RM Module 1 S2011

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Project Risk Management

Module 1

Introduction to RiskManagement

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Introductions

Instructor: Hamid Faridani. PhD, PMP

Email: [email protected]: 416 577 9331
mailto:[email protected]:[email protected]

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Project Management Processes & Knowledge Areas

Closing

12.6 Close

Procure-

ments

4.6 Close

Project

Executing4.3 Direct & Manage

Project Execution

9.2 Acquire

Project Team

10.2 Distribute

Information10.4 Manage

Stkhldr Expect

9.3 DevelopProject Team

9.4 ManageProject Team

8.2 Perform QA12.2 Conduct

Procurements

Planning

5.1 Collect

Requirement

6.3 Estimate

Act. Res.

6.4 Estimate

Act. Duration

5.2 Define

Scope

6.1 Definie

Activities

7.1 Estimate

Cost

6.5 Develop

Schedule

11.1 Plan

Risk Mgmt

7.2

Determine

Budget

4.2 Develop

Project Mgmt

Plan

8.1 Plan

Quality

12.1 Plan

Procurement

10.1 Plan

Comm.

11.2 Identify

Risks

11.3 Perform

Qual. Risk

Analysis

11.4 Perform

Quant. Risk

Analysis

11.5 Plan Risk

Resp.

12.2 Plan

Contracting

5.3 Create

WBS

6.2 Sequence

Activities

9.1 Dev. HR

Plan

Initiating

4.1 Dev. Prj

Charter

10.1 Id.

Stakehldrs

Monitoring and Controlling

4.4 Monitor &

Control Work

4.5 Perform

Int. Chg. Ctl

5.4 VerifyScope

5.5 Control

Scope

7.3 ControlCosts

8.3 Perform

Quality Cont.

12.3 Admin.

Procurement

6.6 Control

Schedule

10.3 Report

Performance

10.4 Manage

Stakeholders

.

11.6 Mon +Ctl Risks

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Managed andMitigatedProject Risks

High qualityProjectProcesses and

Practices

Successful

Projects

The Link between Project Risk and Quality

Management and Project Success

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Measures of Projects Success

Plan & execute

Project to deliver

Project Success: Level 1Was the project done right?

Project Success: Level 2Was the right project done?

Project Success: Level 3Were the right projects done right,

time after time?

Product Value or

Benefit

Use product to

produce

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Measures of Projects Success

Success Level Typical Criteria forSuccess

Possible Critical Success Factors

(Inputs)

OrganizationalAccountability

Level 1: ProjectManagement Success

Was the project done

right?

Time

Cost

Quality

Scope

Safety

Clear & doable goals

Effective project team

Adequate resources

Clear technical performancerequirements

Effective planning & control Risk & quality management

Project Manager

PMO

Level 2: Project Success

Was the right project

done?

ROIC

IRR

Other financialindicators

Stakeholderssatisfaction

Clear & doable goals

Stakeholders commitment &attitude

Effective benefits realization andmanagement

Appropriate operational strategy

Project sponsor

Client, owner oroperator

Level 3: ConsistentProjects Success

Were the right projects

done right, time aftertime?

Maturity of PM cultureand practices

Incorporation ofknowledge management

Productivity ofcorporate resources

Incorporation of qualitymanagement culture inorganization

Effective portfolio management

Comprehensive use of metrics

Shareholders

Seniormanagement

Portfoliomanagers

Project Success Indicators and Factors

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Risk in Projects: The Why Question

Uniqueness: There arealways some projectcomponents or sub projectsthat have not been donebefore.

Deliverables: Products orservices developed oftencannot meet shiftingcustomer expectations

Assumptions: By their very

nature, involve uncertainty,and hence risks

Stakeholders: Theconflicting expectations ofvarious stakeholdersrepresent risk factors

Conflicting Constraints oftime, cost and scope.

