Dr. Honghui Deng

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Dr. Honghui DengDr. Honghui Deng

Associate ProfessorAssociate ProfessorMIS DepartmentMIS Department

UNLVUNLV

MIS 746 IS Project Management

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Session 11. Managing project riskSession 11. Managing project risk

• Project risk management is the art and Project risk management is the art and science of science of identifyingidentifying, , assigningassigning, and , and respondingresponding to risk throughout the life of a to risk throughout the life of a project and in the best interests of project and in the best interests of meeting project objectivesmeeting project objectives

• Risk management is often overlooked, but Risk management is often overlooked, but it can help improve project success by it can help improve project success by helping select good projects, determining helping select good projects, determining project scope, and developing realistic project scope, and developing realistic estimatesestimates

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11. What is risk?11. What is risk?

• A dictionary definition of risk is “the A dictionary definition of risk is “the possibility of loss or injury”possibility of loss or injury”

• Project risk involves understanding Project risk involves understanding potential problems that might occur potential problems that might occur on the project and how they might on the project and how they might impede project successimpede project success

• Risk management is like a form of Risk management is like a form of insurance; it is an investment.insurance; it is an investment.

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11. Why take risks? 11. Why take risks?

OpportunitiesRisks

Try to balance risks and opportunities

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11. Risk utility11. Risk utility

• Risk utility or risk tolerance is the Risk utility or risk tolerance is the amount of satisfaction or pleasure amount of satisfaction or pleasure received from a potential payoffreceived from a potential payoff– Utility rises at a decreasing rate for a

person who is risk-averse– Those who are risk-seeking have a

higher tolerance for risk and their satisfaction increases when more payoff is at stake

– The risk neutral approach achieves a balance between risk and payoff

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11. Risk utility function11. Risk utility function

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11. Common source of risks for IT projects11. Common source of risks for IT projects

• Several studies show that IT projects Several studies show that IT projects share some common sources of riskshare some common sources of risk

• The Standish Group developed an IT The Standish Group developed an IT success potential scoring sheet based on success potential scoring sheet based on potential riskspotential risks

• McFarlan developed a risk questionnaire McFarlan developed a risk questionnaire to help assess riskto help assess risk

• Other broad categories of risk help Other broad categories of risk help identify potential risksidentify potential risks

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11. McFarlan’s risk questionnaire11. McFarlan’s risk questionnaire

1. What is the project estimate in calendar (elapsed) time?

( ) 12 months or less Low = 1 point

( ) 13 months to 24 months Medium = 2 points

( ) Over 24 months High = 3 points

2. What is the estimated number of person days for the system?

( ) 12 to 375 Low = 1 point

( ) 375 to 1875 Medium = 2 points

( ) 1875 to 3750 Medium = 3 points

( ) Over 3750 High = 4 points

3. Number of departments involved (excluding IT)

( ) One Low = 1 point

( ) Two Medium = 2 points

( ) Three or more High = 3 points

4. Is additional hardware required for the project?

( ) None Low = 0 points

( ) Central processor type change Low = 1 point

( ) Peripheral/storage device changes Low = 1

( ) Terminals Med = 2

( ) Change of platform, for example High = 3

PCs replacing mainframes

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11. Risk types11. Risk types

• Market riskMarket risk: Will the new product be useful to the : Will the new product be useful to the organization or marketable to others? Will users organization or marketable to others? Will users accept and use the product or service?accept and use the product or service?

• Financial riskFinancial risk: Can the organization afford to : Can the organization afford to undertake the project? Is this project the best undertake the project? Is this project the best way to use the company’s financial resources?way to use the company’s financial resources?

• Technology riskTechnology risk: Is the project technically : Is the project technically feasible? Could the technology be obsolete feasible? Could the technology be obsolete before a useful product can be produced?before a useful product can be produced?

