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More Impediments to Risk Management Implementation and Attendant Solutions
In the previous article (Risk Article #6), I stated: "When I began to practice the assessment and management of risk, it became blatantly obvious right off that the main challenges were not procedural or technical, but were behavioral, cultural, and organizational. My latest book: Modern Corporate Risk Management: A Blueprint for Positive Change and Effectiveness tries to address the issues related to implementation of the risk methods. So, in these remaining articles, I will focus on how to get people and organizations to take up risk management."
In that 6th article, I indicated that we typically get rewarded for successfully launching projects, but not necessarily for launching successful projects. I noted that in past articles I have reflected on risk-management-implementation hurdles such as the reward system and inconsistent language and would in Article #6 focus on another implementation impediment - that of the inability to implement. In this 7th article in the series I will add to this list the challenges related to a lack of risk monetization.
Although the term "risk monetization" might suggest that a risk is converted directly into money, that is not necessarily the case. Corporate decisions largely are based on consideration of money in one way or another, so, in the end, risks should ultimately impact the perceived value of the project. However, along the way, the risk might initially be converted into a "non-money" parameter such as time delay, reputation impact, or another metric that is not measured directly in monetary units such as dollars.
In the 4th article in this series, I detail just what is the monetization of risk and how to go about monetizing non-traditional risks such as political problems. To be brought up to speed with respect to the techniques involved in translating a risk into an impact on the perceived value of a project, I refer the reader to that 4th article. Examples of the monetization process can also be found in the two books Modern Corporate Risk Management - A Blueprint for Positive Change and Effectiveness and Risk Assessment and Decision Making in Business and Industry, A Practical Guide: 2nd Edition.
Risk Monetization - Great to do but difficult to implement: A perceived focus on threats
It should be obvious that if the perceived value of a project can be significantly influenced by the impact of threats and opportunities (i.e., risks) and that if the decision regarding whether or not to proceed with a project depends largely on the value the project will bring to the company, then any decision maker would desire or require that the project value upon which a decision will be made should reflect the impact of all pertinent risks. That's what you'd think, but you'd be wrong.
In the technical vernacular, there are "loads or reasons" why the impacts of risks are not reflected in the perceived value of a project. The first might be the perception that a focus on risk is a focus on the "downside" - that is, the emphasis of threats.
It is mainly true that when a monetization process is completed, the perceived value of the project has been diminished relative to the before-the-impact-of-risks value. It has been my experience that when risk-identification processes are finished, the list of risks includes mainly threats and relatively few opportunities. This phenomenon is not the result of a focus on threats. Risks related to a project are relative to the base case. That is, when the risk-identification process begins, the project manager or commercial analyst presents to the identification-process participants exactly the project that is being assessed. That project description typically includes most of the attendant opportunities - even most of the low-probability events - and few threats. Therefore, given that the base case description for the project has already taken account of almost all of the "upside," it is no wonder that a risk-identification process can uncover mainly threats that should impact the base case and project value.
The remedy for this pervasive malady is to attempt to influence projects as early in project life as possible. Moderate-and-low-probability opportunities might be kept out of the base case and the inclusion of relatively high-probability threats should be included. In this way, a more realistic base case is first put forward and surprises down the road are minimized. Such a project base case will, in the risk-identification process, yield a more balanced list of threats and opportunities. It is the job of the project risk proponent (PRP) - the person on the project staff who is charged with shepherding every aspect of the risk process - to attempt to ensure that a realistic initial base case is created. Assignment of a trained PRP is critical to project success. More about the role of the PRP can be found in the 1st of this series of articles and in any of the books listed at the end of this article.
Risk Monetization - Great to do but difficult to implement: Not a line item
If a project is "killed" somewhere along the attendant timeline, it is mainly due to risks - mainly threats - that do not appear as "line items" in any project economic model or analysis. For example, it is common for any project-analysis spreadsheet to include rows or cells for such things as production, capital expenses (capex), operating expenses (opex), price, utilization, and the like. It is not typical, however, to find a row or cell specifically dedicated to "politics" or "organizational capability" or any other "soft" risks.
I can tell you from experience that it is these "soft" risks that represent the greatest threats to any project. A governor of a state, for example, might part way through a project decide to modify the tax structure precipitating a salient economic downturn in project value. Perceived project value might also suffer diminution at the hands of environmental risks. Part way along the project timeline it could be discovered that critical permits will not be issued by a governing body unless/until important environmental concerns are successfully addressed. Although organizational capability might not exist as a line-item in a project economic spreadsheet, it is not uncommon to discover that critical departments and disciplines within a company lack sufficient synergy and communication to successfully execute the project.
It is the responsibility of the PRP to ensure that such "soft" risks are, to the extent possible and practical, identified and succinctly described in the risk-identification process. This is the only reasonable remedy for the "soft risk" problem. Cogent description of risk-response plans and succinct monetization of such risks should be emphasized by the PRP.
Risk Monetization - Great to do but difficult to implement: No "pull"
It has already been pointed out in this article that the risk monetization process is largely viewed as an exercise that will lessen the perceived value of a project. As I have lamented in previous articles, the prevailing reward system rewards project leaders for successfully launching a project but not necessarily for launching a successful project. In such an environment, it should come as no surprise that there might be little to no "pull" from upper management to implement a risk monetization process.
If management "above" the project level expects to make decisions based on the best possible estimate of project value, then one remedy to this pervasive problem is to influence decision makers such that they expect and demand that risk impacts have been taken into account. Another solution to the "lack of pull" challenge is to convince project leaders that it is in their best interest to embrace the risk monetization process.
One of the outputs of a risk monetization effort is a table that lists the impact-on-value of each risk. This is an indicator of the "worth" of each risk and, in turn, indicates what might be spent to mitigate a threat or capture an opportunity (you don't want to spend a dollar to offset a dime). Project leaders are under tremendous pressure to stay within budget. Risk monetization can be touted as one method that will help cash-strapped project leaders to address the risks facing the project in the most economic manner.
In the following (8th) article of this series, I will address other impediments to implementation of a risk management process in any organization. The following 9th and final articles will focus on aspects of risk processes that will help any project team member better utilize risk-based information in the successful implementation of a project.
By: Glenn R. Koller
References:
Koller, G. R., Modern Corporate Risk Management - A Blueprint for Positive Change and Effectiveness, J. Ross Publishing, Ft. Lauderdale, FL, 2007.
Koller, G. R., Risk Assessment and Decision Making in Business and Industry, A Practical Guide: 2nd Edition, Chapman & Hall/CRC Press, Boca Raton, FL, 2005.
Koller, G. R., Risk Modeling for Determining Value and Decision Making, Chapman & Hall/CRC Press, Boca Raton, FL, 2000.
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