Copyright Course Technology 2001 1 Chapter 10: Project Risk Management.

Copyright Course Technology 2001 1

Chapter 10:Project Risk Management


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 and 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

• Study by Ibbs and Kwak show how risk management is neglected, especially on IT projects

• KPMG study found that 55 percent of runaway projects did no risk management at all


Table 10-1. Project Management Maturity by Industry Group and Knowledge Area


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


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


Figure 10-1. Risk Utility Function and Risk Preference


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– 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


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


Table 10-2. Questions Addressed in a Risk Management Plan


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 reserve 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


Common Sources of Risk on Information Technology Projects

• Several studies show that 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

• Other broad categories of risk help identify potential risks


Table 10-3. Information Technology Success Potential Scoring Sheet

Success Criterion Points

User Involvement 19

Executive Management support 16

Clear Statement of Requirements 15

Proper Planning 11

Realistic Expectations 10

Smaller Project Milestones 9

Competent Staff 8

Ownership 6

Clear Visions and Objectives 3

Hard-Working, Focused Staff 3

Total 100


Table 10-4. McFarlan’s Risk Questionnaire1. What is the project estimate in calendar (elapsed) time?

( ) 12 months or less Low = 1 point

( ) 13 months to 24 months Medium = 2 points

( ) Over 24 months High = 3 points

2. What is the estimated number of person days for the system?

( ) 12 to 375 Low = 1 point

( ) 375 to 1875 Medium = 2 points

( ) 1875 to 3750 Medium = 3 points

( ) Over 3750 High = 4 points

3. Number of departments involved (excluding IT)

( ) One Low = 1 point

( ) Two Medium = 2 points

( ) Three or more High = 3 points

4. Is additional hardware required for the project?

( ) None Low = 0 points

( ) Central processor type change Low = 1 point

( ) Peripheral/storage device changes Low = 1

( ) Terminals Med = 2

( ) Change of platform, for example High = 3

PCs replacing mainframes


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?

• Financial risk: Can the organization afford to undertake the project? Is this project the best way to use the company’s financial resources?

• Technology risk: Is the project technically feasible? Could the technology be obsolete before a useful product can be produced?


What Went Wrong?Several information technology projects fail because of technology risk. One project manager documented an important lesson he learned on a large IT projectfocus on business needs first, not technology. David Anderson, a project manager for Kaman Sciences Corp., shared his lessons learned from a project failure in an article for CIO Enterprise Magazine. After spending two years and several hundred thousand dollars on a project to provide new client-server based financial and human resources information systems for their company, Anderson and his team finally admitted they had a failure on their hands. Anderson admitted that he was too enamored by using cutting edge technology and took a high-risk approach on the project. He "ramrodded through" what the project team was going to do, and he admitted that he was wrong. The company finally decided to switch to a more stable technology to meet the business needs of the company.

Hildebrand, Carol. “If At First You Don’t Succeed,” CIO Enterprise Magazine, April 15, 1998


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


Table 10-5. Potential Risk Conditions Associated With Each Knowledge Area

Knowledge Area Risk Conditions

Integration Inadequate planning; poor resource allocation; poor integrationmanagement; lack of post-project review

Scope Poor definition of scope or work packages; incomplete definitionof quality requirements; inadequate scope control

Time Errors in estimating time or resource availability; poor allocationand management of float; early release of competitive products

Cost Estimating errors; inadequate productivity, cost, change, orcontingency control; poor maintenance, security, purchasing, etc.

Quality Poor attitude toward quality; substandarddesign/materials/workmanship; inadequate quality assuranceprogram

Human Resources Poor conflict management; poor project organization anddefinition of responsibilities; absence of leadership

Communications Carelessness in planning or communicating; lack of consultationwith key stakeholders

Risk Ignoring risk; unclear assignment of risk; poor insurancemanagement

Procurement Unenforceable conditions or contract clauses; adversarial relations


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


Table 10-6. Sample Probability/Impact Matrix for Qualitative Risk Assessment


Figure 10-2. Chart Showing High-, Medium-, and Low-Risk Technologies


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


Table 10-7. Example of Top 10 Risk Item Tracking

Monthly Ranking

Risk Item This

Month

Last

Month

Numberof Months

Risk ResolutionProgress

Inadequateplanning

1 2 4 Working on revising theentire project plan

Poor definitionof scope

2 3 3 Holding meetings withproject customer andsponsor to clarify scope

Absence ofleadership

3 1 2 Just assigned a newproject manager to leadthe project after old onequit

Poor costestimates

4 4 3 Revising cost estimates

Poor timeestimates

5 5 3 Revising scheduleestimates


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


Quantitative Risk Analysis

• Often follows qualitative risk analysis, but both can be done together or separately

• Large, complex project involving leading edge technologies often require extensive quantitative risk analysis

• Main techniques include– Decision tree analysis– simulation


Decision Trees and Expected Monetary Value (EMV)

• A decision tree is a diagramming method used to help you 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


Figure 10-3. Expected Monetary Value (EMV) Example


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 time 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


What Went Right?McDonnell Aircraft Company used Monte Carlo simulation to help quantify risks on several advanced-design engineering projects. The National Aerospace Plan (NASP) project involved many risks. The purpose of this multi-billion dollar project was to design and develop a vehicle that could fly into space using a single-stage-to-orbit approach. A single-stage-to-orbit approach meant the vehicle would have to achieve a speed of Mach 25 (25 times the speed of sound) without a rocket booster. A team of engineers and business professionals worked together in the mid-1980s to develop a software model for estimating the time and cost of developing the NASP. This model was then linked with Monte Carlo simulation software to determine the sources of cost and schedule risk for the project. The results of the simulation were then used to determine how the company would invest its internal research and development funds. Although the NASP project was terminated, the resulting research has helped develop more advanced materials and propulsion systems used on many modern aircraft.


Figure 10-4. Sample Monte Carlo Simulation Results for Project Schedule


Figure 10-5. Sample Monte Carlo Simulations Results for Project Costs


Risk Response Planning

• After identifying and quantifying risk, 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– 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


Table 10-8. General Risk Mitigation Strategies for Technical, Cost, and Schedule Risks


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


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


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


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

Copyright Course Technology 2001 1 Chapter 10: Project Risk Management.

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