1. Project Management Managing Risks
Dr. Tai-Yue Wang
Department of Industrial and Information Management
National Cheng Kung University
Tainan, TAIWAN, ROC
This is a basic course blah, blah, blah…

2. Where We Are Now

4. Risk Management Process
Uncertain or chance events that planning can not overcome or control.
Possibility or probability that the project will not turn out as planned or desired
The combination of the probability of an event and its consequences
Effect of uncertainty on objectives

5. Risk Concept -- Project Risk
Risk includes potential benefits (opportunities) as well as hazards
Our focus: risk of serious problems or failure, i.e.,
Project not meeting performance requirements, schedule, or budget
“Failure”
Not meeting time, cost, or performance targets by a predefined margin

6. Risk Concept -- Project Risk
Risk of involves two concepts:
The likelihood that some event will occur.
The impact of the event if it does occur.
It is a joint function of the two
Risk = f (likelihood, impact)

7. Risk Management Process
A proactive attempt to recognize and manage internal events and external threats that affect the likelihood of a project’s success.
What can go wrong (risk event).
How to minimize the risk event’s impact (consequences).
What can be done before an event occurs (anticipation).
What to do when an event occurs (contingency plans).

8. The Risk Event Graph
FIGURE 7.1

9. Risk Management’s Benefits
A proactive rather than reactive approach.
Reduces surprises and negative consequences.
Prepares the project manager to take advantage of appropriate risks.
Provides better control over the future.
Improves chances of reaching project performance objectives within budget and on time.

10. The Risk Management Process
The risk management process repeats throughout every phase of the project from Conception through Close-out
FIGURE 7.2

11. Risk Concept -- Risk Management Elements and Process

12. 1. Identify Risks
Generate a list of possible risks through brainstorming, problem identification and risk profiling.
Macro risks first, then specific events

13. Roots of Uncertainty Stakeholders Objectives
Variety of Resources, (human, capital, material..)
Project Organizations
Scope of work
Cost
Time
Delivery of Quantified and Qualitative objectives
Technologies
Environment
Regulators

14. Roots of Uncertainty Roots of Uncertainty are associated with
Who Who are the parties ultimately involved (Executing Agencies, partners, etc..)
Why What do they want (motives, objectives..)
What What is it the parties interested in (design)
Which way How is to be done (activities)
What What resources are required (resources)
When when does it have to be done (Schedule, timetable)

15. 1. Identify Risks: Sources of Risk
External
Internal
Environment
Project
Internal
“Needs and Definition” Risk
Failure to correctly identify and define current or changing customer needs and requirements

16. 1. Identify Risks: Sources of Risk
Internal
Environment
Project
“Technical” Risk
Failure of the end item. Risk due to nature of the end item or the process to create it:
High complexity
Low maturity
Low reliability, produciblity, or testability
High concurrency (overlap of project work)

17. 1. Identify Risks: Sources of Risk
Environment
External
Project
Risks in the project environment
Market conditions
Government mandate
Physical environment (weather, geography, etc.)
Labor and other resource availability
Project priorities
Customer/supplier relationships
Exchange rates

18. 1. Identify Risks Analogy Checklists WBS and work packages
Experience and documentation
Checklists
Experience and post-mortem reviews
Example, next slide
WBS and work packages
Process flow charts

19. Project Management /authority Third Parties /External bodies
Risk Checklist
Element
Ref.
Risk
Likelihood (H, M or L)
Impact (H, M or L)
Project Management /authority 1
Project Manager's lack of Project Management experience 2
Difficulty in securing full funding. (e.g. if the funding is coming from more than one source there may be a greater risk in securing it at the same time) 3
Lack of understanding of project management standards by everyone in the project team.
Project Nature 6
Innovation or the introduction of new features. 7
The project is likely to need a large number of workdays. (e.g. low number of workdays = low risk, anything over six months =high risk) 8
Non-negotiable completion date.
Project Staff 11
The project team is inexperienced or lacking appropriate skills for the project. 12
The project team will be expected to support end-users after project completion. ( ongoing support = low risk, no support project beyond closure = high risk)
The Customer 16
Customer support expected to be part of the project. 17
The project will affect current operations. 18
The customer requirements will not be well documented.
(e.g. poor documentation increases risk of delivered product being unsatisfactory)
Third Parties /External bodies 22
Third party suppliers are not well known to UEA.

