Risk Tolerance for Your Organization
The goal of risk response planning is to come up with options and plans which will allow an organization to face threats which can reduce the likelihood of the project succeeding. Risk response options can be broken down into four methods, and these are transfer, mitigation, acceptance, and avoidance.
It is the responsibility of the project manager to decide the conditions for which the strategies will need to be used, because there are times when applying a certain strategy to specific situation may not be appropriate. The responses that must be taken into consideration should be based on three key parameters.
The first of these parameters is the value of the outcome which is expected. This could be measured as the product of impact dependent on the probability, along with the cost of response.
The second would be described as the worst case scenario, which is the impact combined with the cost of response.
The third is described as the best case scenario. A best case scenario is a situation in which the event does not occur, where the response impact may be taken into consideration.
It is important for organizations to be capable of coming up with different methods in order to respond to the many threats they will face. Each method for approaching a threat will have its very own characteristics, and having a Risk Management plan is critical.
The risk management plan will act as the basis which will allow you to create a synthesis view, which is the Risk Response Chart. One thing that you will also want to keep in mind is that there are times when certain risks may require more than one strategy.
Risk avoidance is just as important, since it involves the taking of actions which will prevent the risk from having an effect on the objectives of the project. Risk avoidance can be accomplished by altering the manner in which activities are carried out, or altering the objectives. Should avoidance be gained for a small cost, then this is the approach which should be taken. However, there are many times when avoidance is mandatory.
Risk transfer is a term which is used to describe transferring a project to a third party which is capable of shielding the project in whole or in part, from any risks which could endanger it. This risk transfer will typically come in the form of a financial arrangement, which will exist between both the third party and the project, and it includes the insurance premium, the financial guarantee, or a contract.
The risk transfer will have a powerful effect on the chance of a negative event occurring, namely that it will make the best case a bit negative, but it will also have an equal effect on the worst case situation as well. This option is best used in a situation where a bad situation would cause a lot more damage than the reduction of the values which are best or expected.
Another important issue that you must always consider is the mitigation of risk. This is a term which is used to describe lowering the chances or the impact of an adverse risk manifesting itself. In the most extreme situations, this can mean getting rid of the risk altogether, which may also be known as avoidance.
With mitigation, it is not hard to consider just the resultant value which is expected, and the reason for this is because the impact will remain above a certain amount. Depending on the risk management plan, the risk will not be acceptable. In either situation, you will have to make use of a different approach. The next thing that you will need to consider is risk assessment.
Risk acceptance involves planning the different ways in which you can deal with an event should it occur, instead of trying to maintain its probability or impact. Dependent on the project angle, this may be a strategy of choice in situations where the effects of a given risk may be known to be contained in a manner which is efficient, where it may be acceptable.
Acceptance could be passive in the event the impact is not of great importance. In this situation, it will have to be lowered, in an situation like this it would be good to make use of a contingency plan which will allow you to respond to the event in a manner that reduces impact.