Organizations and People:The unpredictable andconflicting needs of teams

working on projects Project Environment and

Change: Change involvesuncertainty and risk

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The Nature of Risk

Risks are associated withuncertainty concerning theassumptions made about

projects activities such as theirduration, cost and performancerequirements.

Uncertainty will eventually affect

a projects objectives and henceits success: Negatively, resulting in threats

Positively, resulting inopportunities

Thinking outside thebox involves uncertaintyand risks

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The Dimensions of Risk

Impact

Cause orTrigger

Risk Driver: Definitefact about the project orits environment

Risk Event: Uncertainsituation that if it occurscan have an impact onthe projects objectives

Risk Effect:Contingent effect of riskon project objectives

Trigger: Use ofunionized workers in aconstruction project

Risk Event: Unionstrike during projectimplementation

Impact: Delay in projectschedule and possibleassociated penaltiesand costs

Risk

Impact

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Sources of Uncertainty in Projects

Level 0 Level 1 Level 2 Level 3

ProjectRisk

Management Corporate Experience Organizational & Financial Culture

Customer History & Requirements

Loyalty

External NaturalEnvironment

Physical Environment

Facilities & Services

Socio-Cultural Government and Politics

The Legal Environment

Economic Structure of the Economy

Labour and Financial Markets

Technology Requirements &Performance

Scope uncertainty & Complexity

Technology Maturity and Limits

Applications Organizational Experience

Physical Infrastructure

Personnel Experience

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Relationship between Risk and Objectives

Type of Risk Corresponding Objectives

Project Risk is any uncertainty that, ifoccurs, would affect one or more of theprojects objectives.

Scope, time, cost, performance, quality and clientsatisfaction

Business Risk is any uncertainty that,if occurs, would affect one or more of thebusiness objectives.

Profitability, market share, competitiveness,Internal Rate of Return IRR, reputation, repeatbusiness, share price and others

Safety Risk is any uncertainty that, ifoccurs, would affect one or more of thesafety objectives.

Low accident rate, minimal lost days, reducedinsurance premiums, regulatory and legalcompliance

Product Technical Risk is anyuncertainty that, if occurs, would affectone or more of the product technicalobjectives.

Performance, functionality, serviceability reliability,and maintainability of the product

Security Risk is any uncertainty that, ifoccurs, would affect one or more of thesecurity objectives.

Physical plant security, personnel and assetsecurity, and information security

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Project Risk Management (PMBoK)

Project Risk Management PRM is thesystematic process of identifying,analyzing, and responding to project risks.It includes

PRM includes maximizing the probability

and consequences of positive events(opportunities); and minimizing theprobabilities and consequences of negativeevents (threats)

An Opportunity is not the absence of theabsence of threat. Distinctive opportunities

exist in their own right presenting a chanceto deliver the projects product early, at a

lower cost and, therefore, increasingcustomer satisfaction.

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Threats and Opportunities in Projects

ProjectObjectives:Cost orSchedule

20

40

80

100

60

Target value

Normal VariationsOpportunity

Zone

ThreatZone

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The Definition of Risk

ThreatAny uncertainty that, if itoccurs, would affect one

or more of the projectsobjectives negatively

OpportunityAny uncertainty that, ifit occurs, would affect

one or more of theprojects objectivespositively

RiskAny uncertainty that, if it occurs,would affect one or more of the

projects objectives

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Uncertainty in Project Activities Risks in a project arise because the cost, duration and

outcome of projects activities involve a degree ofuncertainty. The uncertainty is defined in terms of aprobability distribution.

Probability

Cost or Duration Estimate x

10Least

Likely x1

15Most

Likely x2

25Least

Likely x3

The estimated value is a function ofx1, x2 and x3

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Risk and Decision Making Cost Benefit Analysis: A risky

course of action should only betaken when the potential benefitand chance of winning exceed theremedial cost of an unsuccessfuldecision and chances of loosing bya acceptable margin

The risk taker should obtainanswers to: Why should the risk be taken? What will be gained? What could be lost?

