Chapter 8 Managing Project Risk

Risk? Risk vs. Uncertainty Although no one can predict the future with 100% accuracy, having a solid foundation (processes, tools, and techniques) can increase our confidence in these estimates (e.g., cell phone in 2000) Keep in mind that the goal of risk management is not to avoid risks at all costs, but to make well informed decisions Crisis Management – take a reactive approach after they have become problems (e.g., terrorist attacks, kidnappings)

PMBOK® Risk Management Processes Plan Risk Management Determining how to approach and plan the project risk management activities. An output of this process is the development of a risk management plan. Identify Risks Deciding which risks can impact the project. Risk identification generally includes many of the project stakeholders and requires an understanding of the project’s goal, as well as the project’s scope, schedule, budget, and quality objectives. Perform Qualitative Risk Analysis Focusing on a qualitative analysis concerning the impact and likelihood of the risks that were identified. Perform Quantitative Risk Analysis Using a quantitative approach for developing a probabilistic model for understanding and responding to the risks identified. Plan Risk Responses Developing procedures and techniques to reduce the threats of risks, while enhancing the likelihood of opportunities. Monitor and Control Risks Providing an early warning system to monitor identified risks and any new risks. This system ensures that risk responses have been implemented as planned and had the effect as intended.

Common Mistakes in Managing Project Risk Not understanding the benefits of risk management (risks are often schedule, delays, budget overruns) Not providing adequate time for risk management (at the earliest stages) Not identifying and assessing risk using a standardized approach (overlook both Opportunities and Threats)

Effective & Successful Risk Management Requires Commitment by all stakeholders (project sponsors/client, senior management, project manager, and project team) Stakeholder responsibility Different risks for different types of projects (each project has it own unique risk considerations)

Definitions Risk Project Risk Management (PMBOK®) An uncertain event or condition that, if occurs, has a positive or negative effect on the project objectives. Project Risk Management (PMBOK®) Includes the processes of conducting risk management planning, identification, analysis, response planning, and monitoring and control on a project; most of these processes are updated throughout the project. The objectives of Project Risk Management are to increase the probability and impact of positive events and decrease the probability and impact of events adverse to the project.

IT Project Risk Management Processes SWOT Prioritize Risks

Risk Planning Requires firm commitment by all stakeholders to a RM approach Assures adequate resources are in place <time, people, technology> Focuses on preparation

IT Project Risk Identification Framework

Risk Identification Tools & Techniques Learning Cycles - identify facts, assumptions Brainstorming - less structured Nominal Group Technique - structured Delphi Technique - a group of experts Interviews Checklists - structure tools SWOT Analysis Cause & Effect (a.k.a. Fishbone/Ishikawa) Past Projects - lessons learned from past

Nominal Group Technique (NGT) Each individual silently writes their ideas on a piece of paper Each idea is then written on a board or flip chart one at a time in a round-robin fashion until each individual has listed all of his or her ideas The group then discusses and clarifies each of the ideas Each individual then silently ranks and prioritizes the ideas The group then discusses the rankings and priorities Each individual ranks and prioritizes the ideas again The rankings and prioritizations are then summarized for the group

Risk Check List RiRsk Check List Funding for the project has been secured Funding for the project is sufficient Funding for the project has been approved by senior management The project team has the requisite skills to complete the project The project has adequate manpower to complete the project The project charter and project plan have been approved by senior management or the project sponsor The project’s goal is realistic and achievable The project’s schedule is realistic and achievable The project’s scope has been clearly defined Processes for scope changes have been clearly defined

SWOT Analysis

Cause & Effect Diagram

Risk Analysis & Assessment Risk = f(Probability * Impact) Risk assessment focuses on prioritizing risks so that an effective strategy can be formulated for those risks that require a response. Can’t respond to all risks! Depends on Stakeholder risk tolerances

Risk Analysis & Assessment Qualitative Approaches Expected Value & Payoff Tables Decision Trees Risk Impact Table & Ranking Tusler’s Risk Classification Which risks require a response?

Payoff Table The Expected Value Payoff A B A*B Schedule Risk     Payoff Table   A B A*B Schedule Risk Probability Payoff (In thousands) Prob * Payoff Project completed 20 days early 5% $ 200 $10 Project completed 10 days early 20% $ 150 $30 Project completed on Schedule 50% $ 100 $50 Project completed 10 days late $ - $0 Project completed 20 days late $ (50) ($3) 100% $88 The Expected Value

Decision Tree Analysis

IT Project Risk Impact Analysis   Risk Impact Table IT Project Risk Impact Analysis   0 - 100% 0-10 P*I Risk (Threats) Probability Impact Score Key project team member leaves project 40% 4 1.6 Client unable to define scope and requirements 50% 6 3.0 Client experiences financial problems 10% 9 0.9 Response time not acceptable to users/client 80% 4.8 Technology does not integrate with existing application 60% 7 4.2 Functional manager deflects resources away from project 20% 3 0.6 Client unable to obtain licensing agreements 5% 0.4

Risk Rankings Risk (Threats)   Risk Rankings Risk (Threats) Ranking Response time not acceptable to users/client 1 Technology does not integrate with existing application 2 Client unable to define scope and requirements 3 Key project team member leaves project 4 Client experiences financial problems 5 Functional manager deflects resources away from project 6 Client unable to obtain licensing agreements 7

Risk Analysis & Assessment Quantitative Approaches Quantitative Probability Distributions Discrete Binomial Continuous Normal PERT TRIANG

Binomial Probability Distribution

Normal Distribution

Normal Distribution Rules of thumb with respect to observations Approximately…. 68% + 1 standard deviations of mean 95% + 2 standard deviations of the mean 99% + 3 standard deviations of the mean

PERT Distribution PERT MEAN = (a + 4b + c)/6 Where: a = optimistic estimate b = most likely c = pessimistic

PERT Distribution

Triangular Distribution TRIANG Mean = (a+b+c)/3

Simulations Monte Carlo Technique that randomly generates specific values for a variable with a specific probability distribution Goes through a number of trials or iterations and records the outcome @RISK® An MS Project® add in that provides a useful tool for conducting risk analysis of your project plan

Monte Carlo Simulation

Cumulative Probability Distribution

Sensitivity Analysis Using a Tornado Graph

Risk Strategies Accept or Ignore Avoidance Mitigate Transfer Management Reserves Released by senior management Contingency Reserves Part of project’s budget Contingency Plans Avoidance Mitigate Reduce the likelihood or impact (or both) Transfer E.g. insurance

Risk Strategies Depend On The nature of the risk Really an opportunity or threat? Impact on MOV and project objectives Probability? Impact? Project constraints Available resources? Risk tolerances or preferences of the project stakeholders

Risk Monitoring & Control Risk Audits External to project team Risk Reviews Internal Risk Status Meetings & Reports

Risk Response Plan should include: A trigger which flags that the risk has occurred An owner of the risk (i.e., the person or group responsible for monitoring the risk and ensuring that the appropriate risk response is carried out) A response based on one of the four basic risk strategies Adequate resources

Risk Evaluation Lessons learned and best practices help us to: Increase our understanding of IT project risk in general. Understand what information was available to managing risks and for making risk-related decisions. Understand how and why a particular decision was made. Understand the implications not only of the risks, but also the decisions that were made. Learn from our experience so that others may not have to repeat our mistakes.