1. © 2004, David Gadish, Ph.D.1 Project Management CIS 486 Fall 2005 Week 8 Lecture Dr. David Gadish

2. © 2004, David Gadish, Ph.D.2 Week 7 Review  Incorporating GIS in IT Projects (Not in book)  Project Communications Management (Ch 10)

3. © 2004, David Gadish, Ph.D.3 Week 8 Overview  Project Risk Management (Ch 11)  Project Procurement Management (Ch 12)

4. 4 Project Risk Management Chapter 11

5. © 2004, David Gadish, Ph.D.5 Learning Objectives  Understand what risk is and the importance of good project risk management  Discuss the elements involved in risk management planning  List common sources of risks on IT projects  Describe the risk identification process and tools and techniques to help identify project risks  Discuss the qualitative risk analysis process and explain how to calculate risk factors, use probability/impact matrixes, the Top Ten Risk Item Tracking technique, and expert judgment to rank risks

6. © 2004, David Gadish, Ph.D.6 Learning Objectives  Explain the quantify risk analysis process and how to use decision trees and simulation to quantify risks  Provide examples of using different risk response planning strategies such as risk avoidance, acceptance, transference, and mitigation

7. © 2004, David Gadish, Ph.D.7 Learning Objectives  Discuss what is involved in risk monitoring and control  Describe how software can assist in project risk management  Explain the results of good project risk management

8. © 2004, David Gadish, Ph.D.8 The Importance of Project Risk Management  Project risk management is the art and science of identifying, assigning, and responding to risk throughout the life of a project –in the best interests of meeting project objectives  Risk management is often overlooked on projects, but it can help improve project success by helping select good projects, determining project scope, and developing realistic estimates  KPMG study found that 55 percent of runaway projects did no risk management at all

9. © 2004, David Gadish, Ph.D.9 Project Management Maturity by Industry Group and Knowledge Area

10. © 2004, David Gadish, Ph.D.10 What is Risk?  A dictionary definition of risk is “the possibility of loss or injury”  Project risk involves understanding potential problems that might occur on the project and how they might impede project success  Risk management is like a form of insurance; it is an investment

11. © 2004, David Gadish, Ph.D.11 Risk Utility  Risk utility or risk tolerance is the amount of satisfaction or pleasure received from a potential payoff –Utility rises at a decreasing rate for a person who is risk-averse –Those who are risk-seeking have a higher tolerance for risk and their satisfaction increases when more payoff is at stake –The risk-neutral approach achieves a balance between risk and payoff

12. © 2004, David Gadish, Ph.D.12 Risk Utility Function and Risk Preference

13. © 2004, David Gadish, Ph.D.13 What is Project Risk Management?  The goal of project risk management is to minimize potential risks while maximizing potential opportunities.  Major processes include: –Risk management planning: deciding how to approach and plan the risk management activities for the project –Risk identification: determining which risks are likely to affect a project and documenting their characteristics –Qualitative risk analysis: characterizing and analyzing risks and prioritizing their effects on project objectives

14. © 2004, David Gadish, Ph.D.14 What is Project Risk Management? –Quantitative risk analysis: measuring the probability and consequences of risks –Risk response planning: taking steps to enhance opportunities and reduce threats to meeting project objectives –Risk monitoring and control: monitoring known risks, identifying new risks, reducing risks, and evaluating the effectiveness of risk reduction

15. © 2004, David Gadish, Ph.D.15 Risk Management Planning  The main output of risk management planning is a risk management plan  The project team should review project documents and understand the organization’s and the sponsor’s approach to risk  The level of detail will vary with the needs of the project

16. © 2004, David Gadish, Ph.D.16 Questions Addressed in a Risk Management Plan

17. © 2004, David Gadish, Ph.D.17 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  Contingency reserves or allowances are provisions held by the project sponsor that can be used to mitigate cost or schedule risk if changes in scope or quality occur

18. © 2004, David Gadish, Ph.D.18 Common Sources of Risk on IT Projects  IT projects share some common sources of risk  The Standish Group developed an IT success potential scoring sheet based on potential risks  McFarlan developed a risk questionnaire to help assess risk

19. © 2004, David Gadish, Ph.D.19 IT Success Potential Scoring Sheet

20. © 2004, David Gadish, Ph.D.20 McFarlan’s Risk Questionnaire

21. © 2004, David Gadish, Ph.D.21 Other Categories of Risk  Market risk:  Will the new product be useful to the organization or marketable to others?  Will users accept and use the product or service?

