organizations will wish to place their adopted plans in the opportunity region, or even assume their plans are in the risk efficient set. However, an assertion that adopted plans are (relatively) risk efficient is not good enough. Such an assertion needs to be tested. It can be tested by the organization itself, in terms of externally assisted assessment of the quality of the design and selection processes used, which depends on the quality of the concepts they rest on, the culture of the organization they operate in, and the quality of the people. Or it may be tested by the stock market, relevant government watchdogs, or other interested parties. Sooner or later it will be tested by one or the other, and an ineffective or complacent internal test will lead to a negative external test. This 'test' in one form or another is as inevitable as death and taxes. This is a 'stick' incentive to understand and pursue risk efficiency, but the 'carrot' incentive of improved project performance will be more profitable and more fun.

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