30 June 2022

Entreprise Risk Management : uncertainty in projects

Uncertainty

  • In order to manage uncertainty in projects, organizations have a range of possible actions they can take.
    • The 4Ts of hazard risk management (for threats)
    • The 4Es of opportunity management (for opportunities)
  • To monitor and control risks an organization can decide to adopt one of the 4As of control risk management.

The 4Ts of hazard risk management (for threats)

  • Tolerate
    • For risks that are low likelihood/low impact, the main response is tolerate.
    • Tolerate : Accept/retain
      • Tolerate risk and its likely impact
        • Dominant type of control will be Detective.
      • Purpose
        • The exposure may be tolerable without any further action being taken.
        • Even if it is not tolerable, the ability to do anything about some risks may be limited, or the cost of taking any action may be disproportionate to the potential benefit gained.
  • Treat
    • For risks that are high likelihood/low impact, the main response is treat.
    • Treat : Control/reduce
      • Treat risk to reduce the likely impact/exposure
        • Dominant type of control will be Corrective.
      • Purpose
        • By far the greater number of risks will be addressed in this way.
        • The purpose of treatment is that, whilst continuing within the organization with the activity giving rise to the risk, action (control) is taken to constrain the risk to an acceptable level.
  • Transfer
    • For risks that are low likelihood/high impact, the main response is transfer.
    • Transfer : Insurance/contract
      • Transfer risk to another party
      • Dominant type of control will be Directive
    • Purpose
      • For some risks the best response may be to transfer them.
      • This might be done by conventional insurance, or it might be done by paying a third party to take the risk in another way.
      • This option is particularly good for mitigating fi nancial risks or risks to assets.
  • Terminate.
    • For risks that are high likelihood/high impact, the main response is terminate.
    • Terminate : Avoid/eliminate
      • Terminate activity generating the risk
      • Dominant type of control will be Preventive.
    • Purpose
      • Some risks will only be treatable, or containable to acceptable levels, by terminating the activity.
      • It should be noted that the option of termination of activities may be severely limited in government when compared to the private sector.

The 4Es of opportunity management (for opportunities)

  • Purpose
    • Risk versus reward strategy
  • The 4Es of opportunity management :
    • Exist
      • Low exposure, low potential reward
      • Exist in mature/declining markets.
    • Explore
      • High exposure, low potential reward
      • Explore entrepreneurial opportunities.
    • Exploit
      • Low exposure, high potential reward
      • Exploit opportunity until competitors arrive.
    • Exit
      • High exposure, high potential reward
      • Exit depending on risk appetite and capacity.

Control risks with the 4 As

  • An organization can decide to adopt one of the 4As of control risk management.
  • Purpose
    • Risk versus uncertainty in projects
      • The 4As of uncertainty management can be compared to the 4Ts of hazard management and represent a broadly similar approach.
  • The 4As of uncertainty management
    • Accept
      • Accept the risk or uncertainty.
        • Low exposure, low uncertainty
          • For low-exposure/low-uncertainty risks, the organization (or project) will usually accept uncertainty attached to each risk.
    • Adapt
      • Adapt processes and procedures.
        • High exposure, low uncertainty
          • For high-risk-exposure/low-uncertainty risks, the organization will adapt process procedures and introduce controls, including (when appropriate) insurance.
    • Adopt
      • Adopt contingency plans and responses.
        • Low exposure, high uncertainty
          • For low-risk/high-uncertainty risks, the organization will adopt appropriate contingency plans and for high-exposure/high-uncertainty risks, the organization will wish to avoid the uncertainty attached to the risk.
    • Avoid
      • Avoid the risk or uncertainty.
        • High exposure, high uncertainty
  • In the Initiation phase the project experience (traverse) most of the identified risks.
  • In the execution phase you will carry out the work-related activities, and therefore, most of the identified risk will be faced in this phase

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Created : 04/01/2022

Updated : 19/05/2022

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