Insurance as an Analogy to Risk Management

Insurance as an analogy to justify risk management costs

For organizations lacking standard practices in project portfolio and project management, risk management might seem like an unnecessary use of resources.  I’ve even heard some executives say that with insufficient resources to deliver the expected scope on all of their “critical” projects, how can they afford to have project teams “waste” effort on risk management activities.

For those of us that have come through the PM “school of hard knocks”, such statements might appear myopic if not downright idiotic.  However, this leadership perception of low value in this knowledge area often stems from poor implementation of risk management practices – an article I wrote a couple of years back highlights some of these issues.  Buried within that article was an analogy that might help you convince your executives of the benefits that value-based risk management can offer.

Ask the nay-saying executive whether they have purchased house insurance.

If they have a mortgage on your property, their lender will probably insist on coverage for at least the value of their loan.  However, once a mortgage is paid off, the home owner could elect to avoid insuring their house, but most people would likely still maintain this insurance over the duration of their home ownership.  If you ask the executive why they do this, they’d likely offer some variant on the following rationale: “to protect my investment from the unknown”.

Probing deeper, if you ask the same executive how much they spend on home insurance each year, and you multiply that by twenty years, you would likely come to a figure that is at least 2% of the original purchase price of the home.  Insurance is just an example of the transfer risk response approach.  If we added all the costs we incur to mitigate home risks, the 2% estimate would likely be significantly higher.

So, after having led the executive through this analogy, leave them with the question “You...