Risk, it appears, is the elephant in the room when it comes to IT value. Often, we forget about or gloss over risk when talking about IT value. This 400 pound gorilla can pour water on the best laid out value plans. Arguably, it is the most important consideration in the IT value equation.
Now that we have all the corny metaphors out of the way, let us take a closer look at the role risk plays in the IT value equation.
What is risk?
Any initiative, no matter what the domain or the objective, has potential hurdles the team must overcome. The probability of not being able to overcome one or more of these hurdles is risk.
Risk and probability are intertwined and inseparable. The higher the probability of the hurdle(s) getting the better of us, the higher the risk in the adventure we wish to embark upon.
IT initiatives are no different. There is always the probability of failure – introduced by various hurdles we will discuss in this article – that must be factored in to calculate the “real” value of an initiative. In the least, risk should dampen our “youthful exuberance” about the potential of success and more appropriately, put us on guard to take measure to mitigate the risk of failure.
What are the types of risks?
There are as many risks as the facets of an initiative, or perhaps more. Listing them or claiming to factor them all in a couple of pages is fundamentally disrespecting the discipline of risk management. There are volumes written on the topic and an inordinate amount of trees destroyed documenting the various risks and their mitigation techniques.
In this article, we will focus on four of the more pronounced and universal risks.
- Functional Risk
- Process Risk
- Organizational Risk
- Technology Risk
Remember the three dimensions of IT value? If not, please refer to the first article in this series.
To recap, one of the dimensions of IT value is process coverage i.e. automating the processes that deliver the most value to the organization. What if you picked the wrong processes to focus on? What if you got the process details wrong?
These two questions represent functional risk – the probability of spending time and energy on the wrong endeavor!
An initiative follows a process to accomplish its objective – from inception to implementation and operation. The team’s mastery of this process is what introduces the risk:
- Is this a complex initiative?
- Is this type of initiative new to the world i.e. leading edge?
- Is it new to the organization?
- Is the team new to this type of initiative?
Hopefully, you get the idea. There is a learning curve and while you are learning, you are making mistakes – there exists a probability of failure. That as you may recall is the definition of risk.
Every organization, i.e. people and structure, has “issues.” Can these issues pose hurdles to the initiative and introduce the probability of failure?
- Is the project is executed by the wrong department?
- Is there lack of cooperation between departments?
- Are there people actively engaged in sabotaging the effort?
These organizational dynamics introduce a risk that must be acknowledged and factored in the planning. One must actively work toward mitigating this risk because it is the most potent of all risks as it is the hardest to overcome.
Did we pick the wrong technology platform? Is this a bleeding edge technology? Is this technology new to the organization? Is it new to the team?
Again, whether it is the selection or the learning curve of the team, technology introduces risks in an initiative that must be mitigated.
How do we factor in risk?
Does risk adjust or rationalize IT value or does it increase costs?
Well, it depends!
There are four ways to factor in risk in the IT value equation:
- Introduce a separate risk dimension
- Reduce the amount of “value” created using a risk factor
- Increase the cost of the initiative factoring in the mitigation cost
- Increase the internal hurdle rate factoring in the risk probability
All of them should lead to the same conclusion if the same risk factors are applied. However, there is a difference in our ability to monitor and manage risk. If we chose to bury risk in the other factors of the equation, then we might lose the ability to see where the risk is originating and take mitigation steps. Over time, it also hampers our ability to see “known” risks and embed the learning from adventures past.
Consequently, I favor keeping risk as a separate dimension in the IT Value equation.
Follow the Series:
- Part I: A Framework for IT Value
- Part II: A Framework for IT Value
In Part 1, we lay the foundation for a discussion on IT Value. This week, we look at specific areas where IT creates value.
- Part III: A Framework for IT Value
In Part 2, we focused on revenues. This week, we look at the costs in the IT value equation.
- Part IV: A Framework For IT Value
In Part 3, we discussed the cost dimension of IT Value. This week, we will discuss the time to market dimension.
- Part V: A Framework for IT Value
In Part 4, we discussed the time to market dimension of IT Value. This week, we will discuss the quality dimension.
- Part VI: A Framework for IT Value
In Part 5, we focused on quality and its impact on IT Value. This week, we will take a look at productivity and its impact on IT Value
- Part VII: A Framework for IT Value
In Part 6, we focused on productivity and its impact on IT Value. This week, we will take a look at customer satisfaction and its impact on IT Value
- Part VIII: A Framework for IT Value (Risk Dimension)
In Part 7, we discussed customer satisfaction. This week we will look at the risk dimension of IT Value.
Sourabh Hajela is a management consultant and trainer with over 20 years of experience creating shareholder value for his Fortune 50 clients. His consulting practice is focused on IT strategy, alignment and ROI. For more information, please visit http://www.startsmarts.com/.