Do you care about positive risks?

Look out for opportunitiesRisk is generally assumed to have negative impact. However, a ‘risk’ can also have a positive impact. PMBOK 4/e talks of positive risks and calls them ‘opportunities’. Given that most project managers only have a passing knowledge of managing risks proactively (our industry still seems to reward crisis management notwithstanding the fact that most often people who fix a crisis were responsible for it in the first place!), it is extremely likely that most such opportunities are wasted.

A risk is just a future event with probability of occurance between 0% and 100%. If such probability is 100%, surely that is a certainty, and hence can be put on the plan. If it is 0%, again it is a certainty and hence you can plan accordingly. Risks are also known as ‘known unknowns’ because we know about those events – just that we don’t know what it exact outcome will be. So, it quite likely that the outcome could be positive, and need not always be negative. Sample the following examples of events that could have a positive impact:

  • You have made an offer to a manager whose company is fast running out of cash. The grapevine has it that they might not get any funding, and have just weeks before they fold up. If that happens, there is a strong likelihood that the manager whom you have made an offer will join you. Even though this is a negative event par se for that company, but for you, that is a positive event.
  • Your competitor initially undercut his prices and won the bid, but now he is in the danger of being disqualified on technical grounds. His loss means business for you, and hence that is a positive risk.
  • You offer “no-questions asked product replacement warranty” within 60 days of purchase. You allocate 5% of your your operating margin. Your new product has proved to be a great hit among teenages, and is flying off the shelves, and you expect that cost of product replacement might be within just 2%, thereby improving your overall profit margins on this product.
  • You need to arrive at airport on-time, and your commute is through the rush hour. You leave home well in-time, but it is tough and go. However, there is a football match that evening, and it is likely that you find the traffic very thin – possibly because most people are glued to their TV sets.
  • Your new software provides a workflow for managing personal finances. An NGO needs a low-cost software to manage its micro-finance product, but best-matching product is out of their reach. Your product *might* meet most of the requirements, including being in the budget, if only they can tweak their workflow a bit.
  • You are in construction business, and learn that government is toying with the proposal to reduce duties on cement and steel by 20%.
  • A major competitor who is also a large employer in the city is likely to announce lay-offs.
  • Because of an early delivery of an input component, you might be able to shave-off weeks from your delivery schedule.
  • City administration is likely to announce construction of a new  flyover that will cut down city commute and decongest the downtown.
  • You are a tour operator and the international travel association is likely to name your region in “Top Ten Places to visit before you die” list.

Surely, these are simple examples, but demonstrate there are always positive risks in pretty much any project. However, we generally ignore them, and hence are not able to capitalize on them (we typically end up using the ‘accept’ strategy without even recognizing there might be other better ways of maximizing those risks or its returns). In addition to identifying positive risks, these four risk response strategies are identified to maximize the risk or impact of such positive risks:

