Slide 1: Project Risk Management
Slide 2: What is Risk? Risk and uncertainty are equivalent
Slide 3: Three Definitions • Risk – A possible future event which if it occurs will lead to an undesirable outcome. – The cumulative effect of the chances of an uncertain occurrence that will adversely affect project objectives. • Project Risk • Risk Management – A systematic and explicit approach for identifying, quantifying, and controlling project risk.
Slide 4: DEFINITIO PROJECT RISK MANAGEMENT IS THE ART AND SCIENCE OF N IDENTIFYING, ASSESSING, AND RESPONDING TO PROJECT RISK THROUGHOUT THE LIFE OF A PROJECT AND IN THE BEST INTERESTS OF ITS OBJECTIVES PROJECT RISK IS THE CUMULATIVE EFFECT OF THE CHANCES OF UNCERTAIN OCCURRENCES ADVERSELY AFFECTING PROJECT OBJECTIVES
Slide 5: RISK MANAGEMENT PURPOSE IDENTIFY FACTORS THAT ARE LIKELY TO IMPACT THE PROJECT OBJECTIVES OF SCOPE, QUALITY, COST AND TIME QUANTIFY THE LIKELY IMPACT OF EACH FACTOR GIVE A BASELINE FOR PROJECT NON-CONTROLLABLES MITIGATE IMPACTS BY EXERCISING INFLUENCE OVER PROJECT CONTROLLABLES THE PMBOK ALSO POINTS OUT THAT RISK MANAGEMENT INCLUDES MAXIMIZING THE RESULTS OF POSITIVE EVENTS AND MINIMIZING THE CONSEQUENCES OF ADVERSE EVENTS.
Slide 6: ISSUES A RISK SHOULD ONLY BE TAKEN WHEN THE POTENTIAL BENEFIT AND CHANCES OF WINNING EXCEED THE REMEDIAL COST OF AN UNSUCCESSFUL DECISION AND CHANCES OF LOSING BY A SATISFACTORY MARGIN WHAT WILL BE GAINED? WHAT COULD BE LOST? WHAT ARE THE CHANCES OF SUCCESS (AND FAILURE)? WHAT CAN BE DONE IF THE DESIRED RESULT IS NOT ACHIEVED? IS THE POTENTIAL REWARD WORTH THE RISK? POTENTIAL FREQUENCY OF LOSS AMOUNT AND RELIABILITY OF INFORMATION AVAILABLE POTENTIAL SEVERITY OF LOSS MANAGEABILITY OF THE RISK VIVIDNESS OF THE CONSEQUENCES POTENTIAL FOR (ADVERSE) PUBLICITY WHOSE MONEY IS IT?
Slide 7: NATURE OF RISK MANAGEMENT WHEN SPEAKING OF RISK, THINK OF ONLY HAZARDOUS ONES EVERYDAY COMMON DAY ONES ARE IGNORED RARELY DO WE SYSTEMATICALLY IDENTIFY ALL RISKS INVOLVED HOWEVER, INCLINED TO CONSIDER RISK DIFFERENTLY RELATIVE TO FAMILY - VERY PRECIOUS AND LOTS OF POTENTIAL EXAMPLES: SMALL CHILDREN - STAY AWAY FROM ROAD HOW DID DAY GO? - DO MORE TO HELP THEM - RISK ID & AVOIDANCE - INFO FEEDBACK THESE ACTIONS ARE ESTABLISHING THE BASIC ELEMENTS OF MANAGING PROJECT RISK INTO OUR CHILDREN
Slide 8: PROJECT RISK MGMT IS PRO-ACTIVE CLASSIC SYSTEMS METHODOLOGY: INPUT PROCESS FEEDBACK LOOP THIS PROCESS VITAL TO EFFECTIVE PROJECT CONTROL, HOWEVER RISK IS DIFFERENT - - HAS TO DO WITH: UNCERTAINTY, PROBABILITY OR UNPREDICTABILITY, AND CONTINGENT PLANNING OUTPUT
Slide 9: REACTIVE vs. PROACTIVE CRISIS MANAGEMENT -- REACTIVE MODE -- SELECT RESPONSE PRO-ACTIVE -- ANTICIPATE AND PLAN TO AVOID RISK & DECISION MAKING: TAKE RISK IF POTENTIAL BENEFIT AND CHANCE OF WINNING EXCEEDS COST OF UNSUCCESSFUL DECISION AND CHANCES OF LOSING BY A SATISFACTORY MARGIN (CLASSIC COST / BENEFIT ANALYSIS)
Slide 10: Project Risk Management P r o je c t R is k M anagem ent 1 1 .0 R is k Id e n tific a tio n 1 1 .1 R is k Q u a n tific a tio n 1 1 .2 R is k R e s p o n s e D e v e lo p m e n t 1 1 .3 R is k R e s p o n s e C o n tro l 1 1 .4
