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Best Practices For Approaching Risk Management


Sergej is the CEO of Amasty, one of the leading Magento extension vendors building their products and services around customers’ needs.

I’m not one who enjoys taking risks. I don’t like gambling, I’m not a fan of extreme sports and I’ve never hitchhiked. Perhaps this is why I’m so passionate about risk management. As a practicing executive and project management trainer, I asked my colleagues and trainees how risk management works in their companies. The most popular answers were, “We budget 30% for risk,” and “Risk management is not feasible in our project.” 

In my opinion, both answers are exactly the same in terms of risk management. It doesn’t matter if you add a third to the time needed to complete a task if it’s not clear how that task is supposed to help you.

What’s wrong with risk management?

Throughout my findings, I observed that risk management was not in demand among many executives I spoke with because it is not easily understandable. I believe we often choose to focus on the most understandable, urgent and important tasks. How can something like a potential risk compete with a contrasting clear and specific problem? From my perspective, it only can if you keep data on completed projects. Then, you can ensure your reserves can support you during emergencies and key moments. I also suggest you try to revisit your approach to risk management.

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How? To get started, consider the acronym VUCA, which stands for volatility, uncertainty, complexity and ambiguity. This is something that is rather familiar to me, so let’s analyze these concepts and discuss how you can update your risk-management approach.

Volatility 

Until 2020, I had no experience with the term “lockdown.” More frequent examples of volatility are infrastructure failures and malfunctions, employee illnesses and layoffs. This type of volatility is often referred to as a “black swan.”

Since volatility cannot be predicted, I’ve found the best way to deal with it is through fostering resiliency in your company and ensuring your team is prepared. For example, perhaps you can involve several specialists in the technical details of a task. This could help ensure you finish the task on time, even if one of the specialists is dismissed or falls ill (which could otherwise slow down or block your project).

I also recommend having a redundant communication channel, as this can help make you less susceptible to main channel issues, and network architecture resilience has already become a de facto standard. Unfortunately, that’s what “black swans” are all about; they cannot be predicted, and creating redundancy everywhere might not be feasible. The reserve based on past project experience will help in such cases. 

Uncertainty

Uncertainty can include economic, geopolitical or environmental changes, as well as changes in your company and your competitors. We are surrounded by a large number of change signal sources, and without the right approach, they can turn into noise. Examples that have affected virtually every company are user data protection law, such as the GDPR or CCPA.

I recommend defining an information-gathering strategy to overcome uncertainty. Since it is impossible to know everything about everything, you must determine the most important channels of information for you and those responsible for them. With thousands of competitors, you are likely to have enough information about the 10 largest ones. The focus will also help with projects. Knowing your company’s goals will make it much easier to decide what to give up and what should not be sacrificed under any uncertain circumstances.

Complexity

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Complex situations refer to events that you can predict but are hard to manage because of the large number of interactions. Examples of complex solutions could include building a house, assembling an airplane or developing an inventory management system. There are many people involved in each of these projects, so there might be difficulties when interacting with them, as well as a mismatch between the required skills to complete them.

The best way to deal with complexity, as cliché as it might sound, is to simplify. If it is not clear who is responsible for what within a certain process, break it down into several smaller processes and define areas of responsibility. Large development estimates for an important component of the system? Ask to split it into several smaller blocks, or agree on milestones that will give implementation more certainty.

Ambiguity

Ambiguity is the most insidious type of uncertainty. It occurs when everything is so clear that it seems unnecessary to even spell out the result. Ambiguity loves abstractions such as “easy design,” “user-friendly interface” or “quick response.” I will call this ambiguity “conceptual.”

The second type of ambiguity I’ve observed is “situational.” There are many options for solving one problem, and often the solution depends on the specific performer. Ambiguity arises when several interested parties announce the problem and the need to solve it but do not state the expected result. 

The best way to deal with ambiguity is to capture expectations. A quick prototype interface, for example, will clarify ambiguity much more accurately than a thousand words. It is much easier to test the response rate in an experiment and agree on the acceptability of the resulting values than to argue about it when the project is complete.

The Takeaway

If someone were to ask me where to start in risk management, I would say the following: First, start with basic practices, build on the positive results and — only then — move on. Next, remember that risk management processes and tools can be helpful when they are understood and their utility is not questioned. Finally, understanding the nature of uncertainty makes it much easier to move from abstract intentions to planning concrete actions.


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