Adding performance and strategy to risk management
To meet VanRoekel's challenge, government must change the way it thinks about risk.
Federal CIO Steven VanRoekel has issued a challenge: To "use IT as a strategic asset and thereby fundamentally improve the way government does business."
Improving the way government does business boils down to how government makes decisions, and risk management decision-making is an area ripe with opportunity for this. This article puts forth a framework toward evolving risk management – an approach that aligns risk management with performance and strategy objectives.
The mainstream approach to managing risk currently focuses on maintaining a risk register based on risk probability and impact. Multiplying probability and impact gives a resulting "risk rating." Risks with the highest rating rise to the top. While insightful, this approach falls short on providing information needed for allocating scarce resources in a manner that maximizes ROI and best aligns to strategy and performance objectives.
To fill this gap, a variable for "complexity"-- a measure reflecting the unknowns of the solution and/or coordination challenges of addressing the risk -- is critical, and studies indicate that it is in short supply.
Bent Flyvbjerg and Alexander Budzier of Oxford University's Saïd Business School, examined 1,471 IT projects (92 percent were public agencies and 83 percent were U.S.-based) comparing their budgets and estimated performance benefits with the actual costs and results. The findings: The average overrun was 27 percent—and one in six projects was a black swan, with a cost overrun of 200 percent, on average, and a schedule overrun of almost 70 percent.
To meet VanRoekel's challenge of using IT strategically and improving the way government does business, decision-making processes much evolve and improve to prevent these overruns and black swans.
"Complexity" clearly means that unknowns and coordination challenges do exist. Through clear identification, these challenges can be addressed and managed with the aim of reducing complexity. Examples of complexities include understanding what the engineering solution needs to be or getting the right resources on the team – not easy tasks.
A relatively simple way to begin applying the complexity variable to your current risk management tool set is to establish a 2 by 2 matrix with "Risk Rating" [the product of risk probability and impact (note: impact should include best estimate solution cost)] on one axis and "Complexity" on the other. Together, Risk Rating and Complexity provide a more robust, transparent framework for making decisions in alignment with performance and strategic objectives. An overview of the four strategic segments created by the 2 by 2 matrix is shown below:
| Strategic Segment | ROI Confidence | Segment Notes |
|---|---|---|
| Medium to High Risk, Low to Medium Complexity | Relative confidence due to low to medium solution unknowns and / or coordination challenges. | This is typically known as the "low hanging fruit" or "quick wins" segment. |
| Low to Medium Risk, Low to Medium Complexity | Relative confidence due to low to medium solution unknowns and / or coordination challenges. | Due to the low to medium risk rating, this segment raises the question of if scarce resources would be optimized. The answer depends on strategy and performance objectives. |
| Medium to High Risk, Medium to High Complexity | Relatively low confidence due to medium to high solution unknowns and/or coordination challenges. | For these medium to high risks, prepare to allocate resources to match the medium to high complexity. If possible, you may want to take effort to reduce complexity. |
| Low to Medium Risk, Medium to High Complexity | Relatively low confidence due to medium to high solution unknowns and/or coordination challenges. | Due to the low to medium risk rating and medium to high complexity, ask yourself if scarce resources would be optimized. The answer depends on strategy and performance objectives; if possible, you may want to try to reduce complexity. |
| Click here for an image of these categories in matrix form | ||
In managing risk to match performance and strategy objectives, decision makers need not focus solely on one strategic segment versus another. Rather, this evolved risk management framework provides information for making decisions aligned with the specific objectives, risk philosophy, applicable mandates, and budget of your organization. Particularly in an era of never-before-seen budget challenges and security attacks, improving the approach to risk management is needed now more than ever.
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