FUTURE THINKING
The future seems to be coming at us at an ever-increasing rate.  As effective managers and practitioners, we must think proactively about all the possibilities that the future may bring, but those possibilities have uncertain outcomes.  We call those possibilities opportunities if we believe they will have positive outcomes.  For example, we have the opportunity to successfully complete a project and make a substantial profit or we have an opportunity to introduce a new product into the marketplace first and capture the lion’s share of that market.  We call those possibilities risks if we believe they will have negative outcomes.  For example, we have the risk of not successfully completing that same project and losing our investment or we may have the risk of our competition beating us to the marketplace with a new product and losing market share. To quote Tom DeMarco, “Moving aggressively after opportunity means running toward rather than away from risk.”

RISK/OPPORTUNITY BALANCE
As illustrated in Figure 1 below, good risk management practices are a balancing act between risk and the opportunity.  We need to identify and manage both the risk and the associated opportunity.  Not paying attention to opportunities and balancing opportunity management along with risk management can lead to the loss of important opportunities or to taking on projects where the risk so outweighs the opportunity that there is little to no chance of success.

WALKING THE BOARD
To demonstrate this point, let’s assume that I place a 2×4 that is 10 feet long on the ground.  It is 2 inches off the floor and 4 inches wide.  If you can walk across it toe-to-heel, without falling off, I will give you $10.  Would you do it?

What is the risk in this scenario?  The potential problem is that you would fall off the board.

Let’s analyze the risk, what’s the probability you fall of the board?  For most of you it may be fairly low.  But for me, I have had both knees replaced and I still don’t have good side to side balance, so for me the probability may be higher.  What’s the loss if you do fall off?  Don’t say $10 – because you are not losing the $10 – you don’t have it yet.  The loss might be that if you are the only one who steps off the board others might point and laugh causing you to be embarrassed.  Or you could actually twist and sprain an ankle or even fall and crack open your head – but what is the possibility of that happening?

Now let’s analyze the opportunity — the $10 reward for success.  What is $10 worth to you?  What’s the probability you receive the reword?  If we were in a room together running this experiment, how many of you trust that I would actually give you the $10?  When we talk about this in my classes, most students are willing to take on this challenge for the possibility of a $10 reward.

CHANGING THE CHALLENGE
Let’s take the same board and place is between two seven story buildings.  Assume that the boards is reinforced and locked down so that it won’t break or twist and fall.

Is anyone still willing to do it for $10?  Why not?  What did I change?

Of course the answer to that question is I changed the risk side of the balance.  So let’s analyze again.

Did I change the probability that you fall off?  Maybe — outside between two seven-story buildings there may be a breeze or you may be nervous and shaky which might increase the likelihood that you fall. But mostly what I changed was the loss if you do – from 7 stories up, if the risk turns into a problem and you do fall – you will go splat.

So to bring this challenge back into balance, I have to increase the opportunity side as well.  How about imitating the Fear Factor TV show – I will give you $50,000 if you are successful.  Any takers?

At this point someone in my class usually starts asking questions about harnesses or airbags.  Ah – RISK MITIGATION!  When you really want the reward (and which of us couldn’t use $50,000) but the risk looms to large for us to be willing to take it on, we try to figure out way to reduce that risk.

We can do that by reducing the probability that the risk turns into a problem (for example, we could practice down on the ground for a while until we got really good at walking the board or we could get out of our 5 inch stiletto heels into a good tennis shoe).  We can also reduce the loss if the risk does turn into a problem by having the harnesses or airbags.  We could also transfer part of the risk to someone else.  For example, maybe we could hire a world class gymnast to walk it for us and split the reward with them.

LESSON LEARNED
Risk management is all about identifying and analyzing our risks in order to decide:

• Which risks are small enough and the associated opportunity good enough to just accept the risk
• Which risks are so big that the opportunity is just not worth it so we avoid the risk
• That we really want the opportunity but the risk is large enough that we need to actively attack that risk in order to reduce it through mitigation actions

Bio:

Linda is the author of The Certified Software Quality Engineer Handbook from ASQ Quality Press.  She is a past chair of the ASQ Software Division and has served as the Division’s Program Chair, Certification Chair and Marketing Chair, and on the ASQ National Certification Board.  Linda is an ASQ Fellow and has a PE in Software Engineering from the state of Texas.  Linda is also a Grand Master of the Pyrotechnic Guild International.