1

EE97 Lectures

Senior Project DesignFall 2006

Lecture 5Concept: Risk & Risk Management

10-06-06

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Quote for the Day

“Knowledge to inform…guts to lead”

—Ron Lasser

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First Thoughts on Risk

What does this tell us about risk?

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Risk Management ala’ Dilbert

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And another view

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“The biggest risk may be not taking any”

Risk as a Paradox

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“Nothing ventured,nothing gained”

Or…Maybe Other Terms

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“Footprints in the sands of time were not made by those sitting down”

Or...in as Action

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“You miss 100% of theshots you don’t take”

Or…by Wayne Gretzky

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“You can’t steal 2nd base with one foot on 1st base”

—Unknown

Or…by way of The National Pastime

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The ObjectivesUnderstand risk Apply project risk management to your project for your project proposalIdentify the elements of a risk management planList common sources of risks in technology projectsIdentify the qualitative risk analysis process and explain how to calculate risk factors and use expert judgment to rank risksExplain the quantitative risk analysis process and how to apply decision trees, simulation, and sensitivity analysis to quantify risksProvide examples of negative and positive risksDiscuss what is involved in risk management

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Risk and Regret

Risk is the chance or possibility of lossRegret is the amount of loss a person can tolerate

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What is risk?risk (r ih sk) n.

The possibility of suffering harm or loss; danger. A factor, thing, element, or course involving uncertain danger; a hazard: “the usual risks of the desert: rattlesnakes, the heat, and lack of water”(Frank Clancy)

The danger or probability of loss to an insurer. The amount that an insurance company stands to lose.

The variability of returns from an investment. The chance of nonpayment of a debt.

One considered with respect to the possibility of loss: a poor risk.

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Or is Risk…The potential future harm that may arise from some present action

Often combined or confused with the probability of an event which is seen as undesirable

A believable scenario combining regret and rewardprobabilities into an expected value

The assessment of some probability of expected harms

The value at riskAssessment (or "measure" although it is not usually possible to directly measure) of risk, and (for some applications) the formal methods used to determine this value

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What is regret?re·gret (r -gr t )

v. tr.To feel sorry, disappointed, or distressed about. To remember with a feeling of loss or sorrow; mourn.

v. intr.To feel regret.

n.A sense of loss and longing for someone or something gone. A feeling of disappointment or distress about something that one wishes could be different.

regretsA courteous expression of regret, especially at having to decline an invitation.

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Anunexpected

eventor change

Aprobability

of thatevent

Theimpactof thatevent

R I S K

“Cause” “Consequence”“Chance”

Maybe we should talk about chance...

The Three Components of

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What is Uncertainty?

un·cer·tain·ty n-sûr tn-tn. pl. un·cer·tain·tiesThe condition of being uncertain; doubt. Something uncertain: the uncertainties of modern life.Statistics. The estimated amount or percentage by which an observed or calculated value may differ from the true value

Great! So now we need to know the definition of uncertain

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What does Uncertain mean?

un·cer·tain n-sûr tnadj.

Not known or established; questionable: domestic changes of great if uncertain consequences.Not determined; undecided: uncertain plans.Not having sure knowledge: an uncertain recollection of the sequence of events.

Subject to change; variable: uncertain weather.Unsteady; fitful: uncertain light.

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Frank H. Knight established the economic definition of the terms in his landmark book, Risk, Uncertainty, and Profit (1921): risk is present when future events occur with measurable probabilityuncertainty is present when the likelihood of future events is indefinite or incalculable

Uncertainty vs. RiskUncertainty:

Some parameters are not knownRisk assessments may be right or wrong

Risk:Fully quantified (for example, a die)

Decision-maker knows all of the odds

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Certainty:

•Each decision has a known outcome•Problem can be solved deterministically

Risk

•The nature of the problem is random•But the probabilities of the different states are known

Uncertainty:

•The nature of the problem is random•The probabilities of the different states are unknown

Conflict:

•The nature of theproblem is random•The probabilitiesof the different statesare somewhatdetermined by anopponent

You are here (probably)

Chaos:

•Uncertainty even in the fundamentals

Spectrum of the… Unknown

21Source: De Meyer, Loch, Pich, INSEAD Singapore 2000 IEEE Conference on Management of Innovation and Technology

Types of Uncertainty

Variation in durations, costs, performance levels of resourcesForeseen risks (identified upfront)Unforeseen risks (encountered

mid-project)Chaos – fundamental uncertainty about the basic structure of the project

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What is Consequence?con·se·quencen.