  1. Exploit – this strategy aims to eliminate the uncertainty associated with a particular upside risk by ensuring the opportunity definitely happens. Since this is a positive risk, the outcome is likely to be positive. However, there is an uncertainty to it, so if there is a way to eliminiate such uncertainty and make it a certainty, it ensures that you reap the benefits of such a positive risk. The idea is to virtually guarantee that a given risk becomes a certainty! Let’s consider some examples:
    1. Suppose you are developing a prototype. If your customer likes it, your order book could be full for next few years! You have been diligent so far, and now have the prototype ready a week before delivery date. You are 70% sure that the customer will like your prototype, but instead of deliverying early, you decide to subject the prototype to even more stringent testing and analysis. Ideally, you will want to raise such probability to 100%, but that might not always happen. However, you put all efforts to make such event a certainty.
    2. Another example – you have to make product release next weekend – if that happens, your customer might be able to roll out new services to its customers. You pull out some of the best technical folks on other projects and put them on this task to ensure that it happens.
    3. Your biggest customer might be willing to give you 2x, or even 3x business if only you stopped working for his biggest competitor. You take the call to stop working with the competitor and make that event happen.
  2. Share – Sharing a positive risk involves allocating some or all of the ownership of the opportunity to a third party who is best able to capture the opportunity for the benefit of a project.  Here, the idea is to involves more players who also becomes stakeholders so that collectively raise the winnings. This strategy might be handy for some types of risks that might have have a positive uncertainty, but chances are that by yourself, you might by constrained in how much you can win. By involving other complementary players, you not only push the envelope, you get others to the game, make the game bigger and help everyone win, thereby also maintaining your own interest.
    1. You are building a cool product that you expect to be a best seller. However, you lack the product design or marketing expertize to fully explout this opportunity. Instead of home-growing those capabilities, you decide to get experts on this project who are fired up with this challenge.
    2. Apple uses this extremely well. By making its iPhone APIs available to larger developer community, it has been able to ensure that there is a dedicated army of developers constantly working to create highly innovate apps. This has resulted in over 100,000 such apps being available on iPhone!
    3. You have developed a new intellectual property that promises to be a revolution. Instead of patenting it, you decide to open-source it to create a major eco-system of other vendors who might get interested to develop tools and apps around that technology thereby pushing the envelope.
  3. Enhance – the idea is to increase the probability or impact of a positive risk. Increasing probability might not make it a certainty, but does improve the chances of the positive event happening. Improving the impact might not be necessarily associated  with an increase in the probability itself, but might lead to a higher yield should the event happen. Of course, there is also an opportunity to do both of them simultaneously!
    1. Let’s assume there is a cloud cover over a drought-hit region and there is a 20% possibility of rain. What do you do? You can utilize scientific methods like cloud-seeding to improve the possibility of rain to, say, 40%. In this example, you can’t increase the impact, but you are able to increase the possibility of that event.
    2. This strategy is used quite well by retailers, especially in apparels industry. Studies have shown that home labels (or we can just call them the unbranded stuff) has a higher chances of being bought when carefully placed alongside branded apparels than standalone. This simple placement trick increases the chances of customers picking up home labels.
    3. Companies and industry trade association hire lobby firms to influence lawmakers and citizens to look at some important regulation more favorably, thereby maximising chances of its adoption and eventual success.
    4. While pushing for a new idea, sometimes you want to socialize it with a key voice in the organization, or perhaps get some industry references that generally extol benefits of that idea, thereby increasing the chances that your idea gets accepted.
    5. This story illutsrates a great example of how one can both increase the probability and the impact simultaneously. I blooged about it in a different context, but you can read the story Are you helping your competitors succeed?
  4. Accept – Accepting the opportunity is being willing to take advantage of it if it comes along, but not actively pursuing it. When I earlier said most of us ignore positive risks, we probably work in a passive mode, and pick up those low-hanging fruits. While this might not be a bad idea, in some cases, you might not want to incur the cost of ensuring that a certain risk does happen. So, this is like a zero-cost effort where if the positive risk happens, you are willing to grab it.
    1. For example, you have just started out your consulting venture and are busy doing the legwork for it, and don’t want to take up an assignment for the coming month lest it interferes with your initial preparations. You hear about a business in distress that needs exactly the kind of consulting that you are offering, but decide not to actively pursue it. However, when they call you up, you are willing to take the call.
    2. A competitor is likely to go out of business and you might benefit when that happens, but you don’t want to be seen as a bad rival trying to accelerate his downfall. So, you decide to take it easy and monitor the situation, but when that happens, you gladly step in.
    3. You want to take homeloan. There is a chance that interest rates will come down in the coming quarter. Instead of waiting for that to happen (or, it might not even happen), you decide to take the loan right now. If the interest rates go down, you benefit.

