1. Chapter 10 Risk and opportunities management
Introduction
The nature of risk and risk management
Qualitative and quantitative approaches
Opportunities management
Summary
Project management in practice: It’s a risky business

2. Introduction
Uncertainty distinguishes projects from repetitive operations, key
Risk is complex in nature and it may (or may not) be manageable
Elements of management may be beyond the single project
These often reflect political, social and other organisational issues
Evaluation of risk is important, it indicates whether a project is viable
There are well-developed procedures for managing risks
Management of the process and outcomes
Identifying eventualities in advance allows PM to choose actions
Opportunity also a part of uncertainty, consider at
Project level: new capabilities or unexpected uses of outcome
Task level: an early finish allows next project to start early or development of a better method

3. 10.1 The nature of risk and risk management
‘Known knowns’ form the basis of planning
‘Known unknowns’ are uncertainties
‘Unknown unknowns’ are not known in advance
Definitions of risk:
The possibility of suffering harm or loss
[PMI BoK 2004]
Uncertainty inherent in plans and the possibility of something happening (i.e. a contingency) that can affect the prospects of achieving business or project goals
[BS 6097 (2000) Part 3: Guide to the Management of Business Related Project Risk]

4. 10.1 The nature of risk and risk management (Continued)
Risk management incorporates a process for
Identifying potential risks
Analysing them
Managing the significant ones
Project planning looks into the future; there is always uncertainty
Objective is not necessarily to eliminate all uncertainty
Risk is proportional to return, view as trade-off
Saving money on one activity may mean an increase in risks
Individuals have different perspectives on risk
Individuals are prepared to accept different cost/benefit levels
Individuals will choose different levels of risk
Treatment of risk is based on partial knowledge and instinct

5. 10.1 The nature of risk and risk management (Continued)
Framework for risk management
Figure Risk management schema

6. 10.1 The nature of risk and risk management (Continued)
Risk Identification
The process of prediction of the key risk outcomes
Indicators that something is going/may go wrong in a project
How to identify risks
By brainstorming
By consultation activities
Seek the wider stakeholder views
Seek the view of experts
Refer to the WBS
Look to time, cost and quality plans

7. 10.1 The nature of risk and risk management (Continued)
Categories of risk identification
Consider what might happen
The possibility of missing key objectives
Unexpected changes demanded by stakeholders
Technological problems
Staffing changes
Behaviour that would conspire to cause failure
Particular aspects
Time: critical path, critical chain
Cost: how good are the estimates?

8. 10.1 The nature of risk and risk management (Continued)
Quality: assurance for all processes or are some out of the projects control?
Health and safety
Legal or financial standing of the organisation
Check key assumptions
Will changes made to save money increase costs elsewhere?
Will changes produce further risks?
Have the risks become ‘normal’?

9. 10.1 The nature of risk and risk management (Continued)
Response control or mitigation (1)
Procedures are required to ensure
Either the likelihood of the event occurring is reduced
Or effects can be managed or mitigated
Consider
Corrective action
Contingencies and reserves
Outsourcing the risk to contractors, experts or insurance
Conducting limited trials (fundamental to agile/extreme approaches)
The top 20 percent of risks are likely to cause 80 percent of delays or over-runs
For these significant risks make contingency plans
Put contingency plans into the project proposal

10. 10.1 The nature of risk and risk management (Continued)
Response control or mitigation (2)
Formal techniques may be required by
Organisation policy
Client demand
Benefits
Improvements to plans, better reflecting reality
Highlighting areas that need attention and contingency planning
Harnessing the ‘gut-feel’/intuition element
Allowing factors/events to be traced historically
Building up experience in a structured way

11. 10.1 The nature of risk and risk management (Continued)
Response control or mitigation (3)
Benefits from ongoing process through the project
Support documentation
the risk register or the risk log
Risk register/risk log:
List identified risks
Their occurrence
Actions taken to mitigate them
Results of the actions taken
Add new risks as they become apparent
Remove expired risks
Beneficial as highlights ongoing process

12. 10.2 Qualitative and quantitative approaches
How risky is an event or activity?
How likely is it to occur, what is the probability?
Improbable to highly likely
What might be the effect (impact/severity) of the event?
Critical – will cause total failure
Major – will hold up or increase costs in one or more areas
Minor – will only cause inconvenience

13. 10.2 Qualitative and quantitative approaches (Continued)
Qualitative approaches
Gather peoples’ perceptions as to probability and impact
Use scales
Low–medium–high; 1 to 3; 1 to 5 (APM); 1 to 10 (PMI)
Ratings based on opinion or perception
Chart on matrix
Visual identity of high risks needing attention