20. WBS and work packages with assessed level of risk

21. OUTGOING LETTERS PROCESSING
SCALED, SORT BY POSTAGE
METERED, PUT INTO FOREIGN AIR MAIL BAG
IBD ALL FOREIGN
QC- QUALITY CONTROL
ALSO SPECIAL GROUP MAIlNG PIECES WHITE
SORT TO SIZE
MACHINE STAMPS POSTAGE
BUNDLE
QC FOR SEAL, ADDRESS POSTAGE
PUT INTO BAGS
AIR MAIL 1 OZ OR LESS
BLDG. 200
CHECK WEIGHT
SORT TO SIZE
MACHINE STAMPS POSTAGE
BUNDLE
QC FOR SEAL, ADDRESS POSTAGE
PUT INTO TRAYS
1 OZ OR LESS
AIR MAIL
BROWN
ALL OVER 1 OZ
HEAVY
BLDG. 130
FIRST CLASS
SEALED BY HAND
SORT
> ½ LB
PUT INTO TRAYS
METERED, QC CHECK
SORT INTO POST OFFICE BAGS
ALL REMITTANCE MAIL AFTER 6:30 PM
≤ ½ LB
AIR
MAIL
BLDG. 231
WEIGHED SORTED INTO 1,2,4, 8 OZ. GROUPS BY MACHINE
SORT INTO 1ST CLASS & AIR MAIL
METERED, QC CHECK PUT INTO BAGS
WHITE
BROWN
HEAVY
AIR MAIL
AFTER
6:30 PM ?
U.S. POST
OFFICE
OUTGOING LETTERS PROCESSING
YES NO
US MESSENGER PICK UP
O’HARE

22. 1. Identify risks Causes Effect Risk sources Outcomes,
Brainstorming
Delphi Technique
Cause-Effect analysis
Causes Effect
Risk sources Outcomes,
and hazards Consequences
Example, next slide

23. Cause and Effect Diagram
HARDWARE
PEOPLE
Bought-in items may be delivered late
Key staff may be out of action
Welding may be defective
Staff productivity may be lower than planned
Material may be off-spec
External agencies may delay
Manufacture may not correspond with design
PRODUCT
DELIVERED
LATE
Procurement procedures may be ineffective
Import taxes may be raised
Design may have to be re-engineered
Fabricator may go bankrupt
Design specs may be changed
Cash flow may not be sufficient to pay bills
Design may not meet standards
MONEY
FUNCTIONS

24. 2. Assess the Risk Scenario analysis for event probability and impact
Risk assessment matrix
Failure Mode and Effects Analysis (FMEA)
Probability analysis
Decision trees, NPV, and PERT
Semiquantitative scenario analysis

25. 2. Assess the Risk Assess RC (the risk “consequence” or “exposure”)
RC = (Probability) x (Impact)

26. 2. Assess the Risk Probability, expressed as Impact, expressed as
numerical estimate, 0-1.0
or nominal rating, e.g, VH, H, M, L,VL
or interval rating, e.g., 1-5
Impact, expressed as
physical impact on time (weeks), cost ($) or, performance
or nominal or interval rating, e.g. VH, H, M, L, VL,

27. 2. Assess the Risk Combing several independent risk sources
Composite likelihood factor,
CLF = (W1) MH + (W2) CH + (W3) MS + (W4) CS + (W5)D
where
MH , MS , CH , CS , and D are failure likelihoods due to immaturity of hardware and software, complexity in hardware and software,and dependency on external factors, respectively; each has value 0 to 1.0
W1, W2, W3, W4, and W5 each has value 0 through 1.0 and together total 1.0.

28. 2. Assess the Risk Combing several independent risk sources
Composite impact factor,
CIF = (W1)TI + (W2)CI + (W3)SI
where
T1, C1, and S1 are impacts due to failure in technical performance, cost, and schedule, respectively; each has value 0 to 1.0
W1, W2, and W3 each has value 0 through 1.0 and together total 1.0.

29. 2. Assess the Risk Risk Consequence RC = probability x impact
Example
RC = 0.75 x 5 = 3.75

30. 2. Assess the Risk Risk Consequence
When probability and impact are expressed as nominal values (e.g., VH, H, M, L,VL; next three slides),
RC = f(probability,impact)

31. Project Management /authority Third Parties /External bodies
Element
Ref.
Risk
Likelihood (H, M or L)
Impact (H, M or L)
Project Management /authority 1
Project Manager's lack of Project Management experience 2
Difficulty in securing full funding. (e.g. if the funding is coming from more than one source there may be a greater risk in securing it at the same time) 3
Lack of understanding of project management standards by everyone in the project team.
Project Nature 6
Innovation or the introduction of new features. 7
The project is likely to need a large number of workdays. (e.g. low number of workdays = low risk, anything over six months =high risk) 8
Non-negotiable completion date.
Project Staff 11
The project team is inexperienced or lacking appropriate skills for the project. 12
The project team will be expected to support end-users after project completion. ( ongoing support = low risk, no support project beyond closure = high risk)
The Customer 16
Customer support expected to be part of the project. 17
The project will affect current operations. 18
The customer requirements will not be well documented.
(e.g. poor documentation increases the risk of the delivered product being unsatisfactory)
Third Parties /External bodies 22
Third party suppliers are not well known to UEA.

