Why risk mitigation

An option provides the opportunity to take an action without the obligation to take that action. Options may cost money, but they also add value by allowing managers to shift risk or capture added value, depending on the outcome of one or more uncertain parameters. For example, a contract clause permitting termination of a contract if a critical technology is not developed provides an opportunity but not an obligation to terminate.

An options approach also improves strategic thinking and project planning by helping to recognize, design, and use flexible alternatives to manage uncertainty.

Increasing options and decision points is a valid risk mitigation strategy for project owners. For example, the option to terminate a contract can be of value to owners. Delaying commitment to a single strategy or solution by carrying alternative optional strategies until sufficient information becomes available to resolve the uncertainty is an example of the use of options as a form of managerial flexibility. Another example of an options approach was that used by the Manhattan Engineer District in World War II, in which both an enriched uranium and a plutonium device were developed so that there would be an available alternative; information gained from one was used in making a decision about the other i.

This is similar to power plants that can run on gas or oil and switch between the fuels based on their relative price. In the case of the Manhattan Project we can safely assume that the progress and relative effectiveness of the alternative efforts were compared in order to make informed choices, including ultimately the choice that was used in the war.

Both worked, but the additional cost to buy the option was considered justifiable. The use of these options may, however, require some imagination and changes from the usual methods and practices. Because risk is uncertainty and information reduces uncertainty, many options involve the creation or. It should be stressed that creating options to generate new information is not the same as simply postponing decisions in the hope that some new data will materialize to save the situation. The use of options is premised on specific rules for implementation that define the conditions that would trigger a change in strategy.

The process includes continuing to monitor the uncertain parameters, evaluating their status and impact, and changing strategies if alternative options are warranted. This should be a proactive not a reactive process. As an illustration of a risk assessment applied to both downside risk and upside opportunity, consider the case of a risk associated with two alternate technologies or processes. Process 1 is newer, and the cost estimates for this process are highly uncertain, compared to Process 2, which is more established and for which the cost estimates are much less uncertain than those of Process 1.

If the estimated construction cost of using either of the two processes is the same, then there is a substantially greater risk of obtaining a high project cost with Process 1 than with Process 2. It is assumed that the probable costs of these two processes are statistically independent—that is, there is no correlation between the cost of one and the other.

Figure , which plots the probability that the project. Figure shows these two options plus a third, which is to pursue both Process 1 and Process 2. Note that in this third approach, the expected cost is less than for either of the two processes individually, and the probability of a cost overrun is less than with either of the others for any budget. Obviously, one does not construct two facilities just to find out which process is cheaper.

However, this elementary illustration indicates that the best approach may be to pursue the engineering of both options until, using a series of decision points, enough additional information is obtained to refine the cost estimates and thus determine which process should be chosen. If project directors seek to manage the risks, not simply to compute them, then they should recognize that project engineering and design can be conducted in a series of steps, such that after each step—e.

Based on the new information generated by the engineering, design, and procurement process, the estimates at each quarter will provide better guidance about the economics of the final facility. Then the sponsor can make a decision to continue the project or to terminate it. The principal benefit of the options approach is that by reliance on sequential decisions made as more and better information is available, rather than on a single decision made at the beginning of a project, and using the high uncertainty as an opportunity not simply a risk, the net value of a project can be increased.

Thus a project that might have been canceled can instead be turned into a highly beneficial one. Although this example is simple, the fundamental point it illustrates is that the purpose of risk analysis is to support decisions.

The objective of risk management should be to decide whether or not to build a project, and which of alternative process technologies to use, not merely to compute risks or probability distributions.

The example also shows that adding management decision points increases the value of the project to the owner. Risk assumption is the last resort. It means that if risks remain that cannot be avoided, transferred, insured, eliminated, controlled, or otherwise mitigated, then they must simply be accepted so that the project can proceed.

Presumably, this implies that the risks associated with going ahead are less than, or more acceptable than, the risks of not going forward.

