Anyone that has taken a course in risk management knows that there are multiple strategies available to respond to identified negative risks including avoidance, transferral, acceptance and mitigation. One would assume that risk owners would select the right response for a given risk, but most of the risk registers I’ve ever reviewed usually reflect only two responses – accept and mitigate.
For low severity risks which are usually characterized as having either a very low probability of occurrence as well as a low to medium impact if realized, the effort required to eliminate them may cost more than the benefits of doing so so acceptance might be the best response. For risks that lend themselves to mitigation and whose severity is significant enough that it merits the effort, developing and executing an active response, that might be the best strategy.
But when was the last time you actually saw a project team propose and execute an avoid or transfer response strategy?
There are a couple of common ways in which an avoid response could be used – one is to reduce or modify scope which in extreme cases could even imply electing not to proceed with a given project. For example, if a highway is to be built spanning multiple cities in a developing country, yet I know that the region between two of the cities is plagued by insurgent activity, I might propose that the project’s scope be reduced to skip connecting those two cities until order is restored to avoid incurring any labour-related safety concerns. It is also possible to avoid a risk by changing one’s approach to delivering scope – in the highway construction example, while the straight path between two cities might be the shortest, if that would result in the destruction or disturbance of some ancient ruins, significant stakeholder risks could be avoided by taking a longer route.
With a transfer strategy, the objective is to shift the risk to a third-party. While the common method of doing this is to purchase insurance, outsourcing a subset of your project’s scope to a subcontractor who assumes full risk of quality or schedule issues is also an option.
One of the key benefits of both the avoid or transfer response strategies is that they can completely eliminate specific risks which is an ideal outcome in those cases where risk severity is extreme. However, the efficacy of these strategies tends to diminish over the lifetime of a project – during initiation and planning, they can be quite effective, but once scope and approach are nailed down, it can be a much costlier proposition to avoid or transfer risks. As with all risk management activities, neither of these responses is free so it is important to balance the cost of avoidance or transfer against the expected financial and non-financial (e.g. reputational) impacts of risk realization before making response recommendations.
As Mr. Miyagi said in the Karate Kid Part 2: “Best way to avoid punch, no be there!”