QUANTIFYING THE IMPACT OF PROPOSED RISK MITIGATION STRATEGIES: DOES THE COST TO MITIGATE EXCEED THE COST OF THE IMPACT?
The risk management process involves a concise, well defined framework for identification, analysis, and mitigation of identified program risks. In order to effectively manage risks, handling options must be established and mitigation actions defined. Typically, mitigation actions are identified and acted upon without consideration of the cost to implement these actions. Decisions of whether to assume, control, transfer, avoid, and watch the risk are likely taken with little regard to their potential effect on the risk. It is not uncommon for the cost to mitigate the risk to exceed the cost impact of the risk itself. Unless each risk’s impact and mitigation are quantified and translated into dollars, a determination cannot be made regarding handling options for the risk. (However, it is important to note that cost is only one factor that risk is assessed against; the mitigation may be worth the cost if it helps achieve a performance goal – or provides greater overall benefit – to the item at risk.)
The author proposes a methodology for quantification of risk impact and mitigation costs in order to examine viable handling options. The method associates a specific dollar value to each risk impact and mitigation strategy. These costs are then compared to each other, thus providing specific guidance on each risk. Depending on how the two variables compare, recommendations are made on appropriate handling options for the risk.
Quantifying the expected value of the cost of the risk’s impact will facilitate comparison with the cost of the risk mitigation strategy. It is important the method be employed on each risk individually – and not all risks cumulatively – since one risk’s cost impact could offset several other risks’ cost impacts. Assessing all risks together could result in mitigating risks that should otherwise be assumed.
Philip E. Beenhouwer
Mr. Philip Beenhouwer joined The MITRE Corporation, a Federally-Funded Research and Development Center (FFRDC) located in McLean, Virginia (USA), in 2002, and has more than fifteen years of professional U.S. Federal Government Information Technology experience in all aspects of cost analysis, cost estimating, and risk and uncertainty analyses supporting various military and civilian programs. He has supported the Department of Homeland Security (including the Border Patrol and the Transportation Security Administration), the Defense Logistics Agency, the Defense Distribution Center, the Federal Aviation Administration, the U.S. Census Bureau, and is currently supporting the Department of Health & Human Services.
Mr. Beenhouwer is a Certified Cost Estimator/Analyst (CCE/A) by the Society of Cost Estimating and Analysis (SCEA) and has an M.S. in Transportation Policy, Operations, and Logistics from George Mason University, a B.S. in Management Science from the State University of New York College at Cortland, and is a Level 3 certified Program Manager from the Defense Acquisition University.