BUS605: Strategic Project Management

Most people use the term risk to refer to something bad that might happen, or that is unavoidable. The connotations are nearly always negative. But in fact, with risk comes opportunity and new possibility, as long as you can clearly identify the risks you face and employ reliable techniques for managing them. Risks can impact a project's cost and schedule. They can affect the health and safety of the project team or the general public, as well as the local or global environment. They can also affect an organization's reputation, and its larger operational objectives.

More Risk-Related Terms

Risk Capacity: The maximum amount of risk an organization can bear.

Risk Appetite: The maximum amount of risk an organization is willing to assume.

According to Larry Roth, Vice President at Arcadis and former Assistant Executive Director of the American Society of Civil Engineers, the first step toward identifying and managing risks is a precise definition of the term. He defines risk as "the probability that something bad will happen times the consequences if it does". The likelihood of a risk being realized is typically represented as a probability value from 0 to 1, with 0 indicating that the risk does not exist, and 1 indicating that the risk is absolutely certain to occur. According to Roth, the term tolerable risk refers to the risk you are willing to live with in order to enjoy certain benefits.

In daily life, we make risk calculations all the time. For example, when buying a new smartphone, you are typically faced with the question of whether to insure your new device. If you irreparably damage your phone, the potential consequence is the cost of a new phone – let's say $500. But what is the actual probability of ruining your phone? If you are going to be using your phone in your office or at home, you might think the probability is low, and so choose to forgo the insurance. In this case, a risk analysis calculation might look like this:

0.2 X $500 = $100

In other words, you might decide that the risk of damaging your phone is a tolerable risk, one you are willing to live with. The benefit you gain from tolerating that risk is holding onto the money you would otherwise have to pay for insurance.

But what might make you decide that the risk of damaging the phone was not a tolerable risk? Suppose you plan to use your phone regularly on a boat. In that case, the chance of damaging it by dropping it in the water is high, and so your calculation might look like this:

0.99 X $500 = $495

For many people, this make insurance might seem like a good idea.

Your tolerance of risk is partly a matter of personality and attitude. This article describes a range of attitudes toward risk, ranging from "risk paranoid" to "risk addicted".

Source: Board of Regents of the University of Wisconsin System, https://wisc.pb.unizin.org/technicalpm/chapter/managing-project-risks/
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