Effective Risk Response Plans
In my last blog I discussed the three essential layers to a strong project management environment that lend to better communication and higher levels of collaboration, problem solving and ingenuity. This is the perfect environment for open discussions of risk and ambiguity in project scope and the establishment of realistic measures and risk response plans.
In this blog I would like to build on this idea of effective risk response plans. Assuming that we have a strong environment of open communication and collaboration, lets focus on the specific details applicable to establishing risk response plans.
Now, when you look into the PMBOK (Project Management Body of Knowledge), from the Project Management Institute, they’ll tell you that you need to develop plans for positive risks and negative risks. There are four common approaches to each that are clearly mapped out in any formal project management training programs. I would like to talk about the stuff that exists in the gray areas of project management between the lines of these four common approaches.
In order to “transfer” risk to others and reduce the potential risk that we have to deal with, there are several things that are commonly done: outsourcing, fixed price contracts and a reduction in time and material work. Lets take a look at each of these and the implications therein.
First, outsourcing. Outsourcing is a vey common approach used to reduce exposure to risk. We contract part or all of a project to an external entity that has the appropriate skills, experience and manpower to do the necessary work. Perfect, or is it? In reality, outsourcing has many complications. First of all, it requires a great deal of pre-planning, ongoing management of work performed, and an effective way to monitor quality, progress and completion of scope. Books have been written on these topics alone. In addition, something that few people talk about is that if and when the outsourcing entity fails, all of the accessed risk returns to you like a boomerang. This is something that most organizations neglect to plan for until it’s too late.
Second, fixed price contracts. We use them for many reasons, but one reason in particular is the intent to transfer risk from us to someone else. We take some project work and ask XYZ Corp to give us a fixed price quote to perform all the work detailed in our well-defined scope documents. Once we approve their contract, we no longer care whether it costs them more or less than the agreed amount. True or false? Our contracts protect us, right? The truth is that contracts give us something to fight with in the court of law, but never guarantee the completion of a project. There is a specific difference between these two outcomes that needs to be understood by project management. When your contracts are compromised, you are left with incomplete work that may be more difficult to complete than what you started with.
Third, time and material. In most cases formal training suggests that “time and material” incurs greater risk for us. Although this is true at times, there are times when the use of T & M can save you a great deal of time and money. I know many senior project managers that prefer to use T & M on a regular basis. They have more than enough experience to effectively manage T & M on an ongoing basis. When used properly, this can save the organization anywhere from 10-20% in overall project budget. Something worth thinking about.
So the next time you’re planning your risk response plans and considering whether to outsource, leverage fixed price contracts, and reduce T & M, perhaps you should reconsider what risks you’re really taking.
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