Slide 11: PMBOK Risk • Opportunities - Positive outcome • Threats - Negative outcome
Slide 12: Benefits of Risk Management • More and better information is available during planning and decision making • Project objectives are verified • Improved communications • Higher probability of project success • Proactive approach • Project might be canceled
Slide 13: Why Organizations don’t do Risk Management • Unwillingness to admit risks exist • Postpone the hard parts of the project until later • Risk management costs money – Up front investment of time – Can’t prove it’s necessary • Think health insurance
Slide 14: Why Organizations don’t do Risk Management • “Can Do” management style severely inhibits risk management • Risk identification can make you look like a whiner
Slide 15: Ways to Avoid Risk Management • “Managing risk is everybody’s business” • “There is only one risk: The project might fail. And we’re managing that by working real hard to assure that doesn’t happen.”
Slide 16: The Uncertainty Spectrum NO Information (Unknown unknowns) Partial Information (Known unknowns) SPECIFIC UNCERTAINTY Complete Information (Knowns) TOTAL CERTAINTY GENERAL TOTAL UNCERTAINTY UNCERTAINTY SCOPE OF PROJECT RISK MANAGEMENT* *Note: in this range the information to be sought is known
Slide 17: Project Risk Integration Scope Project Risk Cost Communication Time Quality Procurement Human Resources
Slide 18: INTEGRATING RISK PROJECT MANAGEMENT INTEGRATION SCOPE Life Cycle and Environment Variables INFORMATION / COMMUNICATIONS Expectations Feasibility Ideas, Directives, Data Exchange Accuracy QUALITY Requirements Standards PROJECT RISK Availability Productivity HUMAN RESOURCES Time Objectives, Restraints Services, Plant, Materials: Performance TIME Cost Objectives, Restraints CONTRACT / PROCUREMENT COST
Slide 19: Project Risk Management A subset of project management that includes the processes concerned with identifying, analyzing, and responding to project risk.
Slide 20: Risk Management Objectives • Reduce the number of surprise events • Minimize consequences of adverse events • Maximize the results of positive events
Slide 21: Risk Classification • • • • • • Business risks vs. pure (insurable) risks Classified by uncertainty (business risks) Classified by impact on project elements Classified by their nature Classified by their source Classified by their probability to occur and amount at stake
Slide 22: Consequences of Risk Analysis Positives • greater information is made available during the course of planning and decision making • project objectives are verified • better communications • better probability that project realization will be optimal • increased chance of project success
Slide 23: Consequences of Risk Analysis Negatives • belief that all risks have been accounted for • project could be shut down
Slide 24: Some Considerations • Real information is the key. • The relationship between uncertainty and information is inverse. • For the project manager, conditions of relative uncertainty (partial information) are the rule. • There is a natural resistance to formal risk analysis. • Risks should only be taken to achieve a project objective.
