Risk Avoidance – Uber Risk Mitigation?

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102 There is still snow on the ground here.  However, the roads are clear and dry with no hazards posed by this week’s snow.  Much less uncertainty than yesterday morning!  Which brings to mind the Magnificent Seven – the seven strategies for responding to identified risk events.  (Even now I am hearing in my mind the theme music to the 1960 western film The Magnificent Seven, also known as the Malboro Suite.)

Let me start with Risk Avoidance, a strategy for responding to a negative risk event, or threat.  This response to an identified threat eliminates the threat.  The probability of it occurring is brought to 0%, or the specific project impact of the threat’s occurrence is brought to zero.

For example, what if your project calls for the heavy use of a material, let’s say Blue #10 Widgets.  The cost of these widgets fluctuates daily; it’s difficult to estimate the project cost over several weekly purchases of widgets.  The threat of cost increases is highly probable with a potentially significant budget impact.  Using the response plan of Risk Avoidance, we might contract with the supplier to buy widgets at a fixed price for the expected duration of the project.  What was once uncertain is now known.  The threat has been neutralized.

Let’s contrast Risk Avoidance with Risk Mitigation.  To mitigate a threat is to reduce the probability or the project impact to fall within our tolerance for tisk.  Where Risk Avoidance eliminates the threat, Risk Mitigation only reduces the threat.  You might say that Risk Avoidance is extreme mitigation – or Uber Risk Mitigation!

Using Risk Mitigation in our same example, suppose that the supplier will not agree to a fixed price for future purchases of Blue #10 Widgets:

  • Can we reduce the probability of cost increases? No, we can’t really manipulate the widget market.  If  we purchase in advance every widget that we expect to need, this is Risk Avoidance, eliminating the impact similar to a fixed price futures contract.
  • Can we reduce the negative impact on our project?  Yes, somewhat.  To mitigate this impact, we might create budget reserves, or contingency funds, which can help cover cost increases if they occur.  The impact of being caught short of funds to pay for increased costs is mitigated, or reduced, by having additional funds on hand.

For the PMP® Exam candidate, be very clear about the difference between Risk Avoidance and Risk Mitigation.  While thinking of these two strategies for responding to negative risk events, two other important exam concepts come to mind:

  1. Residual risk is the amount of uncertainly remaining after applying the selected Risk Response Plan, for example, Risk Mitigation.  If reserve is set aside to handle budget risks, then the remaining uncertainty is the probability of the impact of cost increases greater than the reserve amount.
  2. Secondary risk is the uncertainty created by applying the selected Risk Response Plan.  For example, the Risk Avoidance strategy of a fixed price futures contract introduces a new uncertainty – what if the supplier does not fulfill his obligation under the contract?

That briefly covers two of the Magnificent Seven – Risk Avoidance and Risk Mitigation.  Maybe I’ll cover the two relationship-oriented strategies next time, or maybe I’ll discuss a couple of strategies for opportunities.  That uncertainty will become a known in the very near future.