Something that logically or naturally follows from an action or condition. The relation of a result to its cause. A logical conclusion or inference. Importance in rank or position: scientists of consequence.Significance; importance: an issue of consequence.

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What is Mitigation?

mit·i·gatev.v. tr.

To moderate (a quality or condition) in force or intensity; alleviate. v. intr.To become milder.

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Concept Planning Implementation Close-out

Risk

Total (cumulative) Cost

Risk impact is the highestduring this period

Risk and Cost over a Project Lifecycle

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Frank and Ernest -- “Classifying Risk”

26Also: social implications of teambuilding, the need to be positiveand uplifting. Negative thoughts are socially suppressed.

What causes projects to overlook risk?

Quantifying risks could lead to the project not being funded

“conflict of interisk” – shows need for independent analysis

The stakeholder doesn’t want to spend the time/energy

“the Nike stakeholder – just do it”The stakeholder doesn’t believe that the risks are real

“The ostrich effect”The stakeholder wants to “keep it simple”

“The ignorant stakeholder”

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Risk Management ProcessIdentification and assessmentPossible actions available:

Avoidance Reduction Retention Transfer

Create the planImplementationReview and evaluation of the plan

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Categories of Project Risk

Known, controllable (subjective)Known, uncontrollable (objective)Unknown

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Strengths

Weaknesses

ThreatsOpportunities

Major possibilitiesfor project success

Leave these opportunitiesfor others to explore HIGH RISK AREA !

Determine how to usestrengths to defend

SWOT Analysis

Helps identify the broad negative and positive risks that apply to a project

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Aware of Aware of

Manage

Track only

ManageWorkReduction

Risk Avoidance Risk Management

• identify risks up front• assess impact to project• focus management on critical risks• track the broader scope of risks

• identify risks up front• assess impact to project• manage all risks

Source: US Navy, Acquisition Reform – Performance-Based Business Environment Initiative SECNAVINST 5000.2

Moving from Risk Avoidance to Risk Management

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assumption risk

Low probability and/or low severity

riskscan be managed as assumptions and

tracked accordingly

…but carefully consider your

assumptions and monitor them – they easily become risks

..see p38-40 of Royer

Unmanaged assumptions are not as apparentas risks – but can be most dangerous to your project.Consider them a “source” of risk even though not yeta risk themselves.

Assumptions and Risks

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Manageable Risks?

Only some factors are truly manageable risks.Make sure you spend your time managing those risks.

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Risk Conditions (Sampling)

IntegrationInadequate planning, insufficient resources, lack of training ramp up time, insufficient project definition

ScopePoor project and mission objectives, incomplete quality definition, inadequate plans for control of scope (added requirements as project progresses)

TimeErrors in schedule, task, and activity durations, poor allocation of resources, changes in scope, resource availability or lack of it when needed

CostError in cost estimates, productivity or performance failures, changes in contingencies, purchasing, planning, or equipment maintenance

QualityPoor attitude toward robust deliverables, substandard workmanship, materials, or design, inadequate quality assurance reviews or practice

CommunicationsCarelessness in planning, lack of documentation, lack of weekly status review or other design reviews

EthicsLack of authenticity or honesty in transactions, lack of meeting commitments, illegal or immoral behavior or actions

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The Risk “Filter”

Know when you’re really dealing with manageable risk!

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Best Risk Statement"If we fail to communicate clearly then effort will be wasted resolving misunderstandings"•Has a probability

•we can ask how likely this is to happen•Has a consequence

•additional cost and possible schedule delay

Poor Risk Statement"Communication is a problem"

•What is the probability? •What are the consequences? Better Risk Statement

"We may fail to communicate adequately"

•Expresses a probability •"may"

•Contains a condition •"fail to communicate…."

