Risk Management: Risk vs. Uncertainty In a Project

An important part of the project management process is to also manage any risks associated with that particular project.  In doing so, the project has a much better chance to be successful if anything does happen.  The four main steps in risk management are:

1. Risk Identification

2. Risk Assessment

3. Risk Response Development

4. Risk Response Control

 In following these steps carefully, it allows any project manager or team to identify all potential risks, how they might affect the project, and then how to respond to them and to maintain this response level throughout the project.  Recently there was an article published in Forbes about risk management as it pertains to financial risk which explained the difference between mitigating risk and having complete uncertainty about an event.  Although the article is focused on financial situations, it seems it could potentially apply to project management as well.

The article goes on to say that there is a difference between risk and uncertainty.  Risk is used to define cases of known probability.  For example, McDonald’s most likely understands the probability a person will slip and fall in one of their locations for every million visits to a store.  This would be risk; a known probability which is something they can mitigate.  Uncertainty on the other hand is when the probability of an event is not known at all.  In some cases, companies will treat uncertainty by saying there is an X% chance of an event happening, essentially guessing about the level of that chance.  Complete uncertainty however is when “you don’t know what you don’t know.”  It’s the situation when a company hasn’t even thought of an event in the first place, and so cannot manage it in any way.  These uncertainties are called Black Swans.  The article concludes by explaining that companies ought to have contingency plans that will help to offset any Black Swans.  Again, they are not predictable, but can be minimized by generally planning to have “a Plan B” for this type of situation.

Even though the article’s ideas are all based on economics and finance in the business world, is does seem possible that the same approach can (and maybe should be) used for project management as well.  Matrices are typically created for a project to manage risk, measure how much of an effect those risks will have, and how to deploy a contingency if they happen.  In using the theory explained in the article, these matrices are really only taking into considering the known probabilities of those events happening.  It doesn’t account for the potential of Black Swans, which could wreak more havoc on a project if they occur.

Do you think there should be contingency plans built into projects for the unknown?  Is there a way to include some general safeguards outside of a FMEA plan to really minimize risk AND uncertainy?



Forbes: Uncertainty and Risk Management: What to Do About Black Swans?


9 thoughts on “Risk Management: Risk vs. Uncertainty In a Project

  1. Very interesting points. I really believe that contingency plans should address the prospects for the unknown/unlikely to occur. Natural disasters, terrorist attacks, major financial crises etc. have all occurred in recent times and a lot of organizations are not prepared to deal with them. It is impossible to predict when or where these events will occur, especially as the probability of occurring is low. However, organizations need to do a better job of taking the unlikely into consideration as they focus all too much on the obvious risks or threats. By having this additional foresight, they could save themselves significant time and money in the future should something happen. If nothing does happen, then they can promote the fact they have a comprehensive risk management plan in place, thus enhancing the positive perception of the firm.

  2. Contingency plan definitely important for any project to alleviating worry and risk, the unknown and unexpected things will happen. What if the contingency plan is not good enough, do we need to come up with the Plan C? I think your article offers a good step-by-step formula for writing a risk management plan that will help project to succeed. I think it is easier to identify and rank the risk. The real challenge is how to avoid the risk, reduce the damage of the risk when it does occur, or transfer the risk elsewhere. More importantly, for each risk identified, you will need to determine how to deal with it when it occur.

  3. Your article explains clearly the difference between risk and uncertainty. I think it is very important to plan for unknown contingencies. All companies know to plan for known contingencies, but they should also set aside funds for unknown contingencies which they may be faced with when they are not prepared for it. I agree that the same concept applies to project management too. In fact, the example that comes to mind is the team from the previous quarter who had a great idea for raising funds for Autism, but did not plan for an unknown contingency which resulted in them not being able to raise the money that they planned on. Planning and being prepared is the only way to minimize risks and uncertainties.

  4. Contingency plans are necessary for some but not all projects. I work on many projects that don’t require a contingency but did require risk identification and assessment. The project team would make the determination if the identified risks were great enough to warrant contingency plans. I think it is more important to take the outlined steps in managing risk in a project rather than jump to contingency plans.

  5. I agree that not every project requires a contingency plan. However, on larger projects a contingency plan should be a requirement. When I’m looking at new facilities I’ve learned that you always have to hope for the best, but for the worst. A good contingency plan saves a lot of time and money in the end and can keep you totally scrapping project. In our current fundraising group we’ve already talked about different scenarios and “what if” situations and how to combat them. If for example we have too many people or too few people we have to be ready and know what to do in this case.

  6. Interesting topic. On one hand, implementing contingency plan besides standard risk management and applying financial conservatism may be useful in some projects, especially long term ones. On the other hand, unnecessary carefulness and caution may result in overprotection of the project resources, which at the end may turn the whole goal to be unsatisfactory. In my opinion, sometimes it is worth to take risk. It may actually bring great results. At the end it comes down to answering a simple question. What benefits the contingency plan may bring for the project, if any?

  7. Great topic!!! Risk is always at the top of our company’s list for project management. I’m not sure if I agree with the definition because if you know something is going to happen, it’s an issue and not a risk which requires mitigation as well. Risks are unrealized scenarios in which we don’t know if they will occur or not. Yes, I believe risks need a contingency plan if the probability is high enough. That threshold needs to be determined by the impact itself of the risk happening.

  8. I would strongly argue that contingency plans should be definitely be addressed for the unknown, especially in the age of technology. Take the recent Target credit-card breach and all the data that was stolen. When you have several millions of loyal customers who entrust your business with their personal information I’d hope you have a plan B. So yes I believe that contingency plan is definitely required.

  9. A plan B is necessary for any project in order to minimize the damages from risks that have already been identified. On the other hand, I am not so sure what we can do about the uncertainties. As you said, “you don’t know what you don’t know.” In my opinion, the best way to react an uncertainty would be knowing the members within the project and appoint the one you think would be best to handle the situation when it comes.

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