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Risk strategy; risk transfer, sharing and spreading

This post focuses on the last risk management strategy, which we have introduced throughout the last weeks. Take a look at the lasts posts to get the full overview!

The final and most debated goal of risk management strategies is according to Senior Disaster Management Specialist, Damon P. Coppola, risk transfer, sharing or spreading. The concept of the goal is not actually to reduce the risk, but to dilute its consequence or likelihood across a large group of people such that each suffers an average consequence. Risk transfer involves moving the risk to another third party or entity, even though this may include giving up some control. By outsourcing, moving to an insurance agency, or leasing property, your organization is not responsible all alone when something goes wrong.
The most common form of risk transfer is insurance, which includes reinsurance. Insurance reduces the financial consequence of a hazard’s risk by eliminating the monetary loss associated with property damage. Insurers charge a calculated payment that is priced according to the hazard’s expected frequency and consequence. Payment of the premium guarantees the repayment of losses to impacted participants if the insured hazard occurs. In this way the cost of the secondary hazards is thereby shared by, or spread across, all participants through the payment of premiums. The risk transfer safeguards the project team against unpredictable risks such as weather, political unrests, or COVID-19, which are outside of the project team’s control.    
OBS: Risk management may seem superfluous at the beginning of the project. When a project manager is beginning a new project, it is indeed difficult to consider what could go wrong, especially if the project team is overconfidence biased (as described in our earlier post). Therefore, risk management must be considered an absolute priority from the beginning of the project!

Risk transfer do not always result in lower costs. Instead, a risk transfer is the best strategy when you can reduce future damage. In this way insurance can cost money, but it may end up being more cost-effective, than having the risk occur and being solely responsible for reparations.

Risk sharing includes sharing the risk impacts or liability among suppliers, partners, contractors, or companies by a contract. This sharing enables them to reduce risks around capacity and to reduce the risk of price fluctuations. For instance, if a power supply fails in an expensive server causing the loss of revenue for a customer, you could ask and receive a replacement power supply.

Summary of risk management strategies

Avoid, accept, transfer, consequence, or likelihood reduction. For each risk you encounter, you and your organization will have to deal with it. A pre assessment or risk analysis enable more options than just a major construction recall.  

Within your organization’s risk management framework, you should be aware of the different strategies along with understanding the guidelines for their implementation. Engineers and managers make decisions concerning risks every day, throughout the organization. Providing a set of clear strategies along with guidance allows the entire organization to appropriately mitigate risks daily.  

Feel free to comment, or contact us for more information!

Source:

Coppola, D. (2015): “Introduction to international disaster management”

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Risk strategies: Risk likelihood Reduction and Consequence Reduction

This post focuses on the two second risk management strategies, which we introduced last week. Look at the lasts posts to get the full overview!

Risk Likelihood Reduction

For many kinds of hazard risk, it is possible to reduce the chances that they will manifest into even bigger risks. In such case, risk is addressed through a reduction in likelihood. Obviously, this is not practical or feasible for certain types of hazards such as bad weather. Other secondary risks, such as water in the fundament of the construction have several mitigation options available to manage, including controlled release or cover.

In international projects as an example, companies sign contract to lower the likelihood for disagreements before the actual work begins. 

Another way to reduce the risk likelihood would be enhanced training or applying a security patch. You can also reduce the likelihood by implementing controls. Controls that detect the root causing unwanted failures, that the team can avoid. This kind of control seeks to be found in the management or decision-making process. By improving the ability to find design flaws or to improve the accuracy of field failure rate prediction, you can improve the ability to make appropriate decisions concerning the risks in your project.  

To assign high-risk management activities to highly qualified project personnel. In this way the experts, who are used to run a high-risk business, can anticipate problems, and find better solutions. Companies also use diversification of knowledge by sharing skills and know-how across the supply chains to spread and reduce risks. This can, by advantage, be done through a RoC Drill which gather a group of diverse people. This should be done to have an independent, unbiased outside experts review the project’s risk plan before final approval.