If risk assumption is the appropriate approach, it needs to be clearly defined, understood, and communicated to all project participants. Effective risk management is essential for the success of large projects built and operated by the Department of Energy DOE , particularly for the one-of-a-kind projects that characterize much of its mission.

Based on feedback from you, our users, we've made some improvements that make it easier than ever to read thousands of publications on our website. Jump up to the previous page or down to the next one. Also, you can type in a page number and press Enter to go directly to that page in the book. Switch between the Original Pages , where you can read the report as it appeared in print, and Text Pages for the web version, where you can highlight and search the text.

To search the entire text of this book, type in your search term here and press Enter. Ready to take your reading offline? An effective risk management strategy should include regular review points by business stakeholders. For projects, there are several statistical tools — such as S-curves — that can track project progress and flag any changes in risk profile for key variables such as project cost and duration.

Make risk reporting part of your regular business operations, and make sure to incorporate any learning from risks that did become issues to improve your future mitigation strategies. Get started. As a Work OS, monday. With our shared platform, business risks can be identified across all departments and organized within a single risk register and mitigation plan.

But, monday. Plus, our powerful automations mean that risk owners and other stakeholders can be immediately notified and take action if anything changes. With monday. Which means everyone stays aligned and in agreement on the way ahead. But early and honest identification of risks gives the best chance of mitigating them to tolerable levels. Why not get started today with our risk register template? All of us at monday. Link Copied! What is risk? Risk mitigation is the tactics and techniques used to bring risk levels down to what is tolerable to a business.

This is highly individual to each company and is dependent on their risk appetite. Each of these options requires developing a plan that is implemented and monitored for effectiveness. More information on handling options is discussed under best practices and lessons learned below. From a systems engineering perspective, common methods of risk reduction or mitigation with identified program risks include the following, listed in order of increasing seriousness of the risk [4]:.

When determining the method for risk mitigation, the MITRE SE can help the customer assess the performance, schedule, and cost impacts of one mitigation strategy over another. For something like "parallel" development mitigation, MITRE SEs could help the government determine whether the cost could more than double, while time might not be extended by much e.

For conducting rapid prototyping or changing operational requirements, MITRE SEs can use knowledge in creating prototypes and using prototyping and experimenting see SE Guide article on Special Considerations for Conditions of Uncertainty: Prototyping and Experimentation and the Requirements Engineering topic for projecting the cost and time to conduct a prototype to help mitigate particular risks e.

Risk assessment professionals have the knowledge and experience essential to their area of expertise. In other words, that weather report was put together by meteorologists using complex equipment including weather radar, air-, land, and sea stations.

The data can pinpoint conditions at any of these locations, and is aggregated by powerful computer programs. When it comes to supply chain risk management, we know just where you can find the experts, and the technology, to help you pinpoint various types of risk, such as financial, cyber, compliance, and extreme weather events, at locations that are critical to you.

Supply chain risk management is much more than mitigating risk in your supply network. The best risk mitigation is embedded within the comprehensive supply chain risk management provided by The riskmethods Solution TM. By using artificial intelligence, The riskmethods Solution helps organizations monitor, identify, assess, and mitigate risk. Benefits include competitive advantage from cost avoidance, business continuity, compliance, and stakeholder trust, whether employees, business partners or investors.

Good risk management relies on delivering the right information to the right people at the right time. Enterprises establish a risk-management culture, from the executive level through procurement and supply chain roles, and communicate these aims. The risk-aware organization factors in the cost of risk in every decision.

Table of Contents 1. What Is Risk Mitigation? Why Risk Mitigation Is Important 3. What Are Risk Mitigation Strategies? What's in a Risk Mitigation Plan? How to Mitigate Risk with The riskmethods Solution. Why Risk Mitigation Is Important Ignoring risk factors is not an effective strategy, nor does it make risk go away. This allows you to: Collect your key evaluation criteria in one place Rate business partners, facility locations, or transportation hubs based on indicators within different categories of risk, such as natural hazards or compliance risk Assign weights to the categories See at a glance where the greatest threats exist.