•Doesn't have a consequence

Generating Risk Statements

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Closing Processes

Initiating Processes

Planning Processes

Controlling Processes

Executing Processes

Risk Management PlanningRisk IdentificationQuantitative Risk AnalysisQualitative Risk AnalysisRisk Response Planning

Risk Monitoring and Control

PMBOK® Process Groupings

Source: Project Management Book of Knowledge

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What is Risk ManagementProcess of measuring, or assessing risk and then developing strategies to manage the risk

The ideal: a prioritization process whereby the risks with the greatest loss and the greatest probability of occurring are handled first, and risks with lower probability of occurrence and lower loss are handled laterTypicalaly, very difficult process to balance between risks with a high probability of occurrence but lower loss vs. a risk with high loss but lower probability of occurrence

An assessement of the opportunity cost: Resources spent on one task instead could be spent on other more profitable activities

Ideal: expend least amount of resources while reducing the effects of risk as much as possible

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Why is Project Risk Management Important?

Art and science of identifying, analyzing, and responding to risk throughout project life cycleRisk management helps improve project success

Project definitionProject scopeEstimating realistic outcomes and durations

KPMG study found that 55 percent of runaway projects—projects that have significant cost or schedule overruns—did no risk management at all.*

*Source: Cole, Andy, “Runaway Projects—Cause and Effects,” Software World, Vol. 26, no. 3, pp. 3–5 (1995).

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Benefits from Risk Management

80%

60%47% 47% 43%

35%

6%0%

20%

40%

60%

80%

100%

Anticip

ate/avo

id pro

blems

Preven

t surp

rises

Impro

ve ab

ility t

o neg

otiate

Meet c

ustom

er co

mmitmen

ts

Reduce

sche

dule sl

ipsRedu

ce co

st ov

erruns

None

Source: Kulik, Peter and Catherine Weber, “Software Risk Management Practices – 2001,” KLCI Research Group (August 2001).

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“The essence of Risk Management lies in maximizing the areas where we have some control over the outcome while minimizing the areas where we have absolutely no control over the outcome and the linkage between cause and effect is hidden from us.”

The Essence

Source: Against The Gods by P. Bernstein, Ch 12, p197

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PMBOK® Risk Management Overview

Risk ManagementPlanningIdentificationQualitative risk analysisQuantitative risk analysisRisk response planningRisk monitoring and control

42Source; Carnegie Mellon Software Engineering Institute

Communicatethroughout!

Contro

l

Analyze

Plan

Trac

k

Identify

Provide info and feedback inside/outside the project on risk activities, current risks, and emerging risks. Do this throughout all functions!

Communicate

Correct for deviations from plansControl

Monitor risk indicators and mitigations

Track

Translate risk info into decisions and mitigating actions (immediate and future) and implement those actions

Plan

Transform risk data into decision-making info. Evaluate impact, probability and timeframe, classify and prioritize risks

Analyze

Search for and locate risks before they become a problem

Identify

DescriptionFunction

CMU Risk ManagementIdentify, Analyze, Plan, Track, Control, Communicate

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Risk Management PlanningA risk management plan is key deliverableProject team reviews multiple items to formulate plan:

Project definition documents Sponsor’s approaches to riskScheduleCustomer valueTrade-offsUnique items, agreements, suppliers, partners which are critical for success

Scope will vary with project requirements

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Identification and assessment

Identify potential risksAssess potential severity of loss and to the probability of occurrence.

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Risk Identification

Understanding what events are probable and might hurt or enhance a particular project.

Tools and techniques:

Brainstorming

The Delphi Technique

Interviewing

SWOT analysis

Categories of Risk• Market risk• Financial risk• Technology risk• People risk• Structure/process risk• ?

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Brainstorming

A group technique to:Generate ideas or solutionMay be for a generic or a specific problemUsually by listing ideas spontaneously and without judgment

Recommended: an experienced facilitator needs to lead the work sessionMany different techniquesDon’t overuse or over abuse

Psychology literature shows that individuals produce a greater number of ideas working alone than they do through brainstorming in small, face-to-face groupsGroup effects often inhibit idea generation

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Delphi TechniqueUsed to derive a consensus among a set of experts who make predictions about future developments.Performed with an independent and anonymous input regarding future eventsRepeated rounds of questioning with written responsesAvoids the biasing effects possible in oral methods—e.g., brainstorming

• Project risk experts participate –but anonymously.• Facilitator uses a questionnaire to gather ideas about key project risks.• Responses submitted and circulated to the experts for further comment.• Several rounds are used to reach consensus

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InterviewingA method of fact-finding for collecting information in face-to-face, phone, e-mail, or instant-messaging discussionsSpeaking to people with knowledge in the application area or with applicable experience helps to identify potential risksPrepare a set of questions in advance to use as a guideline during an interviewUse open ended questionsLet the interviewee guide and lead you to where they want to take youSuccess, when the interview is over, is like having taken a walk in their shoes!

