What is risk-based management (RBM) to you? Do you have a good understanding of this concept, and how it is applied? Do you think what you have right now is the best? Do you think that RBM is the best and only approach? Do you think it is one of the best? How do you apply it in project management?
RBM is serious approach and a philosophy that considers risks while managing any project endeavor throughout its lifecycle. Management by objectives is still present, but with more focus on risk management. Risk-based management increases the probability of success. In order to appreciate this management approach requires an in-depth understanding of risk itself. This is what the book is about-“Risk-based Management in the World of Threats and Opportunities: A Project Controls Perspective.”
We attribute the high failure rate of projects to a combination of factors, namely a lack of support from business leadership, incompetent project managers, and a firms’ unwillingness to treat a project as they would a start-up business. If you think this is all there is it to it, then you are in for a surprise. There are more where they came from. I have seen many of these things while in different roles after decades long of exposure across industries.
Of course, it is very clear that a project cancelled before it is fully completed is a failure. The degree of failure depends on how much stakeholder money and other resources have already been used and wasted. We must also consider the cascade effects of such failure to any company's bottom line. Crossing the bottom line can result to layoffs, across the board budget cuts, low dividend returns for stockholders, loss of reputation, and decreased stock price to name a few.
Risk-based management describes the available choices and options considered against their associated risks. Actions become possible when we are sure that we adequately comprehend the risks before us. Looking at how other types of management work makes the risk-based concept ideal, since it is a simple perspective that can easily integrate other concepts.
Decisions evolve from a situation where one has to make a choice. The option can be to do or not to do something. It can also be to select one option from a range of options. The most important objectives drive final decision. It is constrained by any, or combination of social, technical, business, safety, and environmental factors. Successful decision-making requires an understanding of each of these factors and objectives (RiskTec, 2013).
There are professionals who have difficulty accepting the term "risk-based." It simply means that risk should be the main contemplation, while keeping an eye to achieving business objectives. It is therefore a foundational concern in the pursuit of a goal. Pursuing a goal naturally results in risk management. This is how we end up with risk management. Under this paradigm, the concern revolves around the decisions we need to make, i.e. whether to avoid or mitigate in the case of a threat, and whether to enhance or exploit in the case of an opportunity.
Risk is not only a factor or featured element of management; it is the central concept at play. It should be the focus of management, second only (if not equal) to the main objectives. An excellent risk manager will see clearly that the objectives and end deliverables are part of the risk. They are the grand consequences of the positive risks (opportunities) identified, and the very reason why the project was initiated.
Risk-based management is as important as the objectives. Failing to mitigate the risk means failure to meet the objectives. When that happens, the risk is on equal footing and of the same importance as the objectives. I trust that you will find this book helpful as you proceed addressing the challenges of your own risk universe.
The paperback and Kindle edition of the book "Risk-based Management in the World of Threats and Opportunities: A Project Controls Perspective" is now available in Amazon.
Copy and paste the following on your browser. You can grab a copy now.
- http://www.amazon.com/RUFRAN-C.-FRAGO-PMI-RMP/e/B01055MPYI
- http://www.amazon.com/dp/B0104OFUDI/ref=rdr_kindle_ext_tmb
- https://www.linkedin.com/pulse/risk-based-management-world-threats-opportunities-rufran?trk=prof-post
The book provides new/additional knowledge to project management practitioners (beginners to experts), risk management specialists, project controls people, estimators, cost managers, planners and schedulers, and for students of undergraduate courses in Risk Management. The sectional contents offer practical and common sense approach to identifying/managing risks. It is a must have for company managers, directors, supervisors, aspiring industry professionals, and even those students fresh from high school. The material is especially design to start with the foundational principles of risk gradually bringing the reader to deeper topics using a conversational style with simple terminologies.
So, if you are interested, check it out!
https://www.amazon.com/author/rufrancfrago
Rufran C. Frago (050715) - Author
Other articles authored by Rufran Frago:
- Risks Surrounding Canada’s TFW Part 1
- Risks as a Function of Time
- Project Schedule: P50, Anyone?
- Changing the Culture of Your Organization
- A Person Perceives Others Based on His Own Interest
- How Can Management Motivate and Empower?
- How Can Managers Increase Leadership Effectiveness
- Risks Surrounding Canada’s TFW Part 2
Comments
Thanks Rufran,for this additional insight.This is great.We must set our probability of success not to fall below 100% or else it will be regarded as gambling.
@Joseph,
Thanks for your comment and for espousing risk-based management.
The world has become a gambler. This general attitude and seeming addiction of individuals has brought prudence to shame. In return, many people suffered the consequence, even the innocents.
In my mind, majority of people are risk-takers of varying degrees. Personally, I see risk-taking (a manifestation of a person’s risk appetite) as a form of gambling if calculated probability of success is less than 100%. Businesses has risk appetites too, a representation of an aggregate appetite of those individuals who run the company. More conservative companies favor probabilities in the range of 70 above. Bigger companies go even lower to P40 and above. If calculated projected return of investment passes the set hurdle rate and falls within the range of acceptable probability, then “the die is cast.” In many ways, risk-based management is the effort exerted by an individual or group of people to effectively manage one’s addiction (or business propensity) to bet.
Learning about these concepts will help one understand why businesses such as banks and mortgage companies ended up spending more than they bring in. The prevailing heuristics we’ve all heard before is this: 1) The bigger the pain, the greater the gain! 2) No pain-no gain!, 3) The higher the risk, the bigger the profit! Such blanket rules of thumb are often times misleading. Risk-based management help businesses gamble responsibly and stay within set limits. As the wise stockbroker once advised me, “ bet/invest only the amount you can afford to lose.” Nothing can be closer from the truth. The problem becomes aggravated when “greed” mixes into the picture. This is when a sure winner can become an instant loser, true both in business and in people.
Cheers,
Rufran (070815)
The need to adopt risk based management approach by organizations globally became necessary after sublime mortgage crises in U.S in 2007 which resulted to global meltdown. On yearly basis my organization usually conduct both internal and external situation analysis to isolate variables that might pose a problem to our services. We pay particular attention to threats that are out there in the external environment that we need to counter or ameliorate with appropriate strategies. We use strategic management tools such as Porter’s five forces frame work, PESTEL and finally SWOT analysis to enable us establish the strengths, weaknesses ,opportunities and threats that we need to contain. Essentially, internal situation analysis helps us to evaluate our strengths and weaknesses using our internal data while the external situation analysis helps us to isolate uncontrollable environmental factors that will impact our services. In general ,we are very conscious of risk and uncertainty and how they affect business operations. We had last year tried to adopt enterprise risk management(ERM)-COSO framework. This is gradually being implemented. I advise corporate organizations to adopt risk based management.