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11. Technology risk11. Technology risk

David Anderson, a project manager for Kaman Sciences David Anderson, a project manager for Kaman Sciences Corp., shared his lessons learned from a project failure in Corp., shared his lessons learned from a project failure in an article for CIO Enterprise Magazine. After spending two an article for CIO Enterprise Magazine. After spending two years and several hundred thousand dollars on a project to years and several hundred thousand dollars on a project to provide new client-server based financial and human provide new client-server based financial and human resources information systems for their company, resources information systems for their company, Anderson and his team finally admitted they had a failure Anderson and his team finally admitted they had a failure on their hands. Anderson admitted that he was too on their hands. Anderson admitted that he was too enamored by using cutting edge technology and took a enamored by using cutting edge technology and took a high-risk approach on the project. He "ramrodded through" high-risk approach on the project. He "ramrodded through" what the project team was going to do, and he admitted what the project team was going to do, and he admitted that he was wrong. The company finally decided to switch that he was wrong. The company finally decided to switch to a more stable technology to meet the business needs of to a more stable technology to meet the business needs of the company.the company.

Hildebrand, Carol. “If At First You Don’t Succeed,” CIO Enterprise Magazine, April 15, Hildebrand, Carol. “If At First You Don’t Succeed,” CIO Enterprise Magazine, April 15, 111118111118

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11. What is project risk 11. What is project risk management?management?

• The goal of project risk management is to The goal of project risk management is to minimize potential risks while maximizing minimize potential risks while maximizing potential opportunities. Major processes potential opportunities. Major processes includeinclude– Risk identification: determining which risks are likely

to affect a project– Risk quantification: evaluating risks to assess the

range of possible project outcomes– Risk response development: taking steps to enhance

opportunities and developing responses to threats– Risk response control: responding to risks over the

course of the project

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11. Identifying risk11. Identifying risk

• Risk identification is the process of Risk identification is the process of understanding what potential understanding what potential unsatisfactory outcomes are unsatisfactory outcomes are associated with a particular projectassociated with a particular project

• Several risk identification tools Several risk identification tools include checklists, flowcharts, and include checklists, flowcharts, and interviewsinterviews

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11. Potential risk areas11. Potential risk areas

Knowledge Area Risk Conditions

Integration Inadequate planning; poor resource allocation; poor integrationmanagement; lack of post-project review

Scope Poor definition of scope or work packages; incomplete definitionof quality requirements; inadequate scope control

Time Errors in estimating time or resource availability; poor allocationand management of float; early release of competitive products

Cost Estimating errors; inadequate productivity, cost, change, orcontingency control; poor maintenance, security, purchasing, etc.

Quality Poor attitude toward quality; substandarddesign/materials/workmanship; inadequate quality assuranceprogram

Human Resources Poor conflict management; poor project organization anddefinition of responsibilities; absence of leadership

Communications Carelessness in planning or communicating; lack of consultationwith key stakeholders

Risk Ignoring risk; unclear assignment of risk; poor insurancemanagement

Procurement Unenforceable conditions or contract clauses; adversarial relations

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11. Quantifying risk11. Quantifying risk

• Risk quantification or risk analysis is the Risk quantification or risk analysis is the process of evaluating risks to assess the process of evaluating risks to assess the range of possible project outcomesrange of possible project outcomes

• Determine the risk’s probability of Determine the risk’s probability of occurrence and its impact to the project if occurrence and its impact to the project if the risk does occurthe risk does occur

• Risk quantification techniques include Risk quantification techniques include expected monetary value analysis, expected monetary value analysis, calculation of risk factors, PERT estimations, calculation of risk factors, PERT estimations, simulations, and expert judgmentsimulations, and expert judgment

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11. Expected Monetary Value11. Expected Monetary Value

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Bid the Best Project by utilizing EMV and your personal Bid the Best Project by utilizing EMV and your personal risk tolerancerisk tolerance

Project Project Chance of OutcomeChance of Outcome Estimated ProfitsEstimated Profits

Project 1Project 150%50%50%50%

$120,000$120,000-$50,000-$50,000

Project 2Project 230%30%40%40%30%30%

$100,000$100,000$50,000$50,000-$60,000-$60,000

Project 3Project 370%70%30%30%

$20,000$20,000-$5,000-$5,000

Project 4Project 4

30%30%30%30%20%20%20%20%

$40,000$40,000$30,000$30,000$20,000$20,000-$50,000-$50,000

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11. Simulation for quantifying risk11. Simulation for quantifying risk