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Course of Action for RiskContingency plans

Predefined actions project team will take if an identified risk event occursDefined for catastrophic events

Fallback plansDefined for high impact risks impacting objectives, budget, time, or peopleImplemented when attempts to reduce the risk are not effective

Contingency reservesMaintained by the project sponsor to reduce the cost or schedule overruns to a manageable level of riskProject team may or may not obtain these strategic reserves

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Possible actionsRisk avoidance

Includes not performing an activity that could carry riskExample: not buying a property or business in order to not take on the liability that comes with it

Losing out on the potential gain that accepting (retaining) the risk may have allowed

Example: not entering a business to avoid the risk of loss, butavoids the possibility of earning the profits.

Risk reductionMethods that reduce the severity of the loss

Example: sprinklers designed to put out a fire to reduce the risk of loss by fireMethod may cause a greater loss by water damage and therefore may not be suitableHalon fire suppression systems may mitigate that risk, but the cost may be prohibitive as a strategy

Risk retentionAccepting the loss when it occurs

Example: self insuranceRisk transfer

Causing another party to accept the risk, typically by contractExample: Insurance; another involves contract language that transfers a risk to another party without the payment of an insurance premium

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Create the Plan

Combine methods to be used Define contingency plans if risks do occur

Assess risk of contingency planDecide on escalation plan

Allocate resources to match methods

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Implementation

Execute plan to mitigate risks

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Review and Evaluation of the Plan

Establish checkpoints to evaluate risks on periodic intervalsChange execution as required

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Risk Monitoring and ControlExecuting a risk management process to respond to unexpected or foreseen but undesired eventWorkarounds are responses to unplanned risk events when no contingency plans are availableRisk monitoring and control deliverables:

Requested changesRecommended corrective and preventive actionsUpdates to the risk matrix, project management plan, weekly status reports or other important documentation that communicates to all impacted individuals, project areas, and external project resources

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LimitationsImproper assessment and prioritization is time wasted Too much time for assessment and managing diverts resources that may be otherwise profitably engage on higher return tasksFor unlikely events, better course is to simply retain the risk, and deal with the result if the loss does occurRisk management processes is a process, but should not be a project which prevents the organization from starting and completing real projects Value at risk is a measure used to estimate how the value of an asset decreases over a certain time period under usual conditions; risk management looks at a moment in time

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Schedule

ScopeProduct, Deliverable, Output

Resources

$$$Quality&

what the customer wants

Risk Management Framework

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Risk Breakdown Structure Example 1

HomeEntertainment

Business Technical OrganizationalProject

Management

Competitors

Suppliers

Cash flow

Hardware

Software

Mechanical

Sponsorsupport

Customersupport

Expertsupport

Schedule

Budget

Time

58Source: M. Ingbretson, PM Network, December 2002

Risk Breakdown Structure Example 2

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Risk Breakdown Structure

A toolDetermines the hierarchy of potential risksOrganizes into categories for a projectIdentifies contingencies to mitigate multiple risks across several categories

Also called a risk assessment tree

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Source: Hillson, David, “The Risk Breakdown Structure as an Aid to Effective Risk Management”, 2002This paper has templates of RBSs for SW development, construction, pharmaceutical, etc., projects

How to use the RBSRisk identification aid

Upper levels used as a prompt for complete coverageUsed as a basis for a risk checklist

Risk assessmentCompare identified risks using ‘risk score’ for each

Comparison of projects or tendersCommon framework allows direct comparison

Risk reporting and communicationEasy to roll-up risk information to external project team resources

