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04 June 2013

What to Call Risk and Opportunity Management

Many writings lump risk management and opportunity management together under the label, Risk Management.  Risks and opportunities are left-pointing and right-pointing rays on the same line.

Many equate risk with probability, so they drop opportunity from the label. They think of risk as an abbreviation for risk and opportunity. Others worry, then, that opportunity will be forgotten -- as it usually is!

When one speaks of risk [and opportunity], one speaks of the probability that something will happen. That is,

Risk = Probability x Impact, where Impact is a loss

and

Opportunity = Probability x Impact, where Impact is a gain

If risks and opportunities are rays pointing left and right, then opportunities are negative risks. If you deal with them in the same matrix, pay extra attention to your negative signs.

Risk and opportunity management can result in influencing the probability, influencing the impact, or other strategies such as accepting a potential loss or waiting to deal with situations when and if they become an issues.

(Remember that a situation is a risk if the probability lies between zero and one.  A situation is an issue if the probability is one.)

Uncertainty Management

Could we simply call it Uncertainty Management?  Uncertainty would only deal with influencing the probability that something will occur. The face-value of the term fails to imply the other strategies for dealing with risks or opportunities. The name of this knowledge area should reflect the highest-level concepts, not a component concept.

Opportunities and Threats

Another pairing of terms comes from SWOT analysis - Strengths, Weaknesses, Opportunities, and Threats. SWOT analysis is one technique for identifying risks and opportunities.

Opportunities and threats, as a pair, emphasizes the influences or situations that affect or can be affected by a person or project. (In fact, threat implies that the risk event comes from outside, whereas risks can be either internal or external.)  SWOT analysis emphasizes identification of risks. It makes up only a fraction of the whole set of risk and opportunity management processes.

A Common Risk:  Failing to Deal with Opportunities

Many people forget to manage opportunities with the same vigor that they apply to managing risks.  Exploiting opportunities can mitigate the potential impact of risks. The reasoning goes, Risk A may set us back a week, but Opportunity B may save us a week.

PMs have other reasons to exploit opportunities.   Exploited opportunities cut costs, relieve schedule pressure, and improve quality. In short, they maximize profit.

Failure to exploit opportunities wastes resources, causes product lines to stagnate, erodes market share, and results in lost jobs (perhaps your job!) when the company withers.

The failure to exploit opportunities is itself a fundamental risk.

Therefore, referring to the practice as Risk and Opportunity Management calls attention to the oft-forgotten second half of the discipline. 

Remember that semantics is about communicating, not about winning arguments.  If somebody refers to risk management, you know what they mean.  Adjust.

Copyright 2011, 2013, Richard Wheeler -- Permission granted for non-profit or personal use with a link to this post.

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2 comments:

  1. good explanation. failure to exploit opportunities is itself a fundamental risk. good one

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  2. Risk management attempts to plan for and handle events that are uncertain in that they may or may actually occur. These are surprises. Some surprises are pleasant. We may plan an event for the public and it is so successful that twice as many people attend as we expected. A good turn-out is positive. However, if we have not planned for this possibility, we will not have resources available to meet the needs of these additional people in a timely manner and the positive can quickly turn into a negative.

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