Risk management is the identification, assessment and prioritization of risks followed by an allocation of resources to minimize, monitor and control the probably of unfortunate events and to maximize the realization of opportunities or investments. The strategy to manage risk includes transferring risk to another party, avoiding the risk, reducing the negative effect of risk, or accepting the consequences of the particular risk.
Risk management is not only a financial concept. There are many other types risk management. Schedule risk management is very common. Scope risk management is another type that has many applications.
Because this is so important, let’s take a closer look at what this means. First of all, what is considered a risk? If we are going to identify the risks we will need to know what to look for. I have heard risk defined as the effect of uncertainty on objectives. That definition is alright but a bit too vague. To effectively identify risks for a particular project or initiative I think you have to be a bit more specific to the objective.
We practice risk management in our everyday life. We do it all day long. Most of us are pretty good at it. We must be because we have made it through a lot of days without having to scrap the project of life. For example let’s look at some events in a typical day that would require some risk management. When you start to think about this, the first thing you realize is that not only do the events themselves require risk management but the interrelationship between the events requires risk management. Let’s say it is Monday so you have to get up and go to work. The process that results in you sitting at your desk at work is fraught with danger, but somehow you manage it, every day.
Here is a list of things you might do to get to work in the morning:
Get the Kids Up and Ready
Make Breakfast(Let’s pretend we do this every day)
Drop the Kids off at School
Drive to Work
Park the Car
Walk from the Car to the Office
Each and every one of these events is important and impacted by different outside influences. To make things a little bit more challenging, your spouse is out of town on business. You must accomplish this all by yourself. I know you may be thinking about bailing out already but hang in there, you can do it. Besides I will walk you through it.
The first step is to identify your objective. We know your objective is to get to work so we have a good start. Defining the objective is not always so easy. Before you jump right into the shower you have to first make a plan to meet your objective. You have to have a plan! If you don’t, trust me you will be getting a call at about 9:30 from your wife asking why the kids were late for school and your boss will be waiting at your desk when you get to work wondering where that report is that you promised to deliver first thing.
Now about that shower, but wait, if you start to wake the kids up before you get into the shower maybe by the time you are out of the shower they will be ready to get up. At least go turn the lights on in their rooms. I like to flicker it a few times. It really bugs them but is an effective move. You could start the coffee brewing before you get in the shower as well. Every little bit will help. And don’t forget to let the dog out to go to the bathroom. If you don’t you may be sorry.
I think it is safe for you to get in the shower now. You have a few things started that will be working while you are taking your shower. You could take one of those long lazy showers but that would carry some schedule risk so it might be better to wait until Saturday for that. Finish your shower. Before you start to shave, go flicker the lights in your kids rooms again because they likely are not up. Raise your voice and use the angry dad tone when you tell them to get up this time because now it is time to get serious. If they don’t get up now you will be late for sure.
You can go shave now and get ready for work. The risk involved in shaving is pretty low unless you are still using a razor and haven’t switched over to an electric. Hopefully you remembered to charge your electric otherwise you may need to proceed to work with a 1 day shadow or three day if you like to let it go over the weekend. Getting dressed can carry some risk depending on what type of work you do. The risk is mostly in selecting what to wear. For most people, in this day and age, this is a low risk area.
Remember to keep the kids on task as you are getting ready. You decided to take a little longer to get ready. You have a big meeting at work so you had to iron a shirt and get you suit on. Because of this breakfast is going to be cold cereal, again. You could decide to read the paper during breakfast but feel the need to keep the kids on task. You want to find out what they have going on so you can keep tabs on their activities. You are managing their development. You have a plan for them and your plan does not include a call from the police department one day.
It is time to get the kids off to school. One of them catches a bus. You will have to drive the other two to their school. Thankfully they attend the same school. There are plenty of risks involved in getting your kids to school and they begin before you get into the car. You had better make sure they have all of the necessary tools for education in their respective backpacks. If you don’t, you risk having to turn around and go back to hand deliver a math folder to the school. Traveling in a car carries many risks other than the obvious risk of getting in an accident. Choosing the correct route may be the difference between getting there on time or not. Hopefully you remembered to gas up the night before because you didn’t plan for the extra eight minutes at the gas station.
You are a good driver so I’m sure you’ll have no trouble getting the kids dropped off and getting to the parking lot where you face a new set of challenges. Unfortunately there typically aren’t enough spaces in the lot so it is critical you get there early otherwise you will be stuck in the overflow lot which is a long ways from the entrance to the building. You have lots of materials to bring into the office for a big presentation. It looks like rain and you don’t want to get you graphic boards wet. If you are stuck in the overflow lot your presentation is doomed for sure. You have to watch out for kamikaze drivers in the parking lot. The competition for the final spots is heated and you don’t have time to bring the car to the repair shop so you stay back and take what you can get.
Luckily you find a spot in the main lot but it is starting to drizzle a bit. You try to cover up your presentation boards with your suit coat. It works well enough and you make it to the office but some of the ink from the boards gets on your jacket. You will either have to run the jacket out to the 1 hour laundry or go it without. You decide to go without a jacket so you can put the finishing touches on you graphics. Thirty minutes before the presentation you find out the presentation has been changed to a video conference. You have just minutes to compose the electronic files into a presentation and send it off to the client.
You did it! You made it to work. Again. You are an expert at risk management.
Most people are pretty good at risk management. We all get a lot of practice. The dynamics of business risk management are similar dynamics to those that we encounter every day. The nature of impacts and influences is also the same. As progress along the path to meet our objective we are bombarded with adversity. In the process of putting together our risk management plan, we identify the risk areas, assess the impacts and decide how to manage and control the risk areas. This initial planning gives us the ability manage the adversity.
Like when you decided to skip the full breakfast we can choose to avoid risk. We can choose to minimize the negative effect of risk like you did when you decided to go without your jacket rather than spend the time to bring it to the cleaner and carry the risk of not completing the presentation. You could have transferred some risk to another party if you would have called your sister who lives down the street and asked her to bring your kids to school. Of course there would have been a cost associated with that. You would have had to mow her lawn or something like that.
Risk milestones are interrelated and connected by chronology or timeline. You reduced the risk of getting your kids ready by turning the lights on before your shower. Likewise you started to brew the coffee before you show as well.
The key to effective risk management is to have a system that has measurable results. Risk management for property development can be tied into a milestone schedule to assess and measure risk as it applies to scope schedule and budget.
Risk management is a key to success in business. Most of us are very well equipped to manage risk effectively. Our everyday activities prepare us well. You can find numerous parallels in everyday life.
Make a plan for risk management. You will be glad you did. Check out my upcoming articles and I will outline for the primary levels of risk management and provide you with detailed description on how to build a risk management plan to help you succeed in the new economy.