Lessons LearnedAccessible, common format facilitates post-project reviews

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Risk RegisterA document that contains the results of various risk management processes

Presented as a table or spreadsheet format

A tool for documenting potential risk events and related informationContains a list of identified risks and other information neededRisks refer to specific, uncertain events that may occur to the detriment or enhancement of the project

Source: Kendrick

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Risk Register Contents (1)

An identification number for each risk eventA rank for each risk eventThe name of each risk eventA description of each risk eventThe category under which each risk event fallsThe root cause of each risk

Source: Kendrick

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Risk Register Contents (2)

Triggers for each risk; triggers are indicators or symptoms of actual risk eventsPotential responses to each riskThe risk owner or person who will own or take responsibility for each riskThe probability and impact of each risk occurringThe status of each risk

Source: Kendrick

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Possible fields for a “Risk Register”

Risk identification number Risk type (where indication helps in planning responses)Risk Owner Raised by (person)Date identifiedDate last updatedDescriptionCost if it materializesProbabilityImpact

ProximityPossible response actionsChosen actionTarget dateAction owner/custodian (if differs from risk owner)Closure dateCross references to plans and associated risks and may also includeRisk status and Risk Action Status

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Risk Register—Example

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Real Projects: The Truth Is Out ThereProjects FAIL for Three Reasons:

The Objective (Scope) Is Actually ImpossibleIt cannot be accomplished with the allocated amount of time

The Project Is Over ConstrainedThe Project Is Poorly Planned and Executed

Check Project Scope—make it realistic

Identify All Constraints—understand the restrictions

Construct A Project Plan—think through all tasks the team must accomplish for success

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Risk Utility

Risk utility is the amount of satisfaction received from a potential payoff

Risk aversion have a low tolerance for taking chances

Utility rises at a decreasing rate for peopleRisk-seekers have a higher tolerance for risk

Satisfaction increases when more payoff is at stake

Risk neutrals seek a balance between risk and payoff

More likely to desire contingencies

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Risk Utility as a function of Risk Preference

PotentialPayoff

Risk Averse

PotentialPayoff

Risk Neutral

PotentialPayoff

Risk Seeking

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Assessing Risk

Probability theoryA branch of mathematics concerned with the analysis of random phenomenaIf the outcome of a random event cannot be determined before it occurs, but it may be any one of several possible outcomes, then the actual outcome is considered to be determined by chance

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Impact of event*

Probability of event

Event

*Could be in dollars, time, morale, usually convertible to $$$$

Risk—Expressed as Impact and Probability!

LowRisk Moderate

Risk

HighRisk

Below Risk Threshold

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0

1

2

3

4

5

6

1 2 3 4 5 6 7 8 9 10 11 12

Frequency

Risk Depends on Probability

If you throw a six-sided die:

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Key Project Risk TerminologyRisk Event

Specific event that may affect the project for better or worse

Risk Event ProbabilityAn estimate of the chance that a given risk event will occur

Risk Event ValueAn estimate of the gain/loss that will be incurred to the project if that

Risk Event does occurExpected Monetary Value (EMV)Risk Event Value x Risk Event ProbabilityExpected Value (EV)

The value (similar to EMV) when the item being assessed is not $$$

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Qualitative Risk Analysis

Assess the likelihood and impact of identified risks to determine their magnitude and priority.Risk quantification tools and techniques include:

Probability/impact matrixesThe Top Ten Risk Item TrackingExpert judgment

Source: Kendrick

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Quantitative Risk Analysis

Often follows qualitative risk analysis, but both can be done together.Large, complex projects involving leading edge technologies often require extensive quantitative risk analysis.Main techniques include:

Decision tree analysisSimulationSensitivity analysis

Source: Kendrick

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Macro RiskWhen loss and likelihood are considered in a large number of cases (a population), uncertainty becomes visible and distributions and histograms may be developed:

Frequency

LossesMean

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Which project would yourather manage? Why?

Risk in Projects, Micro Risk

In project management, there is no population There is only one projectto be managed, so managing risk requires attention to the spread of the distribution as well as the meanTo compare two projects, where the loss is measured in time:

Consider that Project A has a decent chance of finishing BEFORE project B!

