Developing Risk Mitigation Strategies. Assume that you are a project team member for a highly complex project based on a new technology that has never been directly proven in the marketplace. Further, you require the services of several subcontractors to complete the design and development of this project. Because you are facing severe penalties in the event the project is late to market, your boss has asked you and your project team to develop risk mitigation strategies to minimize your company's exposure. Discuss the types of risk that you are likely to encounter. How should your company deal with them (accept them, share them, transfer them, or minimize them)? Justify your answers by giving explanation to each risk and why. Below are explanations of the risks.

ACCEPT RISK: One option that a project team must always consider is whether the risk is sufficiently

strong that any action is warranted. Any number of risks of a relatively minor nature may be present

in a project as a matter of course. However, because the likelihood of their occurrence is so small or

the consequences of their impact are so minor, they may be judged acceptable and ignored. In this

case, the decision to ''do nothing'' is a reasoned calculation, not the result of inattention or incompetence.

Likewise, for many types of projects, certain risks are simply part of the equation and must

be factored in. For example, it has been estimated that the U.S. recording industry spends millions

every year in developing, producing, and promoting new recording artists, knowing full well that

of the thousands of albums produced every year, less than 5/o are profitable.10 Likewise, Chapter 3

detailed the extraordinary lengths that pharmaceutical manufacturers must go to and the high percentage

of failures they accept in order to get a small percentage of commercially successful drugs

to the marketplace. Hence, a high degree of commercial risk is embedded in the systems themselves

and must be accepted to operate in certain industries.

MINIMIZE RISK: Strategies to minimize risk are the next option. Consider the challenges that Boeing

Corporation faces in developing new airframes, such as the newly introduced 787 model. Each

aircraft contains millions of individual parts, most of which must be acquired from vendors. Further,

Boeing has been experimenting with the use of composite materials instead of aluminum throughout

the airframe. The risks to Boeing in the event of faulty parts leading to a catastrophic failure are

huge. For example, several early flights were plagued by meltdowns in the aircraft's lithium ion

batteries, manufactured in Japan by GS Yuasa. Consequently, the process of selecting and ensuring

quality performance from vendors is a challenge that Boeing takes extremely seriously. One method

Boeing employs for minimizing risk in vendor quality is to insist that all significant vendors maintain

continuous direct contact with Boeing quality assessment teams. Also, in considering a new

potential vendor Boeing insists upon the right to intervene in the vendor's production process to

ensure that the resulting quality of all supplier parts meets its exacting standards. Because Boeing

cannot produce all the myriad parts needed to fabricate an aircraft, it seeks to minimize the resultant

risk by adopting strategies that allow it to directly affect the production processes of its suppliers.

SHARE RISK: Risk may be allocated proportionately among multiple members of the project. Two

examples of risk sharing include the research and development done through the European Space

Agency (ESA) and the Airbus consortium. Due to tremendous barriers to entry, no one country

in the European Union has the capital resources and technical skills to undertake the development

of the Ariane rocket for satellite delivery or the creation of a new airframe to compete with

Boeing in the commercial aircraft industry. ESA and Airbus partners from several countries have

jointly pooled their resources and at the same time agreed to jointly share the risk inherent in these

ventures.

In addition to partnerships that pool project risk, ameliorating risk through sharing can be

achieved contractually. Many project organizations create relationships with suppliers and customers

that include legal requirements for risk to be shared among those involved in the project.

Host countries of large industrial construction projects, such as petrochemical or power generation

facilities, have begun insisting on contracts that enforce a ''Build-Own-Operate-Transfer'' provision

for all project firms. The lead project organization is expected to build the plant and take initial

ownership of it until its operating capacity has been proven and all debugging occurs, before

finally transferring ownership to the client. In this way, the project firm and the host country agree

to jointly accept financial (risk) ownership of the project until the project has been completed and

its capabilities proven.

TRANSFER RISK: In some circumstances, when it is impossible to change the nature of the risk either

through elimination or minimization, it may be possible to shift the risks bound up in a project to

another party. This option, transferring risk to other parties when feasible, acknowledges that even

in the cases where a risk cannot be reduced, it may not have to be accepted by the project organization

if there is a reasonable means for passing the risk along. Companies use several methods

to transfer risks, depending upon their power relative to the client organizations and the types of

risks they face. For example, if our goal is to prevent excessive budget overruns, a good method for

directly transferring risk lies in developing fixed-price contracts. Fixed-price contracts establish a

firm, fixed price for the project upfront; should the project's budget begin to slip, the project organization

must bear the full cost of these overruns. Alternatively, if our goal is to ensure project functionality

(quality and performance), the concept of liquidated damages offers a way to transfer risk

through contracts. Liquidated damages represent project penalty clauses that kick in at mutually

agreed-on points in the project's development and implementation. A project organization installing

a new information system in a large utility may, for example, agree to a liquidated damages clause

should the system be inoperable after a certain date. Finally, insurance is a common option for some

organizations, particularly in the construction industry. Used as a risk mitigation tool, insurance

transfers the financial obligation to an insuring agency.