22. © 2004, David Gadish, Ph.D.22 Other Categories of Risk  Financial risk:  Can the organization afford to undertake the project?  Is this project the best way to use the company’s financial resources?

23. © 2004, David Gadish, Ph.D.23 Other Categories of Risk  Technology risk:  Is the project technically feasible?  Could the technology be obsolete before a useful product can be produced?

24. © 2004, David Gadish, Ph.D.24 Risk Identification  Risk identification is the process of understanding what potential unsatisfactory outcomes are associated with a particular project  Several risk identification tools and techniques include –Brainstorming –The Delphi technique –Interviewing –SWOT analysis

25. © 2004, David Gadish, Ph.D.25 Potential Risk Conditions Associated with Each Knowledge Area

26. © 2004, David Gadish, Ph.D.26 Quantitative Risk Analysis  Assess the likelihood and impact of identified risks to determine their magnitude and priority  Risk quantification tools and techniques include –Probability/Impact matrixes –The Top 10 Risk Item Tracking technique –Expert judgment

27. © 2004, David Gadish, Ph.D.27 Sample Probability/Impact Matrix

28. © 2004, David Gadish, Ph.D.28 Sample Probability/Impact Matrix for Qualitative Risk Assessment

29. © 2004, David Gadish, Ph.D.29 Chart Showing High-, Medium-, and Low-Risk Technologies

30. © 2004, David Gadish, Ph.D.30 Top 10 Risk Item Tracking  Top 10 Risk Item Tracking is a tool for maintaining an awareness of risk throughout the life of a project  Establish a periodic review of the top 10 project risk items  List the current ranking, previous ranking, number of times the risk appears on the list over a period of time, and a summary of progress made in resolving the risk item

31. © 2004, David Gadish, Ph.D.31 Example of Top 10 Risk Item Tracking

32. © 2004, David Gadish, Ph.D.32 Expert Judgment  Many organizations rely on the intuitive feelings and past experience of experts to help identify potential project risks  Experts can categorize risks as high, medium, or low with or without more sophisticated techniques

33. © 2004, David Gadish, Ph.D.33 Quantitative Risk Analysis  Often follows qualitative risk analysis, but both can be done together or separately  Large, complex projects involving leading edge technologies often require extensive quantitative risk analysis  Main techniques include –decision tree analysis –simulation

34. © 2004, David Gadish, Ph.D.34 Decision Trees and Expected Monetary Value (EMV)  A decision tree is a diagramming method used to help select the best course of action in situations in which future outcomes are uncertain  EMV is a type of decision tree where you calculate the expected monetary value of a decision based on its risk event probability and monetary value

35. © 2004, David Gadish, Ph.D.35 Expected Monetary Value (EMV) Example

36. © 2004, David Gadish, Ph.D.36 Simulation  Simulation uses a representation or model of a system to analyze the expected behavior or performance of the system  Monte Carlo analysis simulates a model’s outcome many times to provide a statistical distribution of the calculated results  To use a Monte Carlo simulation, you must have three estimates (most likely, pessimistic, and optimistic) plus an estimate of the likelihood of the estimate being between the optimistic and most likely values

37. © 2004, David Gadish, Ph.D.37 Risk Response Planning  After identifying and quantifying risks, you must decide how to respond to them  Four main strategies: –Risk avoidance: eliminating a specific threat or risk, usually by eliminating its causes –Risk acceptance: accepting the consequences should a risk occur

38. © 2004, David Gadish, Ph.D.38 Risk Response Planning –Risk transference: shifting the consequence of a risk and responsibility for its management to a third party –Risk mitigation: reducing the impact of a risk event by reducing the probability of its occurrence

39. © 2004, David Gadish, Ph.D.39 General Risk Mitigation Strategies for Technical, Cost, and Schedule Risks

40. © 2004, David Gadish, Ph.D.40 Risk Monitoring and Control  Monitoring risks involves knowing their status  Controlling risks involves carrying out the risk management plans as risks occur  Workarounds are unplanned responses to risk events that must be done when there are no contingency plans  The main outputs of risk monitoring and control are corrective action, project change requests, and updates to other plans

41. © 2004, David Gadish, Ph.D.41 Risk Response Control  Risk response control involves executing the risk management processes and the risk management plan to respond to risk events  Risks must be monitored based on defined milestones and decisions made regarding risks and mitigation strategies  Sometimes workarounds or unplanned responses to risk events are needed when there are no contingency plans