14. 10.2 Qualitative and quantitative approaches (Continued)
Risks in the pink boxes need to be actioned
Figure Probability impact chart

15. 10.2 Qualitative and quantitative approaches (Continued)
Failure mode effect analysis (FMEA)
Consider three elements of each activity or path through the activities:
Likelihood, severity and hideability
Estimate each on a scale of 1–10
Total risk is product of all three: likelihood × severity × hideability
Table FMEA analysis

16. 10.2 Qualitative and quantitative approaches (Continued)
Mathematical models of the scenario
Enables a large number of variables to be considered
Useful guides for decision making
Four models shown:
1. Expected Value
The expected value of the event
is the possible outcome multiplied by
the probability of its occurrence
Useful for comparing several projects or alternatives
Percent chance (probability) can be estimated or calculated using Monte Carlo analysis.
Project
Possible outcome
Probability of occurrence
Expected Value 1
£200 mill
50%
£100 mill 2
£150 mill
70%
£105 mill

17. 10.2 Qualitative and quantitative approaches (Continued)
2. Sensitivity analysis
Use expected, optimistic and pessimistic value of inputs (e.g. costs)
Shows effect on the outcome of a change in the variable
Shows where management attention and control is needed
Example
Prices on materials and labour likely to fluctuate
Contract price is fixed in advance
Need to see effect of fluctuations on profit
Costs of materials say £0.6m
Costs of direct labour say £0.2m
Contribution to say 175 percent of direct labour
Revenues: fixed at £1.2m
Profit = revenue – material costs – (labour + overheads)

18. 10.2 Qualitative and quantitative approaches (Continued)
Table Sensitivity analysis
This shows when the project will make a profit or a loss
Should materials increase by 10 percent, unless there is a drop in labour costs, the project will make a loss

19. 10.2 Qualitative and quantitative approaches (Continued)
3. Monte Carlo simulation
Practicable if use computer (extension to popular spread sheets)
Use range of values of distribution apply to time, cost and other estimates
Shows effect on finances or other critical factors

20. 10.2 Qualitative and quantitative approaches (Continued)
Example
Revenue stream to be generated: in the range of £.75m to £1.15m
Equally likely to be any value
Materials costs: £.25m most likely
could be considerably more, unlikely to be less
Labour costs: £.55m
Could be more, could be less
Profit
Normally = revenue–materials–labour = £.15
Uncertainties suggest otherwise

21. 10.2 Qualitative and quantitative approaches (Continued)
Figure Examples of the use of Monte Carlo analysis

22. 10.2 Qualitative and quantitative approaches (Continued)
4. PERT: Programme evaluation and review technique
Likely a single value for ‘time for completion’ will have an error
Three estimates for each activity are required
Optimistic (o) – if conditions are ideal
Most probable (m) – if conditions are ‘normal’
Pessimistic (p) – if things go wrong
Expected time is (o + 4m + p)/6
Use expected time in critical path analysis
May effect the duration, may change the critical path
The downside
Shows outcome (partial picture) but does not indicate probability
Additional complexity may not be justified by a return in accuracy of the plans
Relies on people being accurate in their forecasting

23. 10.2 Qualitative and quantitative approaches (Continued)
Figure Network showing optimistic, most probable and pessimistic times

24. 10.2 Qualitative and quantitative approaches (Continued)
Figure Distribution of estimated times for an activity

25. 10.2 Qualitative and quantitative approaches (Continued)
Table Three-point estimates for tasks

26. 10.2 Qualitative and quantitative approaches (Continued)
Table Three-point estimates and variances for tasks

27. 10.2 Qualitative and quantitative approaches (Continued)
Table Probabilities of completing tasks

28. 10.3 Opportunities management
‘On a recent project, my team spent two days trying to reduce a £ risk. I would much rather they spent that time looking to see how the project could yield an extra £ of business benefit’ [Project Director, Rolls-Royce]
Many ideas are lost because there is no route to exploit them
Rare that great innovative products are the result of a development process that started out with that objective in mind
A route to exploit opportunities is essential
One framework:
Negative to positive: a risk that doesn’t materialise is a benefit
Opportunities of response: a high risk that is mitigated presents an opportunity
Random good fortune: opportunities presented by a breakthrough
Qualitative process for managing opportunities similar to that of managing risks

29. Summary The issue of risk is central to projects
How risk is managed will impact on project success
A basic process provides a structure
Identification, quantification and mitigation
Use ‘enterprise risk management’ to establish a ‘risk portfolio’
Inclusion of high and low risk projects
Using a risk management framework is strongly recommended
Practice and reflection is essential
Do risk processes work?
Recent research suggests that success is limited
Risk an opportunity management only part of the process
Important how organisations respond
Consideration of process necessary
As is attention to behaviour