Slide 25: PMBOK FIGURE 111 PROJECT RISK MANAGEMENT OVERVIEW Risk Identification Inputs Product Description Other Planning Outputs Historical Information Risk Quantification Inputs Stakeholder risk tolerances Sources of Risk Potential Risk Events Cost Estimates Activity Duration Estimates Response Development Inputs Opportunities to pursue, threats to respond to Opportunities to ignore, threats to accept Response Control Inputs Risk Management Plan Actual Risk Events Additional Risk Identification Tools & Techniques Checklists Flowcharting Interviewing Tools & Techniques Procurement Contingency Planning Alternative Strategies Insurance Tools & Techniques Workarounds Additional Risk Response Development Tools & Techniques Expected Monetary Value Statistical Sums Simulation Decision Trees Expert Judgment Outputs Sources of Risk Potential Risk Events Risk Symptoms Inputs to other Processes Outputs Corrective Action Updates to Risk Management Plan Outputs Risk Management Plan Inputs to other Processes Contingency Plans Reserves Contractual Agreements Outputs Opportunities to pursue, threats to respond to Opportunities to ignore, threats to accept
Slide 26: Risk Identification P r o je c t R is k M anagem ent 1 1 .0 R is k Id e n tific a tio n 1 1 .1 R is k Q u a n tific a tio n 1 1 .2 R is k R e s p o n s e D e v e lo p m e n t 1 1 .3 R is k R e s p o n s e C o n tr o l 1 1 .4 Risk identification is determining which risks are likely to affect the project and documenting the characteristics of each.
Slide 27: Typical Life Cycle Profiles Risk versus Amount at Stake I N C R E A S I N G R I S K Total project life cycle Plan Accomplish Phase 1 Phase 2 Phase 3 Phase 4 Conceive Develop Execute Finish Opportun ity & Risk $ V A L U E (period when highest risks are incurred) tS mount a A take (period of highest risk impact) TIME
Slide 28: Inputs to Risk Identification • Product description – Specification – SOW – Contract • Other planning outputs – WBS – OBS – Cost and Schedule estimates
Slide 29: Inputs to Risk Identification • Historical information – – – – Commercial databases Corporate memory Corporate database (lessons learned) Websites
Slide 30: Inputs to Risk Identification • Assumptions – Explicit – Implicit • Critical success factors
Slide 31: PHASE 1: RISK IDENTIFY ALL POSSIBLE RISKS WHICH MAY SIGNIFICANTLY IMPACT IDENTIFICATION THE SUCCESS OF THE PROJECT -- CAN DO THIS BY: CAUSE-AND-EFFECT ANALYSIS (WHAT COULD HAPPEN  WHAT ENSUES) EFFECT-AND-CAUSE ANALYSIS (WHAT OUTCOMES TO AVOID  HOW THEY MIGHT OCCUR) BRING IN THE EXPERTS ON THE PROGRAM AND QUESTION THEM BRAINSTORM WBS - INDIVIDUAL WORK PACKAGES PLUS COMBINATIONS THEREOF WILLOUGHBY TEMPLATES, SEI TAXONOMY AND CHARELLET CHECKLIST Risk typically examines possibility of suffering harm or loss; however, Risk Identification is also concerned with opportunities (positive outcomes) and threats (negative outcomes).
Slide 32: TYPES OF RISK • Business vs. Insurable Risk • Risk Sources – – – – – External Unpredictable External Predictable Internal Non-Technical Technical Legal
Slide 33: • Knowns TYPES OF RISK (2) – An item or situation containing no uncertainty • Known Unknowns – Things which we know exist but do not know how they will affect us. These can be identified and evaluated. • Unknown Unknowns – Those risks that cannot be identified and evaluated (unexpected needs). These can be
Slide 34: • Risks can also be classified as: – External Unpredictable – External Predictable – Internal Non-Technical – Technical – Legal TYPES OF RISK (3)
Slide 35: • • • • • EXTERNAL UNPREDICTABLE Regulatory Natural Hazards Postulated Events Unexpected Side Effects of the Project Failure to Complete Project Due to Uncontrollable External Events