42. © 2004, David Gadish, Ph.D.42 Using Software to Assist in Project Risk Management  Databases can keep track of risks. Many IT departments have issue tracking databases  Spreadsheets can aid in tracking and quantifying risks  More sophisticated risk management software, such as Monte Carlo simulation tools, help in analyzing project risks

43. © 2004, David Gadish, Ph.D.43 Sample Monte Carlo Simulation Results for Project Schedule

44. © 2004, David Gadish, Ph.D.44 Sample Monte Carlo Simulations Results for Project Costs

45. © 2004, David Gadish, Ph.D.45 Results of Good Project Risk Management  Unlike crisis management, good project risk management often goes unnoticed  Well-run projects appear to be almost effortless, but a lot of work goes into running a project well  Project managers should strive to make their jobs look easy to reflect the results of well-run projects

46. 46 Project Procurement Management Chapter 12

47. © 2004, David Gadish, Ph.D.47 Learning Objectives  Understand the importance of project procurement management and the increasing use of outsourcing for IT projects  Describe the procurement planning process, procurement planning tools and techniques, types of contracts, and statements of work  Discuss what is involved in solicitation planning and the difference between a request for proposal and a request for quote  Explain what occurs during the solicitation process

48. © 2004, David Gadish, Ph.D.48 Learning Objectives  Describe the source selection process and different approaches for evaluating proposals or selecting suppliers  Discuss the importance of good contract administration  Describe the contract close-out process  Discuss types of software available to assist in project procurement management

49. © 2004, David Gadish, Ph.D.49 Importance of Project Procurement Management  Procurement means acquiring goods and/or services from an outside source  Other terms include purchasing and outsourcing  Experts predicted that by the year 2003 the worldwide IT outsourcing market would grow to over $110 billion  U.S. federal spending on IT outsourcing is projected to increase from $6.6 billion in 2002 to nearly $15 billion by 2007 due to an emphasis on e-government, homeland security, and the shortage of IT workers in government

50. © 2004, David Gadish, Ph.D.50 Why Outsource?  To reduce both fixed and recurrent costs  To allow the client organization to focus on its core business  To access skills and technologies  To provide flexibility  To increase accountability

51. © 2004, David Gadish, Ph.D.51 Project Procurement Management Processes  Procurement planning: determining what to procure and when  Solicitation planning: documenting product requirements and identifying potential sources  Solicitation: obtaining quotations, bids, offers, or proposals as appropriate

52. © 2004, David Gadish, Ph.D.52 Project Procurement Management Processes  Source selection: choosing from among potential vendors  Contract administration: managing the relationship with the vendor  Contract close-out: completion and settlement of the contract

53. © 2004, David Gadish, Ph.D.53 Project Procurement Management Processes and Key Outputs

54. © 2004, David Gadish, Ph.D.54 Procurement Planning  Procurement planning involves identifying which project needs can be best met by using products or services outside the organization.  It includes deciding: –whether to procure –how to procure –what to procure –how much to procure –when to procure

55. © 2004, David Gadish, Ph.D.55 Procurement Planning Tools and Techniques  Make-or-buy analysis: determining whether a particular product or service should be made or performed inside the organization or purchased from someone else. Often involves financial analysis  Experts, both internal and external, can provide valuable inputs in procurement decisions

56. © 2004, David Gadish, Ph.D.56 Make-or Buy Example  Assume you can lease an item you need for a project for $150/day. To purchase the item, the investment cost is $1,000, and the daily cost would be another $50/day.  How long will it take for the lease cost to be the same as the purchase cost?  If you need the item for 12 days, should you lease it or purchase it?

57. © 2004, David Gadish, Ph.D.57 Make-or Buy Solution  Set up an equation so the “make” is equal to the “buy”  In this example, use the following equation. Let d be the number of days to use the item. $150d = $1,000 + $50d  Solve for d as follows: –Subtract $50d from the right side of the equation to get $100d = $1,000 –Divide both sides of the equation by $100 d = 10 days  The lease cost is the same as the purchase cost at 10 days  If you need the item for 12 days, it would be more economical to purchase it

58. © 2004, David Gadish, Ph.D.58 Types of Contracts  Fixed-price or lump-sum: involve a fixed total price for a well-defined product or service  Cost-reimbursable: involve payment to the seller for direct and indirect costs  Time and material contracts: hybrid of both fixed-price and cost-reimbursable, often used by consultants  Unit price contracts: require the buyer to pay the seller a predetermined amount per unit of service

