Consulting Journal: Bid management - Some risk considerations

Bid management: Some risk considerations

by David Blakey

Here are some things to consider before you look at risks.

[Monday 20 January 2003]

The management of risk is as important as the management of budget during bid management. This article will describe why this is and will then provide an outline of risk management within bid management.

Importance

There are two areas in which you need to use budget management and risk management. These are the bid itself and the subsequent service provision. On the bid, you need to manage the risks that may stop the bid from proceeding. On the following work, you need to identify and analyze the risks that may reduce the provider's margins.

There are differences between budget management and risk management on a bid. You can identify, analyze and manage the budget and risks for the bid from the beginning of the bid. Indeed, with a full bid strategy in place, you can identify many of the budget and risks issues before a bid even begins. Although you can identify the budget for the subsequent work early in the bid process, its management depends upon the contract negotiations that will occur late in the bid process. You should be able to identify and analyze most risks to the subsequent work early in the bid process. Not only that, but you can usually plan their management early, too. You may even be able to manage some of them within the bid process.

Here are the four areas.

Urgency
	Bid	Work
Budget	Identify: early. Analyze: early. Manage: early.	Identify: early. Analyze: early. Manage: late.
Risk	Identify: early. Analyze: early. Manage: early.	Identify: early. Analyze: mainly early. Manage: some early.

You should aim to do as much work in the lower-right quadrant as you can during the early stages of bid process. Similarly, you should plan to move most budget management planning to late in the bid.

We can now look at how critical each of these areas is.

Criticality
	Bid	Work
Budget	Low	High
Risk	Medium	High

The management of the budget for the bid itself is usually not critical to completion of the bid because it can be easily managed. In many cases, you will manage only internal people and resources; there may not be any ‘real’ costs. Even if the budget for the bid does over-run, this may not be critical if it allows the bidder to win work that is very important for its future growth and profitability.

Similarly, the management of risk on the bid usually has a medium level of criticality. Most risks on the bid will be small in terms of the work that can be won. You must still identify, analyze and manage risks to the bid, as a large risk may emerge. Some risks during the bid process may be ‘show-stoppers’.

We can now calculate the priority that each aspect needs, based on its urgency and criticality.

Priority
	Bid	Work
Budget	Low	Medium
Risk	Medium	High

As the risks to the bid are more urgent than the budget for the subsequent work, the order of tasks should be:

risks to the work;
risk to the bid;
budget for the work; and
budget for the bid.

Some of these priorities may not seem intuitive to you. This is, however, the usual order. You should, of course, look at each bid individually, as these priorities can change. Usually, though, you should deal with the risks to both the work and the bid before you deal with the budgets for them.

Risks

We have established that your usual best course of action is to deal with the risks to the work and to the bid as soon as possible. We can now look at the nature of those risks.

There are nine possible actions that you may be able to take with a risk.

Avoid	You can avoid the risk entirely through some action. The risk event may still occur, but it will not affect you. eg, the bidder's network will fail. You can avoid this risk by not using the network at all. Risks that can be avoided are rare in the bid process.
Eliminate	You can stop the risk event from occurring. The risk probability will be zero. eg, there will be a shortage of supplies for the printers. You can eliminate this risk by having a separate stock of paper and cartridges specifically for the bid.
Reduce	You can reduce the probability of the risk occuring. The risk probability will not be zero, although the risk exposure be reduced. eg, a courier will not be able to deliver your bid documents. You can reduce this risk by having a detailed plan for delivery of the bid documents.
Mitigate	You can reduce the impact of the risk if it occurs. The impact is unlikely to reach zero, but it will be substantially reduced, as will the risk exposure. eg, power may fail while you are printing the bid documents. You can mitigate this risk by planning so that the printing is not all done in a rush with little time to spare. This action can be combined with reduction actions to reduce the risk exposure.
Plan for contingencies	You can prepare plans that you can use if the risk occurs. eg, power may fail while you are printing the bid documents. As well as mitigating this risk, you can prepare a contingency plan for obtaining power. Contingency planning is useful when you have applied reduction and mitigation measures and there is still a ssubstantial risk exposure.
Monitor	You can just monitor a risk and take action if its probability or impact increases. eg, the purchaser may withdraw the bid. You can prepare some plans for this, but it is useful to monitor whether it is likely. Monitoring is useful for risk that have a high impact and a very low probability at the start.
Review	You can review the risk regularly to predict whether its probability or impact is likely to change. eg, the bidder's network will fail. You may not been able to avoid using the network entirely. One reason may be that the cost of doing so is too high in relation to the risk exposure. You can still review the risk from time to time, as events may change its proability or impact. If changes are being made to the network, this may increase the probability of a failure. Risk reviews are useful for making sure that a risk with a high impact and low probability continues to have a low probability and that a risk with a high exposure and a high cost of management continues to have a high expsoure.
Accept	You can accept the exposure of a risk. eg, a supplier may cease trading. If this happens after you have submitted your bid documents, then you may have to accept the costs of finding a new supplier. Risk acceptance is useful for risks have have a low to medium probability and a low impact. Even if they do occur, they will not present much exposure. You should, of course, make sure that you do not have so many risks that you will accept that having to accept them all will present a significant total exposure.
Ignore	You can ignore a risk. I present this to you because it is an option. I do not recommend that you ignore any risk.

There are eight practical individual measures that you can take for a risk. Some of them can be combined.

Some of them apply more to the bid than to the subsequent work.

Risk measures
	Bid	Work
Avoidance	Unlikely	Unlikely
Elimination	Possible	Possible
Reduction	Probable	Probable
Mitigation	Likely	Likely
Contingency	Possible	Likely
Monitoring	Unlikely	Probable
Reviewing	Unlikely	Likely
Accept	Probable	Unlikely

This is only a guide, based upon my own experience. It does indicate that there can be substantial differences between the management of risk during the bid and after it. If, as I have suggested, you analyze and manage the risk to the work and then do the same for the risks to the bid, you may have to change your approach.

I believe that your work on managing risks to the work will involve mainly mitigation, contingency planning and reviewing, with some reduction and monitoring, and perhaps some elimination. Managing the risk to the bid will involve mainly mitigation, with some reduction and acceptance, and perhaps some elimination and contingency planning.

Candidate risk measures
	Bid	Work
Likely	Mitigation	Mitigation Contingency Reviewing
Probable	Reduction Acceptance	Reduction Monitoring
Possible	Elimination Contingency	Elimination

You should avoid trying to combine the two analyses. You should also avoid establishing a pattern for analyzing the risks to the work that you will continue in your analysis of the risks to the bid.

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