What are the chances of success andfailure?

What can be done if the desired result

is not achieved? Is the potential reward worth the risk?

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Risk and Decision MakersRisk elements that tend to

Attract and/or determine the

Response attitudes of decision

makers include:

Potential frequency of loss

Amount and reliability ofinformation available

Severity of potential loss

Vividness of the consequences

Potential for (adverse) publicity

Ability to measure theconsequences

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Risk Management is Proactive

Project risk management should beadvance preparation for possible adverseevents, rather than responding as theyhappen though both may be needed.

Crisis Management (reactive mode)consists of taking the appropriateresponse if an event occurs.

Anticipation and Planning (proactivemode) makes it possible we hope to

avoid this situation in the first place byplanning an appropriate response shouldthe adverse event take place.

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Venture Risk vs. Project RiskVenture Risk:

Analyzing informationand selecting the rightproject

Will the project results beas effective as originallyplanned?

Will the market for theproduct/service exist tothe same degree thatwas forecast?

Project Risk:

Managing uncertainty tomeet the projectobjectives

Can we complete theproject on schedule?

Will the project results

meet the agreedrequirements?

Can we remain within theapproved budget?

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The Dimensions of Risk

Probability

Statistical likelihood of aspecific event taking place

Impact Damage or benefits that will

result if that event occurs

Conditions or Context Timing and situation should

the event occur

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Probability of a Risk Event

Expresses the likelihood of an eventtaking place

Based on scientific observation ofsimilar events, review of scenarios,

analysis of a situation, etc. Useful in many business areas,

including insurance, investments,gaming, etc.

Dependent on accuracy of the

information available: Weatherforecast compared to gambling odds Can be expressed as a percentage or

a decimal Often expressed in relative terms

(likely unlikely)

P(6 and 4) = P(6). P(4)= (1/6).(1/6)= 1/36= 2.7 %

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Probability as a Measure of Uncertainty

Uncertainty in commonterminology is oftenexpressed by phrases suchas: not very likely or highly unlikely

better than even or probable

for sure or highly likely

Probability is stated on a

scale from 0 to 1 0 probability indicates an event has

no chance of occurring

1 probability indicates an event isabsolutely sure to occur

P( Rain) > 90% during themonsoon season in SouthAsia

P (Rain) < 10% in the summer

in North Africa

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The Risk Value

Impact: The magnitude of consequences

The amount at stake; the extent of adverse orpositive consequences which might affect the

projects objectives of: Scope (S), Cost (C),Schedule (T) and Quality (Q)

Probability: The likelihood of occurrence

The ratio of the number of chances that an event

may happen, to the sum of the chances of it bothhappening and not happening

Risk Value = Probability x Impact

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Impact of a risk event Description of the consequences (benefit or

loss) that will result, should the event takeplace: Impact is not related to theprobability of that event

Often expressed in financial terms, but can

also affect other aspects of the organizationor project:Cost impact is expressed in sameunits as the budget.

Estimate is based on scientific observationof similar events, review of scenarios,analysis of a situation

May be easy or difficult to estimate thedegree of impact Estimate assumes that only normal

safeguards are in place Depends on the conditions in effect

when/if the event occurs

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Simple Risk Assessment Matrix

Low priorityrisks

Third priorityrisks

Second priorityrisks

First priorityrisks

Probability

ImpactLow

Low

High

High

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Risk Factors in the Project Life Cycle

Project risk factors changeduring the life cycle

During project planning, theprobability of opportunity orthreat remain high, but the

amount at stake (investment)is low

During projectimplementation, theprobability of opportunity orthreat progressively falls as

the unknowns becomeknowns, but the amount atstake rises steadily asresources are invested

Highest vulnerability to risk isduring the last two phases ofthe life cycle

Opportunity and Risk

Amount at Stake

Plan Accomplish

Phase 1CONCEPT

Conceive (C)

