Risk_Mgmt Unit 1

7/28/2019 Risk_Mgmt Unit 1

1/40

Risk Management


2/40

What is Risk??

The uncertainty that potential or known events mayimpact a project outcome.

The measure of the probability and severity ofadverse effects

The product of the probability of an event notoccurring and the consequence of not succeeding


3/40

What is a Risk?

PMIs (Program Management Institute)

definition allows for positive or negativeimpact

Rons Definition: a future event that has

some uncertainty of occurrence and has

some negative impact if it occurs.


4/40

What is Risk?? Two Parts:

1. Probability of Event Occurring

2. Consequences of Event Occurring (includinglevel of severity)

Consequences can be expressed in many units,so choose carefully (or choose several!)

Severity is subjective, so be careful


5/40

What is not a Risk?

A past or current problem

Not a future event

A certainty

Probability of occurrence = 1

An impossible event

Probability of occurrence = 0

A possible good thingNo negative consequence


6/40

Why Implement Risk Management??

Identify potential problem areas early

Prevent them from occurring

Develop a plan for dealing with the situations, ifthey occur

Reduces chances of costly changes or reduces

impact of unavoidable events: schedule delays,unexpected failures, etc.

Increases the likelihood of success!!


7/40

When Should Risk Management Be Implemented??

Planning begins before/at project startup

Preliminary identification and assessment start at the

earliest technical phase (Problem/need defn, OpsCon, Arch, etc)

Risks are tracked and managed throughout theproject/program life cycle

Plans for reporting should be established early toavoid confusion in responsibilities later


8/40

Risk Types

Three Most Recognized Types of Risk inGovernment and Commercial Practice

1. Technical

2. Cost

3. Schedule


9/40

Risk Types

1. Technical

The degree to which technology issufficiently mature and has been

demonstrated as capable of satisfyingprogram objectives.

Technical risk is frequently the driver in

development phase of a program.


10/40

Risk Types

2. Cost

Availability and sufficiency of funding forthe program.

Government appropriations and fundingcycles are also subject to political risks.

Commercial programs are subject tomarket risks.


11/40

Risk Types

3. Schedule

Adequacy of time allocated for the definedtasks.

Includes effects of changes due tounpredictable events such as: program andtechnical decisions, time-to-market

pressure, labor problems, weather andcustomer directed changes.


12/40

Risk Types

Others

Adequate staffing, resources

Professional/Enterprise reputation External

Political

Social

Regulatory/legislative


13/40

Sources of Risk

Property Risk

Liability Risk

Life Risk

Health Risk

Loss of income Risk


14/40

Risk Diversification and

Insurance Risk without pooling arrangement

Risk with pooling arrangement

Uncorrelated losses

Correlated losses

The role of insurance in risk diversification


15/40

Pooling Arrangements Pooling arrangement -- every participant

agrees to share losses equally, each payingthe average loss.

How does pooling arrange reduce risk?

Uncorrelated losses

Correlated losses


16/40

Effect of Risk Pooling of Uncorrelated Losses

do not change expected loss

reduce uncertainty (variance decreases, losses

become more predictable, maximum probable loss

declines)

distribution of costs becomes more symmetric (lessskewness)


17/40

Effect of Risk Pooling of Correlated Losses

Now allow correlation in losses

Result: uncertainty is not reduced as much

Intuition:

What happens to one person happens to others

One persons large loss does not tend to be offset by

others small losses

Therefore pooling does not reduce risk as much


18/40

Summary of Risk Pooling

Pooling reduces each participants risk

i.e., costs from loss exposure become more

predictable

Predictability increases with the number ofparticipants

Predictability decreases with correlation in

losses


19/40

Pooling Arrangements is Costly

Adding Participants

Distribution cost Underwriting cost

Verifying Losses

Collecting Assessments


20/40

Other Diversification Methods

stock market diversification

diversification across lines of business

within a firm


21/40

Risk Management as a Process Risk Management Definition:

The resources expended to understand, control andminimize the probability and consequence of an undesiredevent.

A diagnostic decision tool that enhances projectmanagement effectiveness and provides program/projectmanagers information to evaluate choices and keep the

program on track.