Identifying and exploiting positive risks doesn’t require any special talent, but it does require a systematic effort to spot such opportunities. While negative risks are typically more dangerous and hence it makes great sense to avoid, transfer or mitigate them, positive risks could make a significant difference to your project’s chances of success. As we see in these examples above, many of these opportunities will fly under your radar if not proactively pursued. A holistic risk management strategy should always consider all types of risks and identify appropriate responses.

Do you care about positive risks?

5 thoughts on “Do you care about positive risks?

  1. Palash Gupta

    Capitalizing on Positive risk is an area generally ignored. As I perceive it, Positive risk refers to risk that we initiate ourselves because we see a potential opportunity, along with a probability of failure.

    I would like to share the following two examples which are quite relevant to our day-day work and all of us implicitly would have employed the “Exploit” and “”Enhance” strategies. (However an explicit approach is always more effective).

    As first example; we have a software development project that is scheduled to take 120 days to complete. Our client would get more value if it is delivered earlier, but agrees that 120 days is how long the project will take and it satisfied with 120 days delivery.

    We realize that, if we utilize a new software-testing tool, it’s possible that we can deliver the project in 90 days instead of 120. If this is a guaranteed full proof solution, we will immediately just jump on it. However, there is risk, since it will be the first time we will use the tool, we have to deal with a lack of expertise and a learning curve. It’s possible that if the tool doesn’t work out, the project could end up taking 150 days to deliver. What would we do?

    Of course, we don’t have enough information to make the decision now, but this example illustrates the concept of positive risk. If we decide to use the tool, it’s a risk we’re introducing ourselves, based on an evaluation of the chances of success and the impact of success vs. the chances of failure and the effect of that failure. Remember that the client will be delighted and there will be a very positive impact on the future business relations with the client.

    Let’s look at another example. Let’s say we estimate a project will take six months to complete. As per industry experience, we think we might be able to complete the project more quickly if we use some of the XP techniques. With these new techniques, we think we can deliver the first iteration to the client in three months and subsequent updates every month after that.

    Of course, there is also a real chance that the new techniques will not work well or that the team may resist the changes, requirement slicing may not support Iterative delivery etc, which could end up delaying the project. There is our dilemma: do we take a chance and introduce risk for positive gain? Or do we go with traditional development techniques and be happy with a six-month delivery date?

    In spite of the potential benefits of the successful management of positive risks, traditionally managers have confined themselves mitigating negative risks. I could think of following major reasons for this –

    – Failure in handling negative risks visibly affects the project outcome however failure in capitalizing on the positive risk may not have a visible negative impact

    – Failure in managing the selected positive risk (opportunity) can put the business in over leveraged situation (as in the first example the project could take 150 days, it tool doesn’t work)

    – Lack of incentive for the manager to take-up the positive risk when the cost of failure in managing it might be higher. It is more related to the fact that – How we define the project success criteria? Project success criteria should be challenging enough for manager to explore the opportunities present in environment and manage them systematically.

    In spite of the traditional conservative approach, as mentioned by you, A holistic risk management strategy should always consider all types of risks and identify appropriate responses. Successful management of positive risks surely makes a significant difference to project’s chances of success.

    1. TV Post author

      @Palash: Excellent perspectives! Thanks for sharing. I agree weith your observation that the penalties for not mitigating negative risks heavily outweigh rewards for mitigating positive risks, and hence managers are typically mich more contend managing negative risks. However, we need to change our perspective to keep looking out for those opportunities – who knows some of them might have potential to eliminate several critical negative risks!

      PS: You write very well. Do you also blog – if not, you should 🙂

  2. Amit Kumar

    This is a gem of an article …
    Managers are paid to take decisions and clear the haze, and this point is often lost in in-grown managers,specially in a technology company like mine.

    -amit

    1. TV Post author

      @Amit: Surely, most of us managers could do a little better in how we take decisions. Many tech companies where engineering is a religion, often promote star techies to the ranks of people managers and decision-makers – something that they are ill-prepared and unwilling to do. The result is all too predictable!

Leave a Reply