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Posted by on Mar 13, 2013

Risk Tolerance

Roulette WheelWhat can I say about risk that hasn’t already been said?

Let’s look at one tiny aspect, risk tolerance. Risk tolerance is an organization’s or individual’s willingness to operate in an uncertain environment.

Individual Risk Tolerance

Each of us has risk tolerance we display every day.

Some personal individual risk tolerance examples are:

  • Do you leave the house early for an appointment just in case there is unexpected traffic?
  • Do you watch the weather channel to determine when to rise, or what route to take?
  • Do you drive the speed limit?
  • Do you lay out your clothes for the next day to avoid color issues, and increase your speed to departure?

What about as a Project Manager? In the Management Concepts Project Risk Management course you are asked to assess yourself against a traits checklist, by choosing the traits which agree with your style:

  • Taking risks makes good sense only in the absence of acceptable alternatives
  • I generally prefer stimulation over security
  • I have confidence in my ability to recover from my mistakes, no matter how big
  • I would commit to someone with unlimited potential, but limited experience to a key position over someone with limited potential, but more experience
  • Anything worth doing is worth doing less than perfectly
  • I believe opportunity generally knocks only once
  • It is better to ask for permission than to beg for forgiveness
  • Success in management is as much a matter of luck as ability
  • Given a choice, I would choose a $3,000 annual raise over a $10,000 bonus that I have a one-in-three chance of winning

The exercise is revealing in that it helps us to recognize our personal risk tolerance, and that others in the room can be different. There is no one right answer, as this is a personal trait, and tolerance is required.

I live in a small town in the Rocky Mountains which has casinos. Many people come to town each day in order to take a chance at winning big money. Most of them don’t, but they are willing to take the risk. I am not a gambler and don’t enjoy the sport, but there are many people who do.

Our risk tolerance is different and individual. Even the gamblers have different risk tolerances. Some will only play the penny or nickel machines while others play the dollar machines or sit at the card tables. There is risk aplenty for all tolerances!

Organizational Risk Tolerance

Organizations also have a risk tolerance.

There are many questions to ask in order to discern the organizational risk tolerance:

  • What’s the value of time to market for the product?
  • Are there regulatory penalties in non-compliance?
  • How much market share is at stake?
  • What reputation issues exist?
  • Can we afford to be right/wrong?
  • Will the budget support this risk?
  • What will the CEO (or any CXO) think?

Often there are values and decisions which exceed our personal experiences at work in organizational risk tolerance. Review the history of an IBM, Google, Tylenol, or Odwalla to see how risk tolerance can differ across organizations.

Project Risk Tolerance

The intersection of your risk tolerance and organizational risk tolerance happens at the project. Since you may not be able to understand the risk tolerance of the entire organization, you must start with the sponsor. The sponsor has asked for the project to be delivered, you have been selected as the project manager, the intersection is now established.

The magic is that your risk tolerance doesn’t count!

You must operate under the risk tolerance of the sponsor. Since the sponsor asked for the project, they own the risk, you manage the risk. This phenomenon is often difficult because I am not comfortable operating in your risk tolerance. It’s not how I would do things and I may have difficulty understanding directions which have a risk tolerance component. It is extremely important that you have a risk tolerance conversation with the sponsor so that all understand the management of risk on the project.

Risk tolerance; easy to define, difficult to manage correctly. Have the conversation!

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