Just one of many tools in the PMs toolkit to run the project


22/40

PlanningIdentification

Assessment

Analysis

Closure

Risk Management Process Steps

Tracking, Management, Reporting


23/40

Planning

Should be established prior to or duringwork startup

Responsibility generally lies with themanager leader with input from all teammembers

Accommodate enterprise/organizationalneeds and interests


24/40

Planning

Assessment ApproachQualitative vs. Quantitative

Qualitative = assessment based on

experience

Quantitative = analysis based onmathematical formulas

Selection is dependent upon workresources, customer requirements,available tools, staffing experience


25/40

A loss exposure is a potential loss that may be associated with a

specific type of risk. We generate risk statement such that

consequences and response/action plans can be clearly defined

Meaningful title (one liner)

Understandable description of the risk (uncertainty and

consequence)

(optional) some suggestion of a priority or ranking of this risk

It can be done through:

Loss exposure checklist

Financial statement analysis

The flow chart

Identification


26/40

Criteria Application:

Qualitative assessment requiressimplistic values assigned for frequency

of occurrence and level of severity

Quantitative requires calculation ofprobability and severity factors for

mathematical analysis

Assessment/Analysis


27/40

Criteria Development

Simplified criteria

Severity of Consequence Low, Medium or High

Probability of Occurrence

Use number between 0 and 1

or L, M or H

Qualitative Assessment


28/40

Quantitative Risk Analysis

Two Approaches in Common Use

- Using simple combinations to make decisions

-Monte Carlo Simulation Programs


29/40

Risk Exposure analysis

Risk Exposure: RE = Prob (Loss) * Size(Loss)

Loss financial; reputation; future

prospects, For multiple sources of loss:

RE = Sum[Prob (Loss) * Size (Loss)]

all sources


30/40

Risk Prevention and Mitigation

Prevention vs. Mitigation:

Preventionanticipate and resolve theproblem before it occurs.

Mitigationassume risk can not beprevented and develop plan for reducingconsequence or reducing probability of

occurrence, or both


31/40

Risk Prevention and Mitigation

Prevention vs. Mitigation Examples:

Risk/consequence: Loss of key projectpersonnel resulting in product delivery

delaysPrevention: Salary/benefit increases, rewards formilestone successes

Mitigation: Promote remaining personnel with project

knowledge; hire new personnel with directly applicableexperience


32/40

Ensure that processes are ISO compliant ifappropriate (records, etc.)

Update Risk Management Plan as needed for

each closed itemMaintain archives/records to provideknowledge for future projects

Closure


33/40

Manage risks by providing detailed reportsat team level and summary reports atmanagement/customer levels

High impact or priority risks should receivevisibility at top levels (e.g. Top 5 or Top 10)

Summarized versions of risk worksheets

provide appropriate data for reports

Monitoring change in Risk status is just asimportant as final resolution

Tracking and Reporting


34/40

Exposure of physical assets

Property can be categorized as:

Real property: land, all structures permanently

attached to the land and whatever is growing onthe land.

Personal property: all property other than real

property.


35/40

Two parties to the contract

Insured

Insurer

All types of property are not insurable, it generally

cover loss to tangible property.

Coverage can not be purchased for loss ofgoodwill and loss of a copyright

Raw land is difficult to insure


36/40

Liability Exposure

One of the serious financial risk is loss

through legal liability for harm caused to

others. Insurance for liability loss is more complex

than property insurance as people other than

insured and insurer are involved.


37/40

Types of liability damages

Bodily injury: it includes payments for

medical bills, loss of income, rehabilitation

cost, loss of service, pain and sufferingdamages and punitive damages.

Property damage: there may be a loss from

actual damage to the property , as well asloss of use of the property. Loss of use may

include both loss of income and payment

for extra expense.


38/40

Personal injury: it results from libel(written,

printed or pictorial material that damages a

persons reputation), slander(spoken wordsthat are defamatory and/ or injurious to a

persons reputation), invasion of privacy,

false arrest and the like.


39/40

Legal expenses: Defense process can be

very costly, in some cases cost of defense

may be as great or greater than damageawards.


40/40

Types of liability exposure

Contractual Liability

Employeremployee liability

Property ownertenant liability

PrincipalAgent liability

Risk_Mgmt Unit 1

Documents

Transcript of Risk_Mgmt Unit 1