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Topics: Risk Management, Strategy
How Would You Address this Project Risk?

This isn’t a real-life problem I’m seeking to answer. However, I’m hoping to learn something by the way you choose to answer it.

Let’s say you’re working on a project that costs USD $10 million, and you have a risk with an incredibly low probability of occurrence, but a very high impact – the impact is so high that the risk is guaranteed to make your project fail if it is realized, resulting in the loss of the entire USD $10 million investment. However, it will cost USD $2 million dollars to implement a process that will significantly reduce this risk’s impact. Would you accept the risk since its odds of occurrence are so low? Or would you spend a very large sum to mitigate the risk?
Good arguments can be made for both choices, so I’m curious how you would respond and the reason behind your choice.
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Great question. My first thought is to determine if what the $2M pays for can be reusable in other projects or within the organization, i.e., a large security/infrastructure upgrade, BC/DR program, or other initiatives along those lines.

Since the extra investment isn't taking away the high-risk impact but just reducing it, I'll accept the risk under one condition. I'll break down the project results into more smaller results which will remain as added value to the business even if the original project has to be abandoned underway because the alleged risk manifested itself. That way the investment in the project so far is not lost. As a matter of fact, I do this with all my projects. I call this managing success instead of managing risks.

Depends on the critical nature of the project to the organization beyond the $10MM. If the realization of the risk could mean loss of life, imprisonment or the failure of the company, one could view the $2MM risk response as a costly insurance premium.


If it is only a financial loss, and the probability is extremely low, then I would manage the risk WITH sponsor endorsement of the strategy. There is no reason why the sponsor and/or senior stakeholders can't be involved in such a major risk process.

I would avoid the risk altogether. In other words, I would re-design and re-plan so that the risk no longer applies.

Risk resolution strategy of an Organisation plays a significant role in addressing such issues. If the contingency plan is effective in addressing the loss then $2mn can be saved

The first thing I would determine is whether there is any other impact if the risk materializes. If the impact is purely financial I risk mitigation strategy would be different that say there is a political impact as well. I would go with Sante on the financial impact only and the sponsor should definitely be involved in deciding the mitigation regardless of the impact.

in FMEA there's a concept of RPN (risk priority number). RPN = Severity x Occurrence x Detection. severity is the impact of risk, occurrence is the probability and detection is how early one can detect the risk. if probability is low but impact is high, it would most likely lead to a high RPN- then would be compared to RPNs of other risks and action taken accordingly

Your initial project is 10M$, to reduce risk you have to spend an other 2M$ (20% extra). You now have a 12M$ project with a risk of lower probability but same impact?
Would the business case still stand? many other questions.

In practice I would push for re-design, first action for that very high impact risk.

If the project is in the kind of developing a new product, the risk is the full value of the project. Total loss if product is not a success, it is a corporate choice to accept risk, sponsor should help you there.

Probability x Impact = Risk

Your scenario presents a risk score higher than the cost of the entire project. From my board, we shall invest a further 20% and go with the implementation of the risk mitigation process. Hopefully, we can all sleep without much worries.

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"If a man will begin with certainties, he shall end in doubts; but if he will be content to begin with doubts, he shall end in certainties."

- Francis Bacon