59. © 2004, David Gadish, Ph.D.59 Cost Reimbursable Contracts  Cost plus incentive fee (CPIF): the buyer pays the seller for allowable performance costs plus a predetermined fee and an incentive bonus  Cost plus fixed fee (CPFF): the buyer pays the seller for allowable performance costs plus a fixed fee payment usually based on a percentage of estimated costs  Cost plus percentage of costs (CPPC): the buyer pays the seller for allowable performance costs plus a predetermined percentage based on total costs

60. © 2004, David Gadish, Ph.D.60 Contract Types Versus Risk

61. © 2004, David Gadish, Ph.D.61 Statement of Work (SOW)  A statement of work is a description of the work required for the procurement  Many contracts, or mutually binding agreements, include SOWs  A good SOW gives bidders a better understanding of the buyer’s expectations

62. © 2004, David Gadish, Ph.D.62 Statement of Work (SOW) Template

63. © 2004, David Gadish, Ph.D.63 Solicitation Planning  Solicitation planning involves preparing several documents: –Request for Proposals: used to solicit proposals from prospective sellers –Requests for Quotes: used to solicit quotes for well-defined procurements –Invitations for bid or negotiation and initial contractor responses are also part of solicitation planning

64. © 2004, David Gadish, Ph.D.64 Outline for a Request for Proposal (RFP)

65. © 2004, David Gadish, Ph.D.65 Solicitation  Solicitation involves obtaining proposals or bids from prospective sellers  Organizations can advertise to procure goods and services in several ways –approaching the preferred vendor –approaching several potential vendors –advertising to anyone interested  A bidders’ conference can help clarify the buyer’s expectations

66. © 2004, David Gadish, Ph.D.66 Source Selection  Source selection involves –evaluating bidders’ proposals –choosing the best one –negotiating the contract –awarding the contract  It is helpful to prepare formal evaluation procedures for selecting vendors  Buyers often create a “short list”

67. © 2004, David Gadish, Ph.D.67 Sample Proposal Evaluation Sheet

68. © 2004, David Gadish, Ph.D.68 Detailed Criteria for Selecting Suppliers

69. © 2004, David Gadish, Ph.D.69 Be Careful in Selecting Suppliers and Writing Their Contracts  Many dot-com companies were created to meet potential market needs, but many went out of business, mainly due to poor business planning, lack of senior management operations experience, lack of leadership, and lack of visions. Check the stability of suppliers  Even well-known suppliers can impede project success. Be sure to write and manage contracts well with all suppliers

70. © 2004, David Gadish, Ph.D.70 Contract Administration  Contract administration ensures that the seller’s performance meets contractual requirements  Contracts are legal relationships, so it is important that legal and contracting professionals be involved in writing and administering contracts  Many project managers ignore contractual issues, which can result in serious problems

71. © 2004, David Gadish, Ph.D.71 Suggestions on Change Control for Contracts  Changes to any part of the project need to be reviewed, approved, and documented by the same people in the same way that the original part of the plan was approved  Evaluation of any change should include an impact analysis. How will the change affect the scope, time, cost, and quality of the goods or services being provided?  Changes must be documented in writing. Project team members should also document all important meetings and telephone calls

72. © 2004, David Gadish, Ph.D.72 Contract Close-out  Contract close-out includes –product verification to determine if all work was completed correctly and satisfactorily –administrative activities to update records to reflect final results –archiving information for future use  Procurement audits identify lessons learned in the procurement process

73. © 2004, David Gadish, Ph.D.73 Using Software to Assist in Project Procurement Management  Word processing software helps in writing proposals and contracts, spreadsheets help in evaluating suppliers, databases help track suppliers, and presentation software aids in presenting procurement-related information  In the late 1990s and early 2000s, many companies started using e- procurement software to do many procurement functions electronically

74. © 2004, David Gadish, Ph.D.74 Using Software to Assist in Project Procurement Management  Companies such as Commerce One, Ariba, Concur Technologies, SAS, and Baan provide corporate procurement services over the Internet  Organizations also use other Internet tools to help find information on suppliers or auction goods and services

75. © 2004, David Gadish, Ph.D.75 Questions?

76. © 2004, David Gadish, Ph.D.76 Next Week’s Agenda  Student Project Presentations –One group per lecture

77. © 2004, David Gadish, Ph.D.77 In 2 Weeks  Student Project Presentation –Monday  Course Wrap-up & PM Discussion –Wednesday