McDonnell Aircraft Company used Monte Carlo simulation to help quantify risks on several advanced-design engineering projects. The National Aerospace Plan (NASP) project involved many risks. The purpose of this multi-billion dollar project was to design and develop a vehicle that could fly into space using a single-stage-to-orbit approach. A single-stage-to-orbit approach meant the vehicle would have to achieve a speed of Mach 25 (25 times the speed of sound) without a rocket booster. A team of engineers and business professionals worked together in the mid-11180s to develop a software model for estimating the time and cost of developing the NASP. This model was then linked with Monte Carlo simulation software to determine the sources of cost and schedule risk for the project. The results of the simulation were then used to determine how the company would invest its internal research and development funds. Although the NASP project was terminated, the resulting research has helped develop more advanced materials and propulsion systems used on many modern aircraft.

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11. Expert judgment11. Expert judgment

• Many organizations rely on the Many organizations rely on the intuitive feelings and past intuitive feelings and past experience of experts to help experience of experts to help identify potential project risksidentify potential project risks

• The Delphi method is a technique for The Delphi method is a technique for deriving a consensus among a panel deriving a consensus among a panel of experts to make predictions about of experts to make predictions about future developmentsfuture developments

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11. Response to risk11. Response to risk

• Risk avoidanceRisk avoidance: eliminating a : eliminating a specific threat or risk, usually by specific threat or risk, usually by eliminating its causeseliminating its causes

• Risk acceptanceRisk acceptance: accepting the : accepting the consequences should a risk occurconsequences should a risk occur

• Risk mitigationRisk mitigation: reducing the impact : reducing the impact of a risk event by reducing the of a risk event by reducing the probability of its occurrenceprobability of its occurrence

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11. Risk Mitigation Strategies11. Risk Mitigation Strategies

Technical Risks Cost Risks Schedule Risks

Emphasize team supportand avoid stand aloneproject structure

Increase the frequency ofproject monitoring


Increase project managerauthority

Use WBS and PERT/CPM Use WBS and PERT/CPM

Improve problem handlingand communication

Improve communication,project goals understandingand team support

Select the most experiencedproject manager


Increase project managerauthority

Use WBS and PERT/CPM

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11. Risk planning11. Risk planning

• A A risk management planrisk management plan documents the documents the procedures for managing risk throughout procedures for managing risk throughout the projectthe project

• Contingency plansContingency plans are predefined actions are predefined actions that the project team will take if an that the project team will take if an identified risk event occursidentified risk event occurs

• Contingency reservesContingency reserves are provisions held are provisions held by the project sponsor for possible by the project sponsor for possible changes in project scope or quality that changes in project scope or quality that can be used to mitigate cost and/or can be used to mitigate cost and/or schedule riskschedule risk

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11. Risk management questions11. Risk management questions

• Why is it important to take/not take this risk in Why is it important to take/not take this risk in relation to the project objectives?relation to the project objectives?

• What specifically is the risk and what are the risk What specifically is the risk and what are the risk mitigation deliverables?mitigation deliverables?

• How is the risk going to be mitigated? (What risk How is the risk going to be mitigated? (What risk mitigation approach is to be used?)mitigation approach is to be used?)

• Who are the individuals responsible for Who are the individuals responsible for implementing the risk management plan?implementing the risk management plan?

• When will the milestones associated with the When will the milestones associated with the mitigation approach occur?mitigation approach occur?

• How much is required in terms ofHow much is required in terms of resources to resources to mitigate risk?mitigate risk?

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11. Response to risks11. Response to risks

• Risk response control involves executing Risk response control involves executing the risk management processes and the the risk management processes and the risk management plan to respond to risk risk management plan to respond to risk eventsevents

• Risks must be monitored based on defined Risks must be monitored based on defined milestones and decisions made regarding milestones and decisions made regarding risks and mitigation strategiesrisks and mitigation strategies

• Sometimes workarounds or unplanned Sometimes workarounds or unplanned responses to risk events are needed when responses to risk events are needed when there are no contingency plansthere are no contingency plans

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11. Tracking risks11. Tracking risks

• Top 10 risk item tracking is a tool for Top 10 risk item tracking is a tool for maintaining an awareness of risk maintaining an awareness of risk throughout the life of a projectthroughout the life of a project