Slide 36: • • • • • • • EXTERNAL PREDICTABLE Market Risks Operational Environmental Impacts Social Impacts Currency Risk Inflation Taxes
Slide 37: INTERNAL, NON-TECHNICAL • • • • • Management Schedule Cost Cash Flow Loss of Potential Benefit or Profit
Slide 38: TECHNICAL • Changes in Technology • Performance Uncertainty • Risks Associated with Project’s Technology • Design • Sheer Size or Complexity
Slide 39: • • • • • • Licensing Patent Rights Contractual Difficulties Outsider Suits Insider Suits Force Majeure (PMI’s Word) LEGAL
Slide 40: OTHER RISK ID SOURCES • Overly Aggressive Cost Estimates • Overly Aggressive Duration Estimates • Staffing Plan - Personnel With Special Skills • Procurement Management Plan • Historical Project Files & Project Team Knowledge • Commercial Databases
Slide 41: KEEP IN MIND • How can you assess risks? – Break things down into individual elements and determine their relationships All of them Concentrate on those with greatest impact and most likely probability of occurrence • What risks should you assess? – –
Slide 42: RISK FACTORS ALL PROJECT RISKS ARE CHARACTERIZED BY THE FOLLOWING THREE RISK FACTORS RISK EVENT: PRECISELY WHAT MIGHT HAPPEN TO THE DETRIMENT OF THE PROJECT Write it as an “If - Then” Statement RISK PROBABILITY: HOW LIKELY THE EVENT IS TO OCCUR AMOUNT AT STAKE: THE SEVERITY OF THE CONSEQUENCES WITH THIS DATA, THE RISK EVENT STATUS ("CRITERION VALUE" OR RANKING) OF A GIVEN RISK EVENT CAN BE DETERMINED BY: RISK EVENT STATUS = RISK PROBABILITY X AMOUNT AT STAKE
Slide 43: RISK EVENT vs. RISK SYMPTOM RISK EVENT ARE DISCRETE OCCURRENCES RISK SYMPTOM ⇒ TRIGGERS THESE ARE INDIRECT MANIFESTATIONS OF ACTUAL RISK EVENTS EXAMPLES OF RISK SYMPTOMS: POOR MORALE = EARLY WARNING SIGN OF SCHEDULE DELAY EARLY PROJECT COST OVERRUN = POTENTIAL POOR PROJECT OVERALL ESTIMATING
Slide 44: Risk Identification Tools and Techniques • Checklists – Project Healthcheck • Flowcharting – Cause & Effect (fishbone or Ishikawa charts • What could happen What ensues How they occur – Effect & Cause • Outcomes to avoid – System or Process flowcharts
Slide 45: Risk Identification Tools and Techniques • Interviewing • Brainstorming
Slide 46: Outputs • Sources of risk (i.e., categories) – – – – Stakeholder actions Estimates Staffing plans Common sources of risk: • • • • Changes in requirements Design errors, omissions, and misunderstandings Poorly defined R & R Insufficiently skilled staff
Slide 47: Outputs • Potential Risk events – Specific discrete events that might effect the project – Generally include: • • • • Probability Alternative outcomes Timing Frequency (more than once?)
Slide 48: Outputs • Risk Symptoms – Triggers, or trip wires, or indicators – Indirect manifestations of risk events • Poor morale • Lack of reported progress • Inputs to other processes – Improved estimating – More training
Slide 49: Risk Quantification P r o je c t R is k M anagem ent 1 1 .0 R is k Id e n tific a tio n 1 1 .1 R is k Q u a n tific a tio n 1 1 .2 R is k R e s p o n s e D e v e lo p m e n t 1 1 .3 R is k R e s p o n s e C o n tr o l 1 1 .4 Risk quantification consists of evaluating the risks and risk interactions to assess the range of possible project outcomes.
Slide 50: PHASE 2: RISK QUANTIFICATION GOALS OF QUANTIFICATION (OR ASSESSMENT) INCREASE THE UNDERSTANDING OF THE PROJECT IDENTIFY THE ALTERNATIVES AVAILABLE ENSURE THAT UNCERTAINTIES AND RISKS ARE ADEQUATELY CONSIDERED IN A STRUCTURED AND SYSTEMATIC WAY AND INCORPORATED INTO THE PLANNING AND DEVELOPMENT PROCESS ESTABLISH THE IMPLICATIONS OF THESE UNCERTAINTIES ON ALL OTHER ASPECTS OF THE PROJECT
