Managing Risks in Projects

Risk Concepts The Likelihood that some Problematical Event will Occur The Likelihood that some Problematical Event will Occur The Impact of the Event if it does Occur The Impact of the Event if it does Occur Risk = f (likelihood, impact) Risk = f (likelihood, impact) Project is considered Risky if at least One Factor is large Project is considered Risky if at least One Factor is large

Risk Identification Risk Tolerance is a Function of Experience Risk Tolerance is a Function of Experience –PM –Stakeholders Risk of Failure Risk of Failure –Schedule –Budget –Technical Goals Risk of Opportunity Risk of Opportunity –Rewards –Savings –Benefits

Risk Identification (Continued) Ways to Identify Project Risk Ways to Identify Project Risk –Chronology –Type of Work High Risks High Risks –Approach is New/Unusual –Technology is New/Unusual –Staff needs Training in New Tasks/Skills –Process using New Equipment, Systems or Procedures

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

Sources of Risk (Continued) Internal Risks Internal Risks –Market Risk »Ill Defined Market or Customer needs and Requirements »Failure to Identify Changing Needs and Requirements »Failure to identify Newly Introduced Products by Competitors –Technical Risk »Maturity »Complexity »Quality »Concurrency, or Dependency

Sources of Risk (Continued) External Risks, External Risks, –Market Conditions –Competitors’ Actions –Government Regulations –Interest Rates –Decisions by Sr. Mgmt or Customer »Budgets »Staffing »Priorities

Sources of Risk (Continued) External Risks (Continued) External Risks (Continued) –Customer Needs and Behavior –Supplier Relations –Weather –Labour Troubles –Material or Labor –External Control by Customers or Subcontractors

Risk Assessment Risk Likelihood Risk Likelihood –Probability a Hazard or Risk Factor will Materialize –Numerical Value between 1.0 (Certain) and 0 (Impossible) –Qualitative Rating »High Greater than 50% »Medium 20 to 50% »Low 20% or Less –Composite Likelihood Factor (CLF) »Sum of Multiple, Independent Risk Sources

Risk Assessment(Continued) Risk Impact Risk Impact –What Happens if a Risk Hazard Materialized –Specified in Terms of »Time »Cost »Performance Measures –Qualitative »High »Medium »Low

Risk Assessment(Continued) Risk Impact (Continued) Risk Impact (Continued) –Numerical Measure Between 0 and 1.0 »0 not Serious »1.0 Catastrophic

Risk Assessment(Continued) Risk Consequence Risk Consequence –Function or Likelihood and Impact –Can be Expressed as Numerical rating between 0 and 1.0 –Risk Consequence Rating (RCR) »RCR = CLF + CIF - CLF(CIF) –Can be Expressed as an Expected Value or the Average Outcome for large Tries »Risk Consequence = (Impact) x (Likelihood)

Risk Assessment(Continued) PERT PERT –Incorporates Risk through the three Estimates for Each Project Activity »a, Optimistic »m, Most Likely »b, Pessimistic –Use a larger value of b to account for Greater Risk –This Produces a larger Variance for Project Completion Time (Add buffer Time to Project) –PERT Provides a Way for Measuring the Consequences of Risk on Project Completion Times

Risk Assessment(Continued) Risk Priority Risk Priority –PM must Define a Risk Tolerance Level –Consider Risks at that Level and Higher –Team Members Review all these Tasks and Make Recommendations –In Complex Systems Joint Failures Can Occur

Risk Response Planning How to Deal with the Problem Transfer the Risk Transfer the Risk Avoid Risk Avoid Risk Reduce Risk Reduce Risk Contingency Planning Contingency Planning Accept Risk (Do Nothing) Accept Risk (Do Nothing)

Risk Likelihood, Risk Impact, and Expected Value Consequences

Avoid Risk Alter the Initial Project Concept Alter the Initial Project Concept –Eliminate Risky Activities –Minimize System Complexity –Reduce End-Item Quality Requirements Change Contractors Change Contractors Incorporate Redundancies Incorporate Redundancies Change Safety Procedures Change Safety Procedures Better to Reduce Risk to Acceptable Level Than Eliminate Payoff Opportunity Better to Reduce Risk to Acceptable Level Than Eliminate Payoff Opportunity

Reduce Risk Technical Performance Reduce System Complexity to a Minimum Reduce System Complexity to a Minimum –Reorganize Tasks –End Item Design –Decouple Activities »Contains Failure to one Activity Use Design Margins Use Design Margins –A Management Reserve –Design Value is Greater than Design Requirement

Reduce Risk Meeting Schedules Create Master Project Schedule Create Master Project Schedule Schedule Risky Tasks Early to Allow Time to Recover Schedule Risky Tasks Early to Allow Time to Recover Focus on Critical and Near-Critical Activities Focus on Critical and Near-Critical Activities –Path –Risk Best People on Time-Critical Tasks Best People on Time-Critical Tasks

Reduce Risk Meeting Schedules (Continued) Incentives for OT Incentives for OT –Compensated Salary –Compensated Time Do High Risk Activities in the Project Network in Parallel Do High Risk Activities in the Project Network in Parallel Organize Project Early with Adequate Staff Organize Project Early with Adequate Staff

Reduce Risk Meeting Project Cost Identify and Monitor Cost Drivers Identify and Monitor Cost Drivers Perform Design Alternative Reviews and Assessments Perform Design Alternative Reviews and Assessments Validate System Design and Performance Validate System Design and Performance –Modeling –Assessment

Accept Risk (Do Nothing) Not All Risks are Severe or Fatal Not All Risks are Severe or Fatal Cost Benefit Analysis Cost Benefit Analysis Not for Risks which are Potentially Severe Not for Risks which are Potentially Severe

Risk Management is Project Management Another Tool for PM Another Tool for PM Supplements Supplements –Requirements Definition –Task Definition –Scheduling –Budgeting –Configuration Management –Change Control –Performance Tracking and Control

Expect the Unexpected Do All You Can Do All You Can Cannot Cover Every Contingency Cannot Cover Every Contingency Bonaparte’s Principle came along before Murphy’s Laws, i.e., “Something Surely Will Go Wrong” Plan for It to Occur Bonaparte’s Principle came along before Murphy’s Laws, i.e., “Something Surely Will Go Wrong” Plan for It to Occur

Risk Analysis Methods Expected Value Expected Value Decision Trees Decision Trees Uncertainty and Payoff Tables Uncertainty and Payoff Tables Simulations Simulations