Managing Risks in ProjectsManaging Risks in Projects

Risk ConceptsRisk Concepts

The The LikelihoodLikelihood that some Problematical that some Problematical Event will OccurEvent will Occur

The The ImpactImpact of the Event if it does Occur of the Event if it does Occur Risk = f (Risk = f (likelihood, impactlikelihood, impact)) Project is considered Risky if at least One Project is considered Risky if at least One

Factor is largeFactor is large

Risk IdentificationRisk Identification Risk Tolerance is a Function of ExperienceRisk Tolerance is a Function of Experience

– PMPM– StakeholdersStakeholders

Risk of Risk of FailureFailure– ScheduleSchedule– BudgetBudget– Technical GoalsTechnical Goals

Risk of Risk of OpportunityOpportunity– RewardsRewards– SavingsSavings– BenefitsBenefits

Risk Identification (Continued)Risk Identification (Continued)

Ways to Identify Project RiskWays to Identify Project Risk– ChronologyChronology– Type of WorkType of Work

High RisksHigh Risks– ApproachApproach is New/Unusual is New/Unusual– TechnologyTechnology is New/Unusual is New/Unusual– StaffStaff needs Training in New Tasks/Skills needs Training in New Tasks/Skills– ProcessProcess using New Equipment, Systems or using New Equipment, Systems or

ProceduresProcedures

Sources of RiskSources of Risk

Any Factor of uncertain Probability which Any Factor of uncertain Probability which can affect the Outcome is of a Project is acan affect the Outcome is of a Project is a– Risk Source Risk Source – Risk HazardRisk Hazard

Sources of Risk (Continued)Sources of Risk (Continued)

Internal RisksInternal Risks– Market RiskMarket Risk

» Ill Defined Market or Customer needs and RequirementsIll Defined Market or Customer needs and Requirements

» Failure to Identify Changing Needs and RequirementsFailure to Identify Changing Needs and Requirements

» Failure to identify Newly Introduced Products by CompetitorsFailure to identify Newly Introduced Products by Competitors

– Technical RiskTechnical Risk» MaturityMaturity

» ComplexityComplexity

» QualityQuality

» Concurrency, or DependencyConcurrency, or Dependency

Sources of Risk (Continued)Sources of Risk (Continued)

External Risks, External Risks, – Market ConditionsMarket Conditions– Competitors’ ActionsCompetitors’ Actions– Government RegulationsGovernment Regulations– Interest RatesInterest Rates– Decisions by Sr. Mgmt or CustomerDecisions by Sr. Mgmt or Customer

» Budgets Budgets » StaffingStaffing» PrioritiesPriorities

Sources of Risk (Continued)Sources of Risk (Continued)

External Risks (Continued)External Risks (Continued)– Customer Needs and BehaviorCustomer Needs and Behavior– Supplier RelationsSupplier Relations– WeatherWeather– Labour TroublesLabour Troubles– Material or LaborMaterial or Labor– External Control by Customers or External Control by Customers or

SubcontractorsSubcontractors

Risk AssessmentRisk Assessment

Risk LikelihoodRisk Likelihood– Probability a Hazard or Risk Factor will MaterializeProbability a Hazard or Risk Factor will Materialize

– Numerical Value between 1.0 (Certain) and 0 Numerical Value between 1.0 (Certain) and 0 (Impossible)(Impossible)

– Qualitative RatingQualitative Rating» High Greater than 50%High Greater than 50%

» Medium 20 to 50%Medium 20 to 50%

» Low 20% or LessLow 20% or Less

– Composite Likelihood Factor (CLF)Composite Likelihood Factor (CLF)» Sum of Multiple, Independent Risk SourcesSum of Multiple, Independent Risk Sources

Risk Assessment(Continued)Risk Assessment(Continued)

Risk ImpactRisk Impact– What Happens if a Risk Hazard MaterializedWhat Happens if a Risk Hazard Materialized– Specified in Terms of Specified in Terms of

» Time Time » Cost Cost » Performance MeasuresPerformance Measures

– QualitativeQualitative» HighHigh» MediumMedium» LowLow

Risk Assessment(Continued)Risk Assessment(Continued)

Risk Impact (Continued)Risk Impact (Continued)– Numerical Measure Between 0 and 1.0Numerical Measure Between 0 and 1.0

» 0 not Serious0 not Serious

» 1.0 Catastrophic1.0 Catastrophic

Risk Assessment(Continued)Risk Assessment(Continued)

Risk ConsequenceRisk Consequence– Function or Likelihood and ImpactFunction or Likelihood and Impact– Can be Expressed as Numerical rating between Can be Expressed as Numerical rating between

0 and 1.00 and 1.0– Risk Consequence Rating (RCR)Risk Consequence Rating (RCR)

» RCR = CLF + CIF - CLF(CIF)RCR = CLF + CIF - CLF(CIF)

– Can be Expressed as an Expected Value or the Can be Expressed as an Expected Value or the Average Outcome for large TriesAverage Outcome for large Tries

» Risk Consequence = (Impact) x (Likelihood)Risk Consequence = (Impact) x (Likelihood)

Risk Assessment(Continued)Risk Assessment(Continued)