Slide 51: Risk Quantification - Inputs • • • • • Stakeholder risk tolerances Sources of risk Potential risk events Cost estimates Activity duration estimates
Slide 52: Risk Quantification Tools and Techniques • • • • • Expected monetary value Statistical sums Simulation Decision trees Expert judgment
Slide 53: RISK ANALYSIS TECHNIQUES BRAINSTORMING - SPONTANEOUS CONTRIBUTION OF IDEAS FROM TEAM DELPHI METHOD - METHOD TO DERIVE CONSENSUS USING EXPERT OPINION MONTE CARLO - ITERATIVE SIMULATION USING RANDOM NUMBERS TO INCORPORATE PROBABILISTIC DATA AND DERIVE A PROBABILITY DISTRIBUTION OF THE FINAL RESULT SENSITIVITY ANALYSIS - EVALUATE EFFECT OF A CHANGE IN A SINGLE VARIABLE ON THE ENTIRE PROJECT DECISION TREE ANALYSIS - GRAPHICAL "EITHER / OR" CHOICES UTILITY THEORY - TAKES ATTITUDE OF DECISION MAKER INTO ACCOUNT DECISION THEORY - TECHNIQUE TO REACH DECISION UNDER UNCERTAINTY AND RISK. POINTS TO BEST POSSIBLE COURSE NO MATTER THE FORECAST ACCURACY PROBABILITY ANALYSIS - NEXT PAGE
Slide 54: SIMPLE PROBABILITY SIMPLE PROBABILITY EQUATION: Pr (Event #1) x Pr (Event #2) = Pr (Both Events) P(t) = P(A) * P(B) OR 0.70 X 0.80 = 0.56 OR 56% NOTE: THIS APPLIES TO INDEPENDENT EVENTS ONLY
Slide 55: PROBABILITY EXAMPLE DATA: Probability of Scope = 0.70 Probability of No Scope = 0.30 Probability of Approval = 0.80 Probability of No Approval = 0.20 EXAMPLE: Pr(Scope) x Pr(Approval) = Pr(Scope) x Pr(No Approval) = Pr(No Scope) x Pr(Approval) = Pr(No Scope) x Pr(No Approval) = 0.70 x 0.80 = 0.70 x 0.20 = 0.30 x 0.80 = 0.30 x 0.20 = Total= 0.56 0.14 0.24 0.06 1.00 PRACTICAL APPLICATION -- DECISION TREE ANALYSIS
Slide 56: Expected Monetary Value (EMV) • Product of two values – Risk event probability – Risk event value • Valuation of the risk event is key – Must include tangible as well as intangible value – 1 week slippage with minor client impact – 6 week slippage with major client impact
Slide 57: Expected Monitary Value Example Given the following: Cost Probability Optimistic $100,000 0.20 Most likely $130,000 0.60 Pessimistic $180,000 0.20 Expected Value Calculation: Optimistic $100,000 x 0.20 = 20,000 Most likely $130,000 x 0.60 = 78,000 Pessimistic $180,000 x 0.20 = 36,000 Expected Monitary Value $134,000 (*EMV = Opt imistic + 4(most likely) + Pessimistic) 6 * formula if probability is not known
Slide 58: EMV Example • If no probabilities are given, use EMV=(Opt + 4*ML + Pes)/6 • EMV= ($100 +4*$130+$180)*1000/6 = $133,333
Slide 59: Descriptive Statistics • • • • • • Mean Mode Median Variance Standard Deviation Range
Slide 60: Descriptive Statistics Example Test scores are 10, 20, 25, 40, 45, 45, 50, 55, 55, 60, 60, 60, 65, 65, 65, 70, 70, 70, 70, 70, 75, 80, 80, 85, 90, 90, 90, 95, 100 Mean: number obtained by dividing the sum of a set of quantities by the number of quantities in the set. (answer is 1855 / 29=64) Mode: value or item occurring most frequently in a series of observations. (answer is 70 -it occurs 5 times) Median: middle value in a distribution, above and below which lie an equal number of values (answer is 65) Variance: average of the squares of the variations from the mean of a frequency distribution. (answer is 486.4) Standard deviation: square root of the variance. (answer is 22) Range: measure of the dispersion equal to the difference or interval between the smallest and the largest of the set of quantities. (answer is 90 or 100-10)
Slide 61: Approximations • Mean = (Opt + 4*ML + Pes)/6 • SD = (Max - Min)/6
Slide 62: Exercise Opt ML Pess EMV SDev 13,000 7,500 17,500 Vari 169,000,000 5,625,000 306,250,000 Proj. A 100,000 125,000 180,000 130,000 Proj.B 80,000 Proj.C 75,000 100,000 125,000 100,833 130,000 180,000 129,167
