Risk Management

By Pat Buckna

Small business owners, faced with the pressures of maintaining adequate cash flow and sustaining growth, often find themselves entangled in projects that initially appeared to represent opportunities but ultimately failed to deliver anticipated revenues. Although there can be many reasons for this common situation, implementing some simple project management best practices, including more realistic estimating and effective risk management, can significantly improve the chance of success.
In my experience, business owners miss revenue generating opportunities by under-bidding on contracts. Companies, particularly those in a start-up position, under-price the value of goods or services. This can result from a fear of being non-competitive. But equally common is a failure to actually deliver what we think we can deliver. Here’s a simple example. Many people make their estimates on best-case or overly-optimistic scenarios, assuming little will go wrong or few surprises or changes will occur over the life of a project. I call this the ostrich approach, often resulting in the business owner absorbing the cost of additional work or changes, effectively reducing profits and cash flow.
Anyone who bids too low and accepts all the risk in a project can easily get lots of work, but often at a significant cost. Nearly every consultant I know has their own horror story about their first project where they ended up working for next to nothing. For me it was a database project undertaken for a non-profit agency. Unwisely I agreed to do the work for a fixed price, but I underestimated the complexity of the project, and the enormous number of changes the client requested once work got underway. Afraid of alienating the client, I agreed to all their changes, without any recourse to bill for the additional time I had to spend making the changes. As a result I made no profit on the project and instead of creating additional work opportunities, I ended up strapped for cash and frustrated. The client got a great deal, but more importantly I learned the importance of drawing tight boundaries around scope, and also to find ways of sharing the risks with. I also learned to not be afraid to tell a client that additional changes would cost them additional money. I also began to carefully track and measure my own performance against my estimates, learning where my own estimating strengths and weaknesses were . Since then, I never enter into these kinds of risky contract..

Risk management and contingency planning is another area that is poorly understood but in reality is quite simple to implement in our businesses. Most work we undertake has built-in risks – some related to the work itself, others connected to our ability to perform the work, still others resulting from our client or social conditions outside our control, all of which can adversely affect our projects. We need to identify those risks, rank them in terms of what impact they may have on our project, and determine the cost we will incur if those risks occur. More skilled business owner recognize that improving their ability to anticipate, understand, and estimate the cost of risk is essential to improving their bottom line and improving profitability.
My advice to any business owner, regardless of the size or maturity of your enterprise, is to invest some time and effort in learning how to implement better risk management and estimating practices.