PERTPERT– Incorporates Risk through the three Estimates for Each Incorporates Risk through the three Estimates for Each

Project ActivityProject Activity» a, Optimistica, Optimistic» m, Most Likelym, Most Likely» b, Pessimisticb, Pessimistic

– Use a larger value of b to account for Use a larger value of b to account for Greater RiskGreater Risk– This Produces a larger Variance for Project Completion This Produces a larger Variance for Project Completion

Time (Add buffer Time to Project)Time (Add buffer Time to Project)– PERT Provides a Way for Measuring the Consequences PERT Provides a Way for Measuring the Consequences

of Risk on Project Completion Timesof Risk on Project Completion Times

Risk Assessment(Continued)Risk Assessment(Continued)

Risk PriorityRisk Priority– PM must Define a Risk Tolerance LevelPM must Define a Risk Tolerance Level– Consider Risks at that Level and HigherConsider Risks at that Level and Higher– Team Members Review all these Tasks and Team Members Review all these Tasks and

Make RecommendationsMake Recommendations– In Complex Systems Joint Failures Can OccurIn Complex Systems Joint Failures Can Occur

Risk Response Planning Risk Response Planning How to Deal with the ProblemHow to Deal with the Problem

Transfer the RiskTransfer the Risk Avoid RiskAvoid Risk Reduce RiskReduce Risk Contingency PlanningContingency Planning Accept Risk (Do Nothing)Accept Risk (Do Nothing)

Risk Likelihood, Risk Impact, and Expected Risk Likelihood, Risk Impact, and Expected Value ConsequencesValue Consequences

Avoid RiskAvoid Risk

Alter the Initial Project ConceptAlter the Initial Project Concept– Eliminate Risky ActivitiesEliminate Risky Activities

– Minimize System ComplexityMinimize System Complexity

– Reduce End-Item Quality RequirementsReduce End-Item Quality Requirements

Change ContractorsChange Contractors Incorporate RedundanciesIncorporate Redundancies Change Safety ProceduresChange Safety Procedures Better to Reduce Risk to Acceptable Level Than Better to Reduce Risk to Acceptable Level Than

Eliminate Payoff OpportunityEliminate Payoff Opportunity

Reduce RiskReduce RiskTechnical PerformanceTechnical Performance

Reduce System Complexity to a MinimumReduce System Complexity to a Minimum– Reorganize TasksReorganize Tasks– End Item DesignEnd Item Design– Decouple ActivitiesDecouple Activities

» Contains Failure to one ActivityContains Failure to one Activity

Use Design MarginsUse Design Margins– A Management ReserveA Management Reserve– Design Value is Greater than Design Design Value is Greater than Design

RequirementRequirement

Reduce RiskReduce RiskMeeting SchedulesMeeting Schedules

Create Master Project ScheduleCreate Master Project Schedule Schedule Risky Tasks Schedule Risky Tasks EarlyEarly to Allow Time to Allow Time

to Recoverto Recover Focus on Critical and Near-Critical Focus on Critical and Near-Critical

ActivitiesActivities– PathPath– RiskRisk

Best People on Time-Critical TasksBest People on Time-Critical Tasks

Reduce RiskReduce RiskMeeting Schedules (Continued)Meeting Schedules (Continued)

Incentives for OTIncentives for OT– Compensated SalaryCompensated Salary– Compensated TimeCompensated Time

Do High Risk Activities in the Project Do High Risk Activities in the Project Network in ParallelNetwork in Parallel

Organize Project Early with Adequate StaffOrganize Project Early with Adequate Staff

Reduce RiskReduce RiskMeeting Project CostMeeting Project Cost

Identify and Monitor Cost DriversIdentify and Monitor Cost Drivers Perform Design Alternative Reviews and Perform Design Alternative Reviews and

AssessmentsAssessments Validate System Design and PerformanceValidate System Design and Performance

– ModelingModeling– AssessmentAssessment

Accept Risk (Do Nothing)Accept Risk (Do Nothing)

Not All Risks are Severe or FatalNot All Risks are Severe or Fatal Cost Benefit AnalysisCost Benefit Analysis Not for Risks which are Potentially SevereNot for Risks which are Potentially Severe

Risk Management is Project Risk Management is Project ManagementManagement

Another Tool for PMAnother Tool for PM SupplementsSupplements

– Requirements DefinitionRequirements Definition– Task DefinitionTask Definition– SchedulingScheduling– BudgetingBudgeting– Configuration ManagementConfiguration Management– Change ControlChange Control– Performance Tracking and ControlPerformance Tracking and Control

Expect the UnexpectedExpect the Unexpected

Do All You CanDo All You Can Cannot Cover Cannot Cover EveryEvery Contingency Contingency Bonaparte’s Principle came along before Bonaparte’s Principle came along before

Murphy’s Laws, i.e., “Something Surely Murphy’s Laws, i.e., “Something Surely Will Go Wrong” Plan for It to OccurWill Go Wrong” Plan for It to Occur

Risk Analysis MethodsRisk Analysis Methods

Expected ValueExpected Value Decision TreesDecision Trees Uncertainty and Payoff TablesUncertainty and Payoff Tables SimulationsSimulations