Slide 63: • Normal Distribution So What? – Mean is expected value – Mean = Mode = Median – Standard deviation is a measure of dispersion about the mean • 68.27% of cases occur between Mean + SD and Mean - SD • 95.45% of cases occur between Mean+2SD and Mean-2SD • 99.73% of cases occur between Mean+3sd and Mean-3SD
Slide 64: Mean Blue = 68% Blue + Green = 95% Blue + Green + Red = 99.7% 34.1% 34.1% 1.1% - 3SD - 2SD 13.6% - SD 13.6% + SD + 2SD 1.1% + 3SD Normal Distribution
Slide 65: Mode Median Mean Skewed Normal Distribution
Slide 66: BETA vs. TRIANGULAR DISTRIBUTIONS BETA DISTRIBUTION EXPECTED VALUE TRIANGULAR DISTRIBUTION EXPECTED VALUE P R O B A B I L I T Y COST ESTIMATE Mean = (a + 4m + b) / 6 2 Variance = [(b - a) / 6] P R O B A B I L I T Y COST ESTIMATE Mean = (a + m + b) / 3 Variance = [(b - a) 2 + (m - a) (m - b)] / 18
Slide 67: Simulation Simulation uses a representation or model of a system to analyze the behavior or performance of the system. • Monte Carlo analysis is best known • results used to quantify risk of various schedule choices
Slide 68: Monte Carlo • Requires Optimistic, Most Likely, and Pessimistic estimates. • Uses random number generator to select which value to use • Calculates the database multiple times to develop a probability distribution of the data
Slide 69: Decision Trees Aggressive schedule EMV = $110,000 Conservative schedule EMV = $7,000 Given the following decision tree: Outcome 60% aggressive 250 k 100 k 45 k EMV 150 k 40 k 9k Choice event conservative Choice event Choice event 40% 20% 80% 20 k 16 k
Slide 70: • Definition UTILITY THEORY – Endeavors to formalize management’s attitude toward risk of the decision maker. • Types – Risk Seeking – Risk Neutral – Risk Averse
Slide 71: Expert Judgment Expert judgment can often be applied in lieu of or in addition to the mathematical techniques described above. Derived from: • • • • team members others in or outside of organization published findings industry averages / statistics
Slide 72: QUALITY RISK GOALS OF RISK MANAGEMENT - INCREASE UNDERSTANDING OF PROJECT - IMPROVE PLANS, DELIVERY, AND ID GREATEST RISKS - WHERE TO FOCUS ATTENTION REMAINING MAJOR PROJECT RISK AREA ... WHAT IF PROJECT FAILS TO PERFORM AS EXPECTED DURING OPERATIONAL LIFE / PRODUCT LIFE CYCLE? CONFORMANCE TO QUALITY REQUIREMENT REMEMBERED LONG AFTER COST AND SCHEDULE PERFORMANCE. ∴ QUALITY MANAGEMENT HAS MOST IMPACT ON LONG-TERM PERCEIVED & ACTUAL SUCCESS OF PROJECT
Slide 73: SCHEDULE RISK CAN MANAGE “CRITICAL PATH” BUT NOT MANAGE DURATION REASON --> SCHEDULE RISK HIGHEST RISK PATH = PATH WITH MOST PROJECT COMPLETION RISK RISK IN ALL ACTIVITY DURATION BECAUSE FUTURE IS UNCERTAIN LONGEST DURATION ACTIVITY ≠ RISKIEST THEREFORE, NEED TO ID & MANAGE WHAT COULD CONTRIBUTE TO PROJECT DELAY -- COULD OVERRIDE MANAGEMENT OF CRITICAL PATH
Slide 74: SCHEDULE RISK C B (CONT'D) FINISH START E A MOST LIKELY 9 5 0 6 9 2 8 4 0 1 4 1 D HIGH 10 6 0 7 14 7 MEAN EXPECTED 9 5 0 4.7 9 3.3 ACTIVITY A-B B-C C-E B-E A-D D-E LOW
Slide 75: SCHEDULE RISK B (CONT'D) FINISH START E A SUM OF MOST LIKELY 14 15 11 A-B-E D SUM OF MEANS 14 13.7 12.3 A-B-C-E SUM OF HIGHS 16 17 21 A-D-E PATH A-B-C-E A-B-E A-D-E MOST RISKY
Slide 76: Risk Quantification- Outputs Opportunities to pursue, threats to respond to Opportunities to ignore, threats to accept
Slide 77: Risk Response Development P r o je c t R is k M anagem ent 1 1 .0 R is k Id e n tific a tio n 1 1 .1 R is k Q u a n tific a tio n 1 1 .2 R is k R e s p o n s e D e v e lo p m e n t 1 1 .3 R is k R e s p o n s e C o n tr o l 1 1 .4 Risk response development defines the enhancement steps for opportunities and responses to threats.