Expected Duration of Project A

Expected Duration of Project B

Frequency

Frequency

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Probability/Impact MatrixLists the relative probability of a risk occurring on one side of a matrix or axis on a chart and the relative impact of the risk occurring on the otherConstruct:

List the risks and then label each one as high, medium, or low in terms of its probability of occurrence and its impact if it did occur

Also calculate risk factors:Numbers that represent the overall risk of specific events based on their probability of occurring and the consequences to the project if they do occur

Source: Kendrick

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Probability/Impact Matrix—Example

Risk 6 Risk 9 Risk 1Risk 4

Risk 3Risk 7

Risk 2Risk5

Risk 11

Risk 8Risk 10 Risk 12

Probability

Impact

High

High

Low

Medium

LowMedium

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SimulationUses a representation or model of a systemAnalyzes the expected behavior or performance of the systemMonte Carlo analysis simulates a model’s outcome many times to provide a statistical distribution of the calculated resultsTo use a Monte Carlo simulation:

Three estimates required (usually most likely, pessimistic, and optimistic) In addition, an estimate of the likelihood of the estimate being between the most likely and optimistic values

Source: Kendrick

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Steps of a Monte Carlo Analysis

1. Assess the range for the variables being considered

2. Determine the probability distribution of each variable

3. For each variable, select a random value based on the probability distribution

4. Run a deterministic analysis or one pass through the model

5. Repeat steps 3 and 4 many times to obtain the probability distribution of the model’s results

Source: Kendrick

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Monte Carlo Simulation Results for Project Schedule--Example

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s1 I can't seem to read the final art files for this chapter. This figure is the same as what should be here except for the dates. OK as is, or can someone put in the proper art file?schwalbe, 1/21/2005

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Monte Carlo Simulation Results for Project Schedule--Validation

0

5

10

15

20

25

30

35

40

45

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10/14/05 10/21/05 10/28/05 11/4/05 11/11/05 11/18/05 11/25/05 12/2/05 12/9/05 12/16/05 12/23/05 12/30/05 1/6/06 1/13/06 1/20/060

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100

150

200

250

300

s2

Slide 82

s2 I can't seem to read the final art files for this chapter. This figure is the same as what should be here except for the dates. OK as is, or can someone put in the proper art file?schwalbe, 1/21/2005

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Success Potential Scoring Sheet

100Total

3Hard-Working, Focused Staff

3Clear Visions and Objectives

6Ownership

8Competent Staff

9Smaller Project Milestones

10Realistic Expectations

11Proper Planning

15Clear Statement of Requirements

16Executive Management support

19User Involvement

Relative ImportanceSuccess Criterion

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Decision Trees and Expected Monetary Value (EMV)

A decision tree is a diagramming analysis technique

Useful to select the best course of action in situations in which future outcomes are uncertain

Estimated monetary value (EMV) is the product of a risk event probability and the risk event’s monetary value.A decision tree to help find the EMV

Source: Kendrick

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Expected Monetary Value (EMV)—Example

Source: Kendrick

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Sensitivity Analysis

A technique used to show the effects of changing one or more variables on an outcomeFor example:

Determines what the monthly payments for a loan will be given different interest rates or periods of the loanCalculates break-even points based on different assumptions.

Spreadsheet software, such as Excel, is a common tool for performing sensitivity analysis

Source: Kendrick

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Sensitivity Analysis for Determining Break-Even Point—Example

Source: Kendrick

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Risk Response Planning

After identifying and quantifying risks, you must decide how to respond to themFour main response strategies for negative risks:

Risk avoidanceRisk acceptanceRisk transferenceRisk mitigation

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Risk Management Plan—Example

MethodologyRoles and responsibilitiesBudget and scheduleCategories of riskProbability and impact of identified risksDocumentation of risk with associated courses of action

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26% Successful (on time/on budget)46% “Challenged” (late, over budget, etc.)28% Cancelled

Behind the numbers:Software Development Projects, averaging $2MReported by CIOs, IT Managers

How Many Projects Fail?

Source: The Standish Group International: West Yarmouth, MA

“75% of All Projects Fail”

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A Big Project of the 80’s:Apart from wars, this was the most expensive undertaking in the world. It was a huge engineering project that employed thousands, cost millions of dollars, and took years to complete.

