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Monday, December 19, 2011

Risky calculations

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Quality Tools > Tools of the Trade > 11: Risky calculations

Risks are nasty things. They creep up on us, just when we think things are going well, or else they pile on top of one another, wearing us out with the sheer unexpectedness of it all. Yet we can do something to ease the pain. The first step is to know that the risk are there...

Identifying risks

There is no simple way of identifying risks. The best qualification is probably bitter experience. Once you have encountered some of the things that life can throw at you, you tend to be careful that such things will not happen again.

For those of us who lack prescience or deep experience, a common approach to identifying risks is Brainstorming, although more structured approaches can be used (watch out for PDPC next time!).

A trap for the inexperienced (and sometimes the experienced too) is to be mesmerised by the large and obvious risks. When you are stalking a lion you still need to keep a weather eye out for snakes and spiders. Many companies have been so focused on their traditional competitors that they have missed the dynamic young upstarts who have stolen great chunks of their market before they could get their act together to stop them.

Another approach that can be used is to incrementally look forwards from the present, first considering things that might happen soon, then consider what these might lead to, then what the other possibilities you have thought of might lead to, and so on. The converse of this is to start with a known risk and work backwards, asking, 'What could cause this?'. In either case, you will have a causal chain which you can work on breaking at any convenient point.

Risks are often looked for during planning phases. In critical situations, risks may need more continuous scanning activities. As with many other situations, its all a matter of cost and potential benefit.

Risks do not have to be all bad. An opportunity can be considered to be a good risk. When you are looking for risks, why not also look for things that could happen from which you could benefit? If the market suddenly opens up, will you be ready?

Calculations

When calculating with risks, the first thing you will want to know is, 'How likely is this?'. A risk that is highly unlikely can be discounted. Or can it? A meltdown in a nuclear reactor is unlikely, but should this risk be ignored? The overall risk exposure is a calculated as the product of both the probability and also the overall cost, should the risk occur.




But what if you do not know the exact probability of something happening? What if you do not know the cost? A simple approach is to use more qualitative set of measures, such as 'Very Low', 'Low', 'Medium', 'High' and 'Very High', and then allocate a set of numbers to them. These can be linear, such as 1, 2, 3, 4 and 5, but may be better as a non-linear set, such as 1, 2, 4, 8 and 16, which will account for 'Very High' being much more important than 'Very Low' (not just five times). You can also use different sets of figures for probability and loss. If in doubt, do some experiments; 'suck it and see'.

When you have identified risks, you may be considering a number of possible countermeasures, but how do you decide which is best? Risk Reduction Leverage, shown below, is a simple way of comparing countermeasures by looking at how the risk exposure is reduced and how much it will cost to do this.



Managing risks

Once you have identified the risks, there are three general approaches you can take to managing them. Which one you choose will often depend on the amount of control you have over the situation.




If you can change your plans either to avoid the risk altogether or to reduce the risk exposure, then this may be a good action to pursue, provided it does not cost too much, of course. It is possible to do this in circumstances where you have a degree of control, but it is common not to have this luxury, so you have to plan to do something about the risks that are outside your control.

Contingency plans that you might draw up will, as ever, depend on the severity of the exposure and reduction leverage you can achieve. This need not cost a great deal in the planning phase, especially if you can draw on external support, where you do not have to pay for something until you actually need it. For example, if there is a risk of a key team member leaving, you may, as a contingency, contact a couple of contract agencies to ensure that they will have people with the right skills available.

Overall then, to risk overplaying on the proverbs, if you want to avoid crying over the spilt milk, get the needle and thread ready for that stitch in time. It just might save your bacon.

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