• Establish a periodic review of the top 10 Establish a periodic review of the top 10 project risk itemsproject risk items

• List the current ranking, previous ranking, List the current ranking, previous ranking, number of times the risk appears on the number of times the risk appears on the list over a period of time, and a summary of list over a period of time, and a summary of progress made in resolving the risk itemprogress made in resolving the risk item

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11. Example for risk tracking11. Example for risk tracking

Monthly Ranking

Risk Item This

Month

Last

Month

Number of Months

Risk Resolution Progress

Inadequate planning

1 2 4 Working on revising the entire project plan

Poor definition of scope

2 3 3 Holding meetings with project customer and sponsor to clarify scope

Absence of leadership

3 1 2 Just assigned a new project manager to lead the project after old one quit

Poor cost estimates

4 4 3 Revising cost estimates

Poor time estimates

5 5 3 Revising schedule estimates

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11. Tools for tracking risks11. Tools for tracking risks

• Databases can keep track of risksDatabases can keep track of risks• Spreadsheets can aid in tracking Spreadsheets can aid in tracking

and quantifying risksand quantifying risks• More sophisticated risk More sophisticated risk

management software helps management software helps develop models and uses develop models and uses simulation to analyze and respond simulation to analyze and respond to various project risksto various project risks

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11. Good project risk management 11. Good project risk management

• Unlike crisis management, good project Unlike crisis management, good project risk management often goes unnoticedrisk management often goes unnoticed

• Well-run projects appear to be almost Well-run projects appear to be almost effortless, but a lot of work goes into effortless, but a lot of work goes into running a project wellrunning a project well

• Project managers should strive to make Project managers should strive to make their jobs look easy to reflect the results their jobs look easy to reflect the results of well-run projectsof well-run projects

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Session 11. Managing project riskSession 11. Managing project risk

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11. Discussion questions 11. Discussion questions

• Can you avoid risks? Can you avoid risks? • What are common sources of risk for IT What are common sources of risk for IT

projects?projects?• How does spreadsheet help to quantify risk?How does spreadsheet help to quantify risk?• How does simulation help to quantify risk?How does simulation help to quantify risk?• What is the best way to plan for risks?What is the best way to plan for risks?• What is the difference between contingency What is the difference between contingency

plan and contingency reserve?plan and contingency reserve?

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• Which group of risks (internal, Which group of risks (internal, external) described in this chapter external) described in this chapter is more critical to an information is more critical to an information system project? Why? What is the system project? Why? What is the most critical risk for any most critical risk for any information system project?information system project?

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• Is user involvement important to Is user involvement important to risk management? Why?risk management? Why?

• Comment on sources of risk: Comment on sources of risk: – continued management support– top management style– alignment with organizational needs– user acceptance – shifting goals and objectives

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• Comment on sources of risk: Comment on sources of risk: – vendors– consultants– contract employees– market and change fluctuation– government regulation

• What are effective ways of avoiding the What are effective ways of avoiding the risk of losing internal talents to external risk of losing internal talents to external providers?providers?

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11. Exercise11. Exercise

Case AnalysisCase Analysis

• The Manchester United Soccer Tournament project team has The Manchester United Soccer Tournament project team has identified the following potential risks to their project:identified the following potential risks to their project:

• Referees failing to show up at designated games.Referees failing to show up at designated games.• Fighting between teams.Fighting between teams.• Pivotal error committed by a referee that determines the outcome Pivotal error committed by a referee that determines the outcome

of a game.of a game.• Abusive behavior along the sidelines by parents.Abusive behavior along the sidelines by parents.• Inadequate parking.Inadequate parking.• Not enough teams sign up for different age brackets.Not enough teams sign up for different age brackets.• Serious injury.Serious injury.• How would you recommend that they respond (i.e., avoid, accept How would you recommend that they respond (i.e., avoid, accept

…) to these risks and why?…) to these risks and why?

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11. Cont. Case on Risk Management11. Cont. Case on Risk Management--Below are typical responses to this question:Below are typical responses to this question:

Event Response Contingency

Referees fail to show up

Fighting

Error

Abusive parents

Inadequate parking

Not enough teams

Injury

Documents

Dr. Honghui Deng