In Risk Management, there are three major categories of risk:
- Known knowns: these are risks that can be identified at the outset of a project and the outcome of which can be more or less reliably predicted. Rising labor and material costs are typical example of such risks.
- Known unknowns: the risks that can be identified, but the outcome of which may not be initially clear. For example, dealing with vendors is such a risk for vendors do not always deliver on what they promise.
- Unknown unknowns: risks that can’t be foreseen. Major accidents, natural and man-made cataclysms fall into this category. Remember Donald Rumsfeld’s famous: “Stuff happens?”
The scandalous cost overrun plaguing the organization of the 2014 Sochi Winter Olympic Games seems to warrant introducing yet another risk category: unknown knows, the risks that can’t be precisely identified due to their multiplicity, but whose gross negative impact on the project appears quite certain.
Let me elaborate.
When managing a project, project managers have to balance a number of competing project constraints, of which the most important are time (schedule), cost (budget) and scope/quality, a concept widely knows as the Triple Constraint Model. Should one of these factors change, at least one another will be affected too. For example, if the availability of funds becomes problematic, achieving planned deadlines would no more be possible. In addition, product quality may suffer. Conversely, slipping deadlines could be somewhat recovered by adding more resources, if the funds are available.
These simple relations don’t seem to work in Russia. Take, for example, one of the country’s recent megaprojects, the annual meeting of Asia-Pacific Economic Cooperation (APEC) countries held in Vladivostok, last September. The total price tag for the APEC summit was $20 billion, more than twice than had been originally budgeted. Yet, by the beginning of the summit, only a third of planned construction projects had been finished. Moreover, the quality of construction was extremely poor: a section of a $1 billion road collapsed three months in advance of the summit, and the summit’s hallmark, the $1 billion bridge to the Russian Island (a.k.a “bridge to nowhere”), is already showing construction deficiencies. The widespread corruption of local officials–a risk factor known to everyone in Russia, yet never officially recognized (an unknown known, so to speak)–resulted in the situation when even the inflated budget had failed to ensure elementary quality of the product and its timely delivery.
The lesson of the APEC summit might be very relevant in case of the Sochi Games. The estimated price tag for the Sochi event is expected at the level of $50 billion, about five times above the initial budget. This makes the allocation of significant additional funds–those beyond the sheer need to finish the job–very unlikely. At the same time, many construction projects are behind schedule. Given the fixed date of the opening ceremony, the organizers will be forced to complete the construction by this date, no matter what. A simple logic suggests that when the deadlines are non-negotiable and funds to speed up the work are non-available, there is only one component remaining to be sacrificed: quality. And quality means safety.
Instead on focusing on “readiness” of the Sochi sports facilities, the IOC should insist on extensive audits of their quality. This may help prevent the embarrassment of future technical malfunctions. Or worse.