What is the TARA Framework?
The TARA Framework is a Tool that helps to Assess Risks and How to Manage them.
To do so, it proposes to classify Risks according to 2 variables:
- The Probability of these Risks occurring.
- The Impact these Risks would have.
This model then defines 4 scenarios depending on whether these variables have High or Low values.
It’s name is an acronym for the Strategies proposed in each scenario:
- Transfer the Risk.
- Avoid the Risk.
- Reduce the Risk.
- Accept the Risk.
The Four Scenarios of the TARA Framework
1. Transfer Strategy: Different parties should Share the Risk.
- When the Probability is reduced, people are willing to share Risks.
2. Avoid Strategy: When Probability and Impact are High, Risk should be avoided.
- In these situations, you should not even analyze potential gains.
3. Reduce Strategy: To reduce exposure to the Risk and contain potential effects.
- In this scenario your main Goal is not ta have a large exposure to the Risk.
4. Accept Strategy: If the Impact and the Odds are low, you can Accept a Risk.
- In these scenarios, you should only worry about the Outcome, not Risks.
Before sharing some examples with you, we will give you some Tips on How to use the TARA Framework:
How to use the TARA Framework
All Risks can be mitigated in different ways.
- There is always a way to reduce exposure to Risk.
Avoid “Paralysis by Analysis”.
- Risks must be handled, but don’t let your Analysis paralyze your Actions.
When looking for Risk-sharing Partners, Highlight the low odds.
- Or How, by sharing the Risk, both of you would reduce your chances of failure.
Be disciplined and Don’t get obsessed with potential Gains.
- If your TARA Framework says to Avoid Risk, Avoid it or try to Reduce it.
Now, let’s see some examples:
TARA Framework examples
We’ll now analyze 4 examples that perfectly explain each scenario of the TARA Framework.
Electric Car - Transfer TARA Framework example
The Electric vehicle (either using batteries or Hydrogen Fuel cells) seems to be the next big thing…
…. Or at least, it seems…
And that “seems” is the problem.
Modifying a traditional manufacturing line to produce Electric Vehicles costs billions of dollars.
- The manufacturing process is very different.
What if finally the demand for the Electric Vehicle is not as great as expected in the long term?
- The probability seems to be reduced… But there is one probability.
That is why Car companies are sharing the costs of developing Batteries, Charging Stations, etc.
Currently there are different associations of Automobile Companies to develop electric vehicles together.
- Impact of Potential losses in case the Electric vehicle doesn’t take off: High.
- Probability that the Electric vehicle finally doesn’t take off at all: Low.
They are Transferring the Risk that the Demand for Electric Vehicles will not increase as much as expected.
- Or that it takes longer than expected.
Bitcoin - Avoid TARA Framework example
Tesla recently allowed its customers to pay with Bitcoin.
- They have had to modify their accounting to allow this payment method.
Is this a good idea for an average Business? No.
- The Probability of Bitcoin crashing is: High.
- The Impact this drop would have on your Business would be: High.
The TARA framework tells us to avoid allowing sales in Bitcoin.
Is there anything you could do to mitigate this Risk?
You could only allow a limited amount of sales in Bitcoin.
The Risk of Bitcoin crashing would remain intact but its Impact would diminish.
How many sales should you allow?
- You should develop a more detailed TARA Framework to find out.
Stocks - Reduce TARA Framework example
Now, let’s imagine that you have some savings (we hope you do).
- And, as you are an Amateur Investor, you keep half of your savings in Stocks.
Although you have generally chosen “good” stocks you have a pretty diverse portfolio.
- You hold Coca-Cola, but also small volatile companies.
- The Probability of these Stocks to fall is relatively High.
- The Impact this drop would cause to your Savings is: Low.
The TARA Framework tells you that you should Reduce your exposure to the Risk.
What do you do?
You sell your volatile Stocks and only keep the best ones; the solid Companies.
In this way, the Probability of falling is reduced and you can take the Risk.
A New Product - Accept TARA Framework example
Have you seen Tesla’s Cybertruck?
- It is a weird Electric SUV with an eccentric design.
What was Tesla thinking when they decided to launch that model?
Well, we imagine that, with that Linear Design, Stamping costs are Reduced.
- Curves are much more difficult to handle for a Press.
In addition, we imagine that the Interior, the Materials, the Batteries used… Are common with those of other Tesla models.
We believe it has been carefully designed to be cheap to produce but satisfying to ride.
- Being also, original.
Also, and most importantly, there are millions of Tesla fans who would buy any design proposed by Elon Musk.
- The Probability that the car is a failure is: Low.
- The Impact that this failure would cause on the company would be: Low.
According to the TARA Framework, Tesla should be not worried its Cybertruck.
Even if it fails, we are almost certain that the shared costs with other models would reduce its economic impact.