Published on July 5, 2016
1. RISK DOCTOR BRIEFING To provide feedback on this Briefing Note, or for more details on how to develop effective risk management, contact the Risk Doctor (firstname.lastname@example.org), or visit the Risk Doctor website (www.risk-doctor.com). WHY “RISK” INCLUDES OPPORTUNITY © April 2008, Dr David Hillson PMP HonFAPM email@example.com Most current risk management standards and guidelines use broad definitions of “risk” which encompass both threat and opportunity. For example, the Project Management Institute (PMI) defines project risk as “an uncertain event or condition that if it occurs has a positive or negative effect on project objectives”. Similar definitions exist widely elsewhere, covering other types of risk. However many people still find it difficult to understand why this position has been adopted. And without understanding the reasons, there is natural resistance to putting it into practice. As a result, the risk process is not being used as widely as it could be to identify and capture opportunities. There are three main reasons why risk should include opportunity alongside threat: 1. Conceptual. Risk can be viewed as a source of potential variability in performance, since if risks were to occur they would affect our ability to achieve our goals. Variability is a two-sided construct, since most variables can go both up and down. For example if there is uncertainty about the productivity rate of a team, it could be higher than planned or lower. Weather might be better or worse than expected. System integration might find more or less bugs than usual. This double-sided nature of variability is captured in definitions of risk that include both upside and downside consequences. More generally, risk has been described as “uncertainty that matters”, i.e. a possible future event that would be significant if it occurred. This clearly includes threats, which might occur and which would cause problems if they did. But an opportunity is also uncertain since it is a possible future event, and it matters because it would be helpful if it occurred. So both threats and opportunities are covered by the same description of risk as “uncertainty that matters”. 2. Practical. Threats and opportunities are important, and they both need to be managed. Dealing with them together in an integrated risk process brings synergies and efficiencies. Most organisations have a process for dealing with downside risks, and simply extending this process to include upside risks will deliver additional benefits for little extra cost or effort. Opportunities can be found by using standard risk identification techniques, for example workshops, assumptions testing, SWOT analysis or root-cause analysis. They can be prioritised in the same way as threats, by assessing probability and impact, or other relevant attributes. Opportunity response strategies mirror those used for threats. Reporting formats such as Risk Registers can be simply adapted to include both opportunities and threats. It is easy to implement a combined risk process to manage both threats and opportunities alongside each other. 3. Beneficial. A structured approach to identifying and capturing opportunities is good for business and for projects. It gives people a structured framework to find and implement ways of working “faster, smarter, cheaper”. This supports innovation and creativity, and is highly motivating for teams who want to maximise the value they deliver. A broader inclusive risk process means that opportunities will be sought proactively, and some will be identified and captured which might otherwise have been missed. This will deliver more value than relying on luck or good fortune, and will maximise the chances of hitting targets and achieving objectives. It also demonstrates a more professional approach to colleagues, clients and competitors, who will recognise the value of dealing proactively with all types of uncertainty. Including opportunity within the definition of risk is not a theoretical or academic exercise driven by a misplaced desire for symmetry. It is a natural consequence of recognising that businesses, projects and people are affected by uncertainty, some of which might be helpful if it were managed proactively. Opportunities are important and need to be captured where possible, and the risk process offers a structured way of dealing with them. Doing so delivers genuine practical benefits to the bottom line in terms of increased efficiency and higher success rates. The real reason for including opportunity within “risk” is because it works!
2. RISK DOCTOR BRIEFING To provide feedback on this Briefing Note, or for more details on how to develop effective risk management, contact the Risk Doctor (firstname.lastname@example.org), or visit the Risk Doctor website (www.risk-doctor.com). OPPORTUNITIES ARE THE SAME AS THREATS © January 2013, Dr David Hillson FIRM, HonFAPM, PMI Fellow email@example.com International risk standards and guidelines such as ISO31000:2009 define risk as a double-sided concept. This includes the possibility of both upside and downside risks, with either positive or negative effects on the achievement of objectives. We use the word “opportunity” to describe an upside risk with positive impacts, and “threat” is used for downside risks with negative consequences. Although the theory is clear, in practice many organisations, teams and individuals have problems with including opportunities in the risk process. We’re not sure how to identify a genuine opportunity, how to assess or prioritise it, what response options exist, or how it should be managed. But we don’t seem to have the same difficulty with threats. If we believe that risk management could and should address both opportunities and threats, how can we bring our practice into line with theory? The secret to effective opportunity management is to recognise that an opportunity is the same as a threat, apart from the sign of the impact. Once we see this similarity, the way to address opportunities becomes obvious. We can take the standard risk process which we already use for threats, and apply it to opportunities, with simple modifications to recognise that we are dealing with positive upside risks. So how are opportunities the same as threats? The definition of risk as “uncertainty that matters” covers them both. Just like a threat, an opportunity is uncertain and it may not happen, but if it does occur then it will have an effect on our ability to achieve one or more objectives. The only difference is that if a threat happens it has a negative effect because it turns into a problem, but if an opportunity happens it has a positive outcome as it produces a benefit. There are also similarities in the process for managing opportunities and threats. We can identify opportunities using the same techniques that work for threats. Obviously we can hold a brainstorm session to think creatively about upside uncertainties, or we could produce an opportunity checklist based on previous good experiences. But we can also use root-cause analysis or decision trees to find potentially helpful things. And risk identification techniques like SWOT Analysis or Force-Field Analysis naturally expose opportunities as well as threats. When we want to rank risks, the importance of both opportunities and threats can be assessed in terms of probability (“How uncertain?”) and impact (“How much does it matter?”). The only difference between them is that impact is positive for an opportunity and negative for a threat. Then we can use a standard prioritisation tool like the Probability-Impact Matrix or a heat map to find the best opportunities. We can also model the combined positive effect of opportunities on overall outcomes using quantitative risk analysis techniques like Monte Carlo simulation or sensitivity analysis, with exactly the same approach that we use to model threats. The distinction here is that opportunity impacts are positive, producing savings in time or cost, or enhancing performance or reputation etc. Having found some good opportunities that are worth pursuing, we can develop appropriate risk responses. This includes trying to exploit the best opportunities, and enhancing others to make them more attractive. We should also produce fallback plans to take advantage of any opportunities that might happen spontaneously. In the same way that threat responses aim to remove or reduce the negative effect of downside risks, opportunity responses are designed to capture or improve the positive effect of upside risks. It is clear that everything we know about downside risks (threats) is also true of upside risks (opportunities). Once we realise that an opportunity is the same as a threat apart from the sign of the impact, it will be easier to identify, assess and respond to opportunities – we just use the same approach that already works for threats. And if we manage opportunities proactively, we will turn some of them into additional benefits, including reduced timescales, lower costs or enhanced performance. This will result in more successful projects and businesses, which is good news for everyone.
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