Phase 2DEVELOPMENT

Develop (C)

Phase 3IMPLEMENTATION

Execute (E)

Phase 4TERMINATION

Finish (F)

TIME

INCREASINGR

ISK

$VALUE

Total Project Life Cycle

R. M. Wideman, 1992

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Life Cycle Risk Analysis

Typical Life Cycle Risks

Phase 1

Conceptualization

Phase 2

Development

Phase 3

Implementation

Phase 4

Termination

Unavailable Experts

Poor Definition ofProblem

No or Poor Feasibility

Study

Unclear Objectives

Lukewarm Support fromSponsor

Unproven Technology

Poor Market Intelligence

No Risk ManagementPlan

Hasty and PoorPlanning

Poor Specifications

Unclear WBS & SOW

Unclear Definition ofRoles andResponsibilities

LukewarmManagement Support

Inexperienced PM andProject Team

Unskilled Labour

Unreliable Suppliers

Quality and Availabilityof Materials

Changes in Scope

Changes in Costs andSchedules

Labour Strikes

Weather Conditions

Changes in RegulatoryRequirements

Environmental or OHSCompliance

Inadequate MonitoringControl Systems

Poor Performanceand Quality ofProduct or Service

Changes in

CustomersExpectations

Cash FlowProblems

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Effective Risk Management

Open Communication

Enabling formal, informal andimpromptu communication and flowof information.

Using processes that value theindividual voice and insight intoidentifying and managing projectrisks

Integrated Management Making risk management an integral

and vital part of project management

Adapting risk management tools andmethods to the project management

infrastructure and culture

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The PMI Risk management

Processes

Plan Risk Management meetings to develop a risk management plan

Identify Risks determining project risks and their characteristics

Perform Qualitative Risk Analysis assessing relative impact and likelihood of identified risks

Perform Quantitative Risk Analysis numeric analysis of probability and consequences

Plan Risk Responses developing options to enhance opportunities, reduce threats

Monitor and Control Risks tracking identified risks, executing risk plans and contingency plans

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The Risk Management Processes

*Guide to Project Management Body of Knowledge (PMBOK): Fourth Edition. The Project Management Institute PMI

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Risk Conditions in PM Knowledge Areas

KnowledgeArea Risk Conditions

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

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

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

Cost Estimating errors; inadequate productivity, cost, change, or contingencycontrol; poor maintenance, security, purchasing, etc.

Quality Poor attitude toward quality; substandarddesign/materials/workmanship; inadequate quality assurance program

HumanResources

Poor conflict management; poor project organization and definition ofresponsibilities; absence of leadership

Communications Carelessness in planning or communicating; lack of consultation withkey stakeholders

Risk Ignoring risk; unclear assignment of risk; poor insurance management

Procurement Unenforceable conditions or contract clauses; adversarial relations

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Attributes of the Effective Risk

Management Process (RMP)

Value Added: The RMP should be seen toprovide value to the project team but simple

to use and implement, without undueadministrative burden.

Structured and Generic: The processshould be a structured and generic but

readily adaptable to sector-specific projects Scalable: RMP should be readily scalable to

projects of different scope.

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Elements of an Appropriate RMP

Infrastructure Project Management Information System

Risk Management Information System Performance Failure Information System Lessons Learned Information System Earned Value Information System

Risk Analysis Software Tools Simulation Tools Decision Analysis Tools

Risk Resources Policies and Procedures Standards and Templates Risk Experts Training for Project Team Networking with Relevant External Bodies

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Risk Strategies and Organizational

Environment

High LowRisk Tolerance

Project

RiskManagementPolicies&

Procedures

Guidelin

es

Rigid

Acceptance

Mitigation orEnhancement

Transferring orSharing

Avoidance orExploitation

Project Management: A Systems Approach, Harold Kerzner, J Wiley & Sons

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Organizations Risk Culture

Risk Averse: Organizations that have low riskthreshold

Risk Taker: Organizations that have a high riskthreshold and track record of managing risky

projects. Risk Ignorant/Hostile: Organizations that, because

of the nature of their sector, have arrogant orignorant attitude towards risk.