32. 2. Assess the Risk Example RC = L x H = M (according to table) VL L M
Impact VL L M H VH
Probability

33. 2. Assess the Risk

34. The Risk Breakdown Structure (RBS)
FIGURE 7.3

35. Partial Risk Profile for Product Development Project
FIGURE 7.4

36. Defined Conditions for Impact Scales of a Risk on Major Project Objectives (Examples for negative impacts only)
FIGURE 7.5

37. Risk Assessment Form
FIGURE 7.6

38. Hardware malfunc-tioning
Risk Severity Matrix
Failure Mode and Effects Analysis (FMEA) Impact × Probability × Detection = Risk Value
User Backlash
Interface problems
System freezing
Hardware malfunc-tioning 5 4
Red zone (major risk)
Yellow zone (moderate risk)
Green zone (minor risk)
Likelihood 3 2 1 1 2 3 4 5
FIGURE 7.7
Impact

39. 3. Risk Response Development
Reducing the likelihood an adverse event will occur.
Reducing impact of adverse event.
Avoiding Risk
Changing the project plan to eliminate the risk or condition.

40. 3. Risk Response Development
Transferring Risk
Paying a premium to pass the risk to another party.
Requiring Build-Own-Operate-Transfer (BOOT) provisions.
Retaining Risk
Making a conscious decision to accept the risk.

41. Contingency Planning Contingency Plan
An alternative plan that will be used if a possible foreseen risk event actually occurs.
A plan of actions that will reduce or mitigate the negative impact (consequences) of a risk event.

42. Contingency Planning Risks of Not Having a Contingency Plan
Having no plan may slow managerial response.
Decisions made under pressure can be potentially dangerous and costly.

43. Risk Response Matrix
FIGURE 7.8

44. Risk and Contingency Planning
Technical Risks
Backup strategies if chosen technology fails.
Assessing whether technical uncertainties can be resolved.
Schedule Risks
Use of slack increases the risk of a late project finish.
Imposed duration dates (absolute project finish date)
Compression of project schedules due to a shortened project duration date.

45. Risk and Contingency Planning (cont’d)
Costs Risks
Time/cost dependency links: costs increase when problems take longer to solve than expected.
Price protection risks (a rise in input costs) increase if the duration of a project is increased.
Funding Risks
Changes in the supply of funds for the project can dramatically affect the likelihood of implementation or successful completion of a project.

46. Opportunity Management Tactics
Exploit
Seeking to eliminate the uncertainty associated with an opportunity to ensure that it definitely happens.
Share
Allocating some or all of the ownership of an opportunity to another party who is best able to capture the opportunity for the benefit of the project.

47. Opportunity Management Tactics
Enhance
Taking action to increase the probability and/or the positive impact of an opportunity.
Accept
Being willing to take advantage of an opportunity if it occurs, but not taking action to pursue it.

48. Contingency Funding and Time Buffers
Contingency Funds
Funds to cover project risks—identified and unknown.
Size of funds reflects overall risk of a project
Budget reserves
Are linked to the identified risks of specific work packages.
Management reserves
Are large funds to be used to cover major unforeseen risks (e.g., change in project scope) of the total project.

49. Contingency Funding and Time Buffers
Amounts of time used to compensate for unplanned delays in the project schedule.
Severe risk, merge, noncritical, and scarce resource activities

50. Contingency Fund Estimate ($000s)
TABLE 7.1

51. Managing Risk (cont’d)
Step 4: Risk Response Control
Risk control
Execution of the risk response strategy
Monitoring of triggering events
Initiating contingency plans
Watching for new risks

52. Managing Risk (cont’d)
Step 4: Risk Response Control
Establishing a Change Management System
Monitoring, tracking, and reporting risk
Fostering an open organization environment
Repeating risk identification/assessment exercises
Assigning and documenting responsibility for managing risk

53. Change Management Control
Sources of Change
Project scope changes
Implementation of contingency plans
Improvement changes

54. Change Control System Process
Identify proposed changes.
List expected effects of proposed changes on schedule and budget.
Review, evaluate, and approve or disapprove of changes formally.
Negotiate and resolve conflicts of change, condition, and cost.

55. Change Control System Process
Communicate changes to parties affected.
Assign responsibility for implementing change.
Adjust master schedule and budget.
Track all changes that are to be implemented

56. The Change Control Process
FIGURE 7.9

57. Benefits of a Change Control System
Inconsequential changes are discouraged by the formal process.
Costs of changes are maintained in a log.
Integrity of the WBS and performance measures is maintained.
Allocation and use of budget and management reserve funds are tracked.

58. Benefits of a Change Control System
Responsibility for implementation is clarified.
Effect of changes is visible to all parties involved.
Implementation of change is monitored.
Scope changes will be quickly reflected in baseline and performance measures.

59. Sample Change Request
FIGURE 7.10

60. Change Request Log
FIGURE 7.11

61. Key Terms Avoiding risk Budget reserve Change management system
Contingency plan
Management reserve
Mitigating risk
Opportunity
Retaining risk
Risk
Risk breakdown structure (RBS)
Risk profile
Risk register
Risk severity matrix
Scenario analysis
Time buffer
Transferring risk