Slide 78: Risk Response Development • Defines steps for – enhancing opportunities – responding to threats
Slide 79: Types of Responses • Avoidance - eliminate • Mitigation – Reduce EMV by reducing probability – Reduce Impact - buy insurance • Acceptance – Active: develop plan to deal with risk if it occurs – Passive: Accept risk (e.g., lower profit)
Slide 80: PLANNING ALTERNATIVES • Project Managers have Several Response Options – – – – – – Avoidance Absorption Adjustment Deflection Contingent Planning A Combination of the Above
Slide 81: AVOIDANCE • Defined – Characterized by project manager statements such as: “This alternative is totally unacceptable to me – You would take the appropriate steps to avoid this situation.
Slide 82: ABSORPTION • • • • Risk is Recognized-But Not Acted Upon Accept the Risk AS IS It’s a Matter of Policy Retained & Absorbed (by prudential allowances) • Unrecognized, Unmanaged, or Ignored (by default)
Slide 83: • Modification of the Project – Scope – Budget – Schedule – Quality Specification – Combination of the Above ADJUSTMENT
Slide 84: DEFLECTION • Involves transfer of risk by such means as: – Contracting Out to Another Party – Insurance or Bonding – By Recognizing it in the Contract
Slide 85: CONTINGENT RISKS TO THE CONTINGENT PLANNING IS A MEANS TO ADDRESS PROJECT THROUGH A FORMAL PROCESS AND PROVIDE RESOURCES PLANNING TO MEET THE RISK EVENTS. IT IS THE ESTABLISHMENT OF MANAGEMENT PLANS TO BE INVOKED IN THE EVENT OF SPECIFIED RISK EVENTS EXAMPLES: THE PROVISION AND PRUDENT MANAGEMENT OF A CONTINGENCY ALLOWANCE IN THE BUDGET THE PREPARATION OF SCHEDULE ALTERNATIVES AND WORK-AROUNDS EMERGENCY RESPONSES TO DEAL WITH MAJOR SPECIFIC AREAS OF RISK AN ASSESSMENT OF LIABILITIES IN THE EVENT OF A COMPLETE PROJECT SHUT-DOWN
Slide 86: Types of Responses • Prevent risk from occurring – Reduce the probability that the event will occur – Eliminate means P=0 • Reduce the impact (think “containment”) – Buy insurance (monetary) – Alternative strategies (additional supplier to PDQ)
Slide 87: CONTRACT STRATEGY • To Select the Right Form of Contract Requires: – – – Identification of Specific Risks Determination of how they should be shared between the parties, and The insertion of clear, legal language in the contract documents to put it into effect.
Slide 88: CONTRACT TYPE vs. RISK SCOPE OF WORK INFORMATION UNCERTAINTY VERY LITTLE PARTIAL COMPLETE HIGH MODERATE LOW DEGREE OF RISK SUGGESTED RISK ALLOCATION CONTRACT TYPES HIGH 100% MEDIUM LOW 0% SELLER (CONTRACTOR) 100% AGENCY (BUYER) 0% CPPF CPIF CPFF FPPI FFP
Slide 89: CONTRACT TYPE vs. RISK (CONT'D) P R O B A B I L I T Y Project A Well defined scope and work content. High probability of achieving realistic cost estimate at 100% Project B Fairly well defined scope and work content. Fair probability of achieving 100% cost estimate Project c Poorly defined scope and content. Low probability of 100% cost estimate 80% 90% 95% 100% 110% 120% 140% COST ESTIMATE VALUE +/- 15%: FFP +/- 25%: CPFF +/- 50%: CPIF > 50%: CPPF Suggested types of contract for various spreads
Slide 90: FAST-TRACKING • Awarding contracts before all the information is complete to reduce the overall time for the project • Much higher risk category!! • Appropriate contingency allowances must be increased accordingly.
