Rethinking risk

Conventional wisdom on risk

Conventional wisdom says there are four ways to deal with risk: Accept it, Avoid it, Transfer it, or Reduce it.

Conventional wisdom also says that the best overall risk outcomes are achieved when each party accepts the portion of risk they are in the best position to manage.

The problem with conventional wisdom in design and construction is that risks can be very large, and can last for a very long time (long after the project is completed). All parties to a design/construction contract typically respond to this prospect by doing everything possible to avoid or transfer risk. It’s the hot potato nobody wants.

RISK is a 4-letter word

Professional associations and companies insuring their members are very active in narrowly defining the risks that professionals should accept. The professional indemnity insurance option is itself laden with a certain level of risk: If there is any claim, or even a potential claim, against a design professional, it must be reported to the insured’s insurer.

When that happens, the insurer swings into action to minimise the risk consequences, and gets it’s lawyers going on analysing the situation. The cost of this legal review is born buy the insured by way of a cover deductible – and the deductible amounts these days are often in the range of $50,000 – $250,000. Moreover, a claims history usually raises the premium, and often raises the deductible as well.

The consequences of transferring risk to an insurer, although necessary and (in most cases) required by professional associations, state government licensure agencies, and clients, strongly reinforces an “avoidance” mentality.

Why a Risk Rethink is necessary

Return to the 4 risk responses above. In the zeal to avoid or transfer risk, most design professionals ignore the opportunities in Acceptance and Reduction of risk.

This occurs, I think, because risk is assumed to be static; an unmalleable factor in the project equation; and the “4-letter word” mentality negates thoughtful consideration of how to significantly reduce both the severity and the likelihood of risk.

It follows that if design practices understand how they can take specific risks out of the equation by managing them to reduce the consequences, they can begin to accept some risks – giving them a competitive advantage with clients, and without exposing the firm to the risks of having to report claims.

The DesignRisk app does exactly that: It shows users how to understand and assess project risks, but more importantly how to respond to the risks in ways that significantly reduce the firms risk exposure.

See also: Risk Management 101

And: The Low-risk Practice