Sources Of Risk

The IT Outsourcing Risks:The IT Outsourcing Risks:

Software Development Problems

Range of Intervention Theory Prevention, Treatment and Maintenance Planning, Development and Use

Cost of Intervention

The Importance of Risk Management

Risk management is the art and science of identifying, analyzing, and responding to risk throughout the life of a project and in the best interests of meeting project objectives.

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

Benefits from Software Risk Management Practices*

80%

60%47% 47% 43%

35%

6%

0%

20%

40%

60%

80%

100%

*Kulik, Peter and Catherine Weber, “Software Risk Management Practices – 2001,” KLCI Research Group (August 2001).

Project Risk Management Processes1. Risk management planning: Deciding how to

approach and plan the risk management activities for the project.

2. Risk identification: Determining which risks are likely to affect a project and documenting the characteristics of each.

3. Qualitative risk analysis: Prioritizing risks based on their probability and impact of occurrence.

Project Risk Management Processes (cont’d)

4. Quantitative risk analysis: Numerically estimating the effects of risks on project objectives.

5. Risk response planning: Taking steps to enhance opportunities and reduce threats to meeting project objectives.

6. Risk monitoring and control: Monitoring identified and residual risks, identifying new risks, carrying out risk response plans, and evaluating the effectiveness of risk strategies throughout the life of the project.

Risk Management Planning

The main output of risk management planning is a risk management plan—a plan that documents the procedures for managing risk throughout a project.

The project team should review project documents and understand the organization’s and the sponsor’s approaches to risk.

The level of detail will vary with the needs of the project.

Table 11-2. Topics Addressed in a Risk Management Plan Methodology

Roles and responsibilities

Budget and schedule

Risk categories

Risk probability and impact

Risk documentation

Contingency and Fallback Plans, Contingency Reserves Contingency plans are predefined actions that the

project team will take if an identified risk event occurs.

Fallback plans are developed for risks that have a high impact on meeting project objectives, and are put into effect if attempts to reduce the risk are not effective.

Contingency reserves or allowances are provisions held by the project sponsor or organization to reduce the risk of cost or schedule overruns to an acceptable level.

Common risk factors for IT Projects Risk factors

Lack of top management commitment to the project Failure to gain user commitment Misunderstanding the requirement Lack of adequate user involvement Failure to manage end user expectation Changing scope and objectives Lack of required knowledge/skill in the project personnel New technology Insufficient / inappropriate staffing Conflict between user departments

Information Technology Success Potential Scoring Sheet

Broad Categories of Risk

Market risk

Financial risk

Technology risk

People risk

Structure/process risk

Risk Breakdown Structure

A risk breakdown structure is a hierarchy of potential risk categories for a project.

Similar to a work breakdown structure but used to identify and categorize risks.

Figure 11-3. Sample Risk Breakdown Structure

IT Project

Business Technical OrganizationalProject

Management

Competitors

Suppliers

Cash flow

Hardware

Software

Network

Executivesupport

User support

Team support

Estimates

Communication

Resources

Risk Identification

Risk identification is the process of understanding what potential events might hurt or enhance a particular project.

Risk identification tools and techniques include:

Brainstorming

Interviewing

SWOT analysis

Brainstorming

Brainstorming is a technique by which a group attempts to generate ideas or find a solution for a specific problem by amassing ideas spontaneously and without judgment.

An experienced facilitator should run the brainstorming session.

Be careful not to overuse or misuse brainstorming.

Interviewing

Interviewing is a fact-finding technique for collecting information in face-to-face, phone, e-mail, or instant-messaging discussions.

Interviewing people with similar project experience is an important tool for identifying potential risks.

SWOT Analysis

SWOT analysis (strengths, weaknesses, opportunities, and threats) can also be used during risk identification.

Helps identify the broad negative and positive risks that apply to a project.

Risk Register

The main output of the risk identification process is a list of identified risks and other information needed to begin creating a risk register.

A risk register is: A document that contains the results of various risk

management processes and that is often displayed in a table or spreadsheet format.

A tool for documenting potential risk events and related information.

Risk events refer to specific, uncertain events that may occur to the detriment or enhancement of the project.

Risk Register Contents

An identification number for each risk event. A rank for each risk event. The name of each risk event. A description of each risk event. The category under which each risk event

falls. The root cause of each risk.

Risk Register Contents (cont’d) Triggers for each risk; triggers are indicators

or symptoms of actual risk events. Potential responses to each risk. The risk owner or person who will own or

take responsibility for each risk. The probability and impact of each risk

occurring. The status of each risk.

Table 11-5. Sample Risk Register/Risk Analysis

No. Rank Risk Description Category RootCause

Triggers PotentialResponse

s

RiskOwner

Probability Impact Severity Status

R44

1

R21

2

R7 3

Project severity = expectation (1-10) * impact (1-10)

When should risk analysis be formed? Is not a time activity Periodic update and reviewed

Calculating severity

Problem Expectation Impact SeverityStaff 6 5 30Late delivery of hardware

5 8 40

Communication and Networks problem

5 5 25

Project severity = expectation (1-10) * impact (1-10)

Major Risks Come From Major Risks Come From Management Practices….. Management Practices…..

• Poor analysis of supplier strategy and capabilities• IT treated as undifferentiated commodity• Cash injection looked for rather than business advantage• Incomplete contracting• Difficulties constructing/adapting deals for business/technological change• Poor sourcing/contracting for new technologies • Lack of maturity/experience with long-term ‘total’ outsourcing• Failure to retain requisite capabilities/skills for active contract and relationship management• Power asymmetries developing in favour of vendor• Unrealistic expectations with multiple objectives (Source: Lacity & Willcocks, 2001)

Main Risks in OutsourcingMain Risks in Outsourcing

0 50 100 150 200 250

Other

Industrial relations with internal staff

No Learning from vendor about IT

Systems interconnectedness adversely affected

Loss of control over strategic use of IT

New IT expertise from vendor fails to materialise

Loss of control over IT operations

Lack of expertise in managing contracts

Irreversibility of contract

Credibility of vendor claims

Hidden costs of contract

Points

Risk Mitigations Plan

Learn from Experience Follow a the maturity model. Best Practice / Multi-sourcing approach Know what to outsource

Use the frameworks from previous classes

Performing / Strategic Focus (Not just focusing

on cost)

Time

Insourcing / Bystander (outsourcing between 1-5% of IT. Mostly purchasing of IT functions).

Forming / experimenting stage (outsourcing between 10-20% of IT activities)

Storming / Strategic decision point (Organization leaders share conflicting ideas about outsourcing and pursuing different strategy to provide IT services)

Norming / Proactive Cost Focus (Beginning to form norms and actively focusing and proactively using outsourcing for cost saving including offshore. Outsourcing 20-40% of IT activities)

5

4

3

2

1

Stages

Risk Mitigations Plan

Outsourcing: Type and Scope Best-in-class In case of multi-sourcing

Ability of suppliers to work together Short term deals better than long term deals

Vendor Selection Criteria and Process Check Xerox and General Dynamics case studies Best fit Ability

……And Unrealistic Expectations: And Unrealistic Expectations: The IT Cost/Service Trade-offThe IT Cost/Service Trade-off

Premium Service

MinimalService

‘Rolls Royce’

‘Black Hole’

Minimal Cost Premium Cost

‘Superstar’

Senior management’sand users’ expectationsof IT

‘Chevrolet’

Realm of feasible ITperformance

Senior management’sand users’ perceptions of IT

Realm of feasibleIT performance