Risk Consequence Reduction

The second and similar risk reduction goal, is to reduce the impact of hazard risk on humans, structures, the economy, the environment, or any combination of these. Measures that address consequences typically assume that the hazard is going to result in an even bigger risk, that will have an associated intensity. Such strategy is taken to ensure that the structure, collaboration, system, or other subjects protected by the mitigation strategy, is able to withstand an event without any, or with reduced, negative consequences. The risk levels of most hazard risk can be reducing through at least one, and likely more consequence reduction options, which is not always the case with likelihood reduction. For most technological hazards, consequence reduction revolves around the development of primary and redundant safety and containment. This strategy employs a bit of risk acceptance with a bit of risk avoidance, or an average of both. An example would be a company accepting a bit of delay in the project, by having a buffer time.

Another method to reduce the consequence is to be proactive. Unwanted event or high field failure rates will occur. Therefore, you need to:

1)Think how you will detect the onset of the event, and
2) how to respond.

Maybe you need to stop construction when a part of the plan has a major consequence. Therefore: have plan in place. By acting quick and appropriate you may reduce the exposure to more failures/consequences.

Tip: This can be done by gathering the team around a RoC Drill when you need to reschedule the project process!

Source:

Coppola, D. (2015): “Introduction to international disaster management”

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Risk strategies: Avoidance and Acceptance

This post focuses on the two first risk management strategies, which we introduced last week. They are opposite each other and seeks by this totally different views and strategies. Take a look at the lasts posts to get the full overview!

Risk Avoidance

Some hazard risks pose such a great threat that even a partial reduction in either risk likelihood or consequences is unacceptable, given the possible outcome of a realized event. For these risks, only total risk avoidance is acceptable, which is why action it is deemed necessary to reduce either the likelihood or the consequence factor to absolute zero.  

By stepping away from the business activities involved or designing out the causes of the risk, you can avoid the occurrence of the undesired events. Some opportunities to avoid risk are to exit the business, cancel the project, close the construction, etc.. This strategy has its consequences: In some cases, we even create additional risks by trying to avoid a particular risk. For instance, we may be tempted to choose a supplier with a proven track record instead of a new supplier, that offers significant price incentives. On one hand we choose not to take any chances, but at the other hand we could also miss out on the benefits we could have received by choosing a new supplier. Even though this has other consequences, it is an option.

Eliminating a risk is the best technique you can apply. If the project manager can avoid the risk, surely it is the best way to avoid negative impacts derived from it on the project.   Managing risk in this way is most like how people address personal risks. While some are more risk-loving and some more risk-averse, everyone sure has a tipping point, where things become just too risky and not worth attempting.

Risk Acceptance

Some associated risks for certain hazards are considered to be acceptable “as is”. It may be determined that any further reduction in risk is either too expensive or unnecessary. Several reasons might lead to this decision.
First, every project team has a whole range of hazards with which it must contend, and there assuredly is limited funding to treat those ranges of hazards. Some risks, as determined through cost-benefit analyses, are better left untreated, with the purpose of treating other hazards for which risk reduction will have greater value. All projects will have risks that are so small in terms of consequence or likelihood of occurrence that they are accepted without discussion. This could be going ahead with an event despite the risk of rain, or deciding to take part in a risky activity, which is well managed and supervised, but still risky.
Second, some risk reduction measures can result in one or more undesirable consequences. These secondary hazards may be expected to arise as a direct result of the mitigation measure. In which cases can be considered more damaging or undesirable that the consequences of the hazard risk. Furthermore, the secondary hazards are not discovered until after mitigation has been conducted – in this case you need to decide whether or not to dismantle the new protection mechanisms.
In most cases, risk acceptance is entertained or applied not when risk reduction or avoidance measures are unavailable, but when they are unaffordable.

Source:

Coppola, D. (2015): “Introduction to international disaster management”