There exist four widely accepted risk response methods; assumption, reduction, transfer, and avoidance. Historically, most practitioners argue that the risk response method selected is heavily biased toward the magnitude of the risk and the project manager’s tolerance level for risk. While this may still be true, there are other factors that influence the risk response method selected, and many of these can be included as part of the project management methodology.
The potential rewards of selecting the appropriate risk response can influence the selection process. Figure below shows the risk-reward matrix. What is important to recognize in Figure below is that the risk-reward matrix is actually threedimensional, with the third axis being the quality of resources required. Certain risk response actions, such as assumption or reduction, require that resources be consumed. The quality and availability of the resources required can influence the risk response selection process irrespective of the potential rewards. For example, if a company adopts a risk assumption approach on an R&D project, the rewards could be huge if patents are issued and licensing agreements follow. But this is predicated upon available, qualified resources. Without the appropriate available resources, the only response mechanisms remaining might be risk avoidance or risk transfer.
The risk-reward matrix:
A second factor influencing the risk response method selected is the procedural documentation requirements of the project management methodology. This appears in Figure below. Project management methodologies that are based on policies and procedures are very rigid. Most good methodologies today are based upon guidelines that provide the project manager with significantly more flexibility in decision-making.
This flexibility (i.e., use of guidelines) can affect the risk response method selected. Although no empirical data exists as yet to support this, there appears a tendency for project managers to accept higher levels of risk if the project manager is given more freedom in decision-making. On the other hand, the rigidity of policies and procedures generally allows for lower levels of risk acceptance and project managers seem to prefer avoidance. As risk management grows, more research will be expected in this area.
General strategic planning is never accomplished only once. It must be reexamined over and over again as requirements change and new information appears. The same holds true for strategic planning for project management. As more and more of these problem areas are identified internally from lessons learned files and externally in published articles, some of these often overlooked problems will be corrected.
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