Slide 91: Risk Response Development Inputs Opportunities to pursue, threats to respond to Opportunities to ignore, threats to accept
Slide 92: Risk Response Development Tools and Techniques • Procurement – Buy outside skills • Contingency planning – what to do if the event occurs – containment • Alternative strategies – Prevention • Insurance
Slide 93: Risk Response Development Outputs • • • • • Risk management plan Inputs to other processes Contingency plans Reserves Contractual agreements
Slide 94: Risk Response Control P r o je c t R is k M anagem ent 1 1 .0 R is k Id e n tific a tio n 1 1 .1 R is k Q u a n tific a tio n 1 1 .2 R is k R e s p o n s e D e v e lo p m e n t 1 1 .3 R is k R e s p o n s e C o n tro l 1 1 .4 Risk response control involves responding to changes in risk over the life of the project.
Slide 95: PHASE 4: RISK RESPONSE CONTROL • EXECUTE THE RISK MANAGEMENT PLAN FROM PHASE #3 -ID, QUANTIFY AND RESPOND TO ANY CHANGES EXECUTE WORKAROUNDS -- UNPLANNED RESPONSES TO NEGATIVE EVENTS -ADDITIONAL RISK RESPONSE DEVELOPMENT •CURRENT PROJECT DATABASE -DOCUMENTING ON-GOING RISKS •BUILD HISTORICAL DATABASES RELIABLE DATA IS HARD TO FIND! SHOULD CONSIST OF: -RECORDED RISK EVENTS -EXPERIENCE ON PAST PROJECTS (SIMILAR IS PREFERRED) •POST-PROJECT ASSESSMENT AND ARCHIVE UPDATE
Slide 96: Risk Response Control • Respond to the changes in project risk over the life of the project
Slide 97: Risk Response Control - Inputs • Risk management plan • Actual risk events • Additional risk identification
Slide 98: Risk Response Control Tools and Techniques • Workarounds – Unplanned responses to unforeseen risks that actually occur • Additional risk response development – Revisions to the response, if it proves inadequate
Slide 99: Risk Response Control - Outputs • Corrective action – Implementing the risk management plan when the risk occurs • Updates to risk management plan – Revisions to the risk management plan as circumstances require • Risk never materializes • Probability of occurrence is reduced
Slide 100: Risk Documentation Historical database Current project database Post project assessment and archive update • • • • • Lessons learned Plan variances Actuals Methods, tools and techniques Case studies
Slide 101: SUMMARY PROJECTS ARE LAUNCHED TO TAKE ADVANTAGE OF OPPORTUNITIES, BUT OPPORTUNITIES ARE ASSOCIATED WITH UNCERTAINTIES WHICH HAVE RISKS ATTACHED RISK CAN NEVER BE 100% ELIMINATED FOR THE PROJECT TO BE VIABLE, THE EXPECTED VALUE RESULTING FROM A FAVORABLE PROBABILITY OF GAIN MUST BE HIGHER THAN THE CONSEQUENCES AND PROBABILITY OF LOSS THEREFORE, THE RISKS ASSOCIATED WITH A PROJECT MUST RECEIVE CAREFUL EXAMINATION IN THE CONTEXT OF THE ORGANIZATION'S WILLINGNESS OR AVERSION TO TAKING RISKS THIS IS THE DOMAIN OF PROJECT RISK MANAGEMENT, WHICH FORMS A VITAL AND INTEGRAL PART OF PROJECT MANAGEMENT
Slide 102: When Should Risk Assessments be Carried Out? Risk assessments should be carried out as early as possible and then continuously.
Slide 103: Don’t take the risk if... • • • • • • the organization cannot afford to lose. the exposure to the outcome is too great. the situation (or project) is not worth it. the odds are not in the project’s favor. the benefits are not clearly identified. there appear to be a large number of acceptable alternatives.
Slide 104: Don’t take the risk if... • the risk does not achieve the project objective. • the expected value from baseline assumptions is negative. • the data is unorganized, without structure or pattern. • there is not enough data to understand the results. • a contingency plan for recovery is not in place should the results prove unsatisfactory.