What was it?

Name this Project

Source: Kendrick

92Source: Kendrick

Project SponsorFerdinand de Lesseps"The Great Engineer", Completed Suez Canal, – 1869Great financial and engineering successBelieved that a Central American Canal would save $48 million per year, and would cost less than $100 millionVery persuasive and influential, but he was:

Not an engineer.Not a good administrator.Blind to his own shortcomings.Convinced he was infallible.

93Source: Kendrick

Planning for the Canal$60 million was raised from private investors, knowing that this was one third the estimated costNo planning for problems was done, believed that technology would appear to finish the jobInsufficient effort put into proving feasibility of the project; Issues included:

A nine mile length of 400' deep trench Only one third of the money was for diggingDiseasesRiver floods

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Managing the ProjectThe first year: 1881, engineering estimates for digging more than doubled, costs and schedule were not changedConstant problems with disease, flooding, rain, and equipmentIn 1885, cost estimates quadrupled. More money was raised from investors, canal opening delayed "somewhat"In 1887 costs were raised again (to $330 million); canal was changed to a lock style designIn 1889, still more money was needed, but raising more money was impossible - effort collapsed; Soon after was bankruptcy and liquidation of de Lessep'sCompany1891, more scandal, blame; French government fell

Source: Kendrick

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CONSTRAINLeast Flexible

SCHEDULE SCOPE RESOURCES

OPTIMIZESomewhat Flexible

ACCEPTMost Flexible

Anatomy of a Failed ProjectThe First Panama Canal Project: Background and Scope DefinitionProject Objective:

Construct a sea-level canal across the fifty mile wide Isthmus ofPanamaCost: $60 MillionTime: 12 yearsCompletion: 1892

Source: Kendrick

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Lessons LearnedOver ten years of workCost of $300 millionMore than 20,000 lives lostLots of dirt moved, but no canalSea level canal seen as probably impossibleFerdinand de Lesseps:

Consistently misjudged progress.Had a misplaced faith that needed medicines and machines would materialize.Died broken and in poverty.

Source: Kendrick

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Project Risk Management

Two Sides of the Same Coin:You Cannot Manage What Might Go Wrong Until You Know What “Going Right” Looks Like

Depends on Project Planning to:Identify (and Avoid) Truly Impossible ProjectsDevelop Negotiation Data for Over ConstrainedProjectsEliminate Poorly Planned and Executed Projects

Source: Kendrick

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Characteristic High Risk Low RiskTotal effort hours Large project > 5000 hours Small project < 1000 hoursDuration Longer than 12 months Less than 4 monthsTeam size Over 8 members Fewer than 4Number of clients or client organizations

More than three One

Project scope / deliverables Poorly defined Well definedBusiness benefit Not clear Well definedProject team and client business knowledge

Neither the project team nor the client have solid business knowledge

Both the project team and the client have solid business knowledge

Requirements Very complex, hard for client to define Easy for client to defineDependency on other projects or outside teams

Dependent on three or more outside projects or teams

No more than one dependency on an outside project or team

Project Sponsorship Unknown (should not start the project) Identified and enthusiasticClient commitment Unknown, passive PassionateChanges required for existing procedures, processes and policies

Large amount of change Little change

Organization structures Large amount of change Little or no changeProject manager experience Little experience on similar projects Similar experience on multiple projectsPhysical location of team Team is dispersed at several sites Team is located togetherUse of formal methodology Large project / no formal methods or

processesSmall project / standard methods in use

Technology New technology is being used for critical components

No new technology required

Response time Very short response times are critical Normal response time is acceptableData quality Data is of poor quality Data is of good qualityVendor partnership Have not worked with the vendor before Have a good relationship with the vendor

Risk Checklist - Sample

Source: Matlzman

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How does this all apply to you?You need to assess the risks for your project in your project proposalThe risk assessment consists of four parts:

Identifying the risk – defining the harmful event (or outcome)Determining the likelihood of the risk occurring –its probability and a justification of how the probability is reachedThe mitigation – how you plan to prevent the harmful event occurringThe contingency – what you will do if the risk (harmful event) actually occurs

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The Final Remark

“It might get really worse before it

gets worse”— Lilly Tomlin