Risk Mature: Organizations that recognize and

accept uncertainty as inevitable, and are prepared todevelop mature risk management processes tomanage the negative impact of threats and reap thebenefits of opportunities.

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Risk Attitudes and Drivers of Behaviour

Attitude Neutral

Environment

Behaviour

Attitudesdrive

behaviour ina neutral orpositiveenvironment

Attitude Hostile

Environment

Behaviour

Hostileenvironmentdrives

behaviour

Uncertainty Uncertainty

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Individuals Risk Attitudes

Risk Averse (RA) Uncomfortable with uncertainty and has low tolerance for

ambiguity

Practical, accepting, has common sense approach to issues,

and enjoys working with facts rather than theories. Threats are more readily perceived by the RA, while opportunities

are underrated. RAs tend to over react to threats and under reactto opportunities

Risk Tolerant (RT) Takes uncertainty in a stride as a normal feature of project work

Has a laissez-faire approach that may lead to failure to assessthe potential impact of both threats and opportunities

May appear to have a balanced attitude towards risk, but outlookcan have negative long term effects

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Risk Neutral (RN) Sees risk taking as a price worth paying for future payoffs They think abstractly and creatively and are not afraid of

dealing with uncertainty

RNs have mature attitudes towards threats andopportunities

Risk Seeking (RS) Welcomes the challenge of dealing with risks, and the thrill

of garnering potential payoffs. Risk seekers tend to be adaptable and resourceful, enjoy

lifes challenges and are driven by the promise of payoffs RSs tend to under estimate the consequences of threats

and over estimate the benefits of opportunities

I di id l Ri k Attit d

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Attribute Risk Averse Risk Neutral Risk Tolerant Risk Seeking

Attitudetowardsthreats

Over sensitiveand aware

Aware Unconcernedand cavalier

Underestimatesimportance

Actionstowardsthreats

Aggressivelyavoids and/orminimizes theirconsequences

Respondsproportionately

Does notrespond

Accepts orignores them

Attitudetowards

opportunity

Under sensitiveand/or unaware

Seek strategiesthat have highfuture payoff

Unconcernedand cavalier

Overestimatestheir importance

Actionstowardsopportunity

Under reactand/or ignore

Respondsproportionately

None Aggressivelyexploit and/orenhance

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Tolerance for Risk

Risk Seeker

Risk Neutral

Value at stake

Satisfaction

Low High

Low

High

Risk Averter

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Behaviour Modification of Risk

Attitudes Risk attitudes are not hard wired in the human brain. All attitudes

are chosen situational responses driven by subtle and complex set offactors, some of which are subconscious and deep rooted.

Project team members through reflection and the use of various

available psychometric self assessment instruments (EmotionalIntelligence Individual Diagnostic IQ) can raise their self awareness,which can lead to self-regulation, behaviour modification andmanagement.

Behaviour modification involves understanding of which attitudes willproduce the desired effect in a given situation, and consciouslymodifying ones attitude as appropriate, even if it means adopting an

approach that is counterintuitive Project team members can also be trained to look actively for

opportunities rather than only for threats, and adopt a more positivethinking frame of mind that recognizes that opportunities exist, haveto be proactively identified and effectively managed.

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The Risk-Balanced Project Team Team Work is essential in the risk

management process, where theattributes of each member contribute tothe overall capacity of the team

The risk averse person can be reliedupon to challenge plans and strategieslooking for threats and testing thefeasibility of proposed solutions.

The risk seeker colleague can look moreproactively for opportunities for doing

work better, faster and cheaper. The risk neutral team member can test

all strategies for their long term benefits tothe project and the organization.

The risk tolerant can offer an overall

RM Module 1 S2011

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