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Three Definitions
Risk
A possible future event which if it occurs will p lead to an undesirable outcome.
Project Risk
The cumulative effect of the chances of an uncertain occurrence that will adversely affect project objectives objectives.
Risk Management
A systematic and explicit approach for identifying, quantifying, and controlling project risk.
DEFINITION
PROJECT RISK MANAGEMENT IS THE ART AND SCIENCE OF 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
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?
THESE ACTIONS ARE ESTABLISHING THE BASIC ELEMENTS OF MANAGING PROJECT RISK INTO OUR CHILDREN
PMBOK Risk
Opportunities - Positive outcome Threats - Negative outcome
TOTAL CERTAINTY
Project Risk
Integration Communication Scope Project Risk
Time
Cost
Procurement
INTEGRATING RISK
PROJECT MANAGEMENT INTEGRATION INFORMATION / COMMUNICATIONS
Life Cycle and Environment Variables
SCOPE
Expectations Feasibility
QUALITY
Requirements Standards S d d
PROJECT RISK
Availability Productivity
HUMAN RESOURCES
TIME
CONTRACT / PROCUREMENT
COST
Risk Classification
Business risks vs. pure (insurable) risks Classified by uncertainty (business risks) Classified by impact on project elements Classified b h i Cl ifi d by their nature Classified by their source Classified by their probability to occur and amount at stake
Some Considerations
Real information is the key. p y 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.
Outputs
Sources of Risk Potential Risk Events Risk Symptoms Inputs to other Processes
Outputs
Corrective Action Updates to Risk Management Plan Pl
Outputs
Risk Management Pl Ri k M t Plan Inputs to other Processes Contingency Plans Reserves Contractual Agreements
Outputs
Opportunities to pursue, threats to respond to Opportunities to ignore, ignore threats to accept
Risk Identification
Project Risk Management 11.0 11 0
Risk identification is determining which risks are likely to affect the project and documenting the characteristics of each.
Total project life cycle Plan Accomplish Phase 1 Conceive Phase 2 Develop Phase 3 Execute Phase 4 Finish $ (period when highest risks are incurred) (period of highest risk impact) TIME V A L U E
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). outcomes)
TYPES OF RISK
Known Unknowns
Things which we know exist but do not know how h h they will affect us. These can be ill ff h b identified and evaluated.
Unknown Unknowns
Those risks that cannot be identified and evaluated (unexpected needs). These can be handled via contingency allowances.
EXTERNAL UNPREDICTABLE
Regulatory Natural Hazards Postulated Events Unexpected Side Effects of the Project Failure to Complete Project Due to Uncontrollable External Events
EXTERNAL PREDICTABLE
Market Risks Operational Environmental Impacts Social Impacts Currency Ri k C Risk Inflation Taxes
INTERNAL, NON-TECHNICAL
Management Schedule Cost Cash Flow C h Fl Loss of Potential Benefit or Profit
TECHNICAL
Changes in Technology Performance Uncertainty Risks Associated with Projects Technology Design Sheer Size or Complexity
LEGAL
Licensing Patent Rights Contractual Difficulties Outsider Suits Insider S it I id Suits Force Majeure (PMIs Word)
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
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 ("CRITERION VALUE RANKING) OF A GIVEN RISK EVENT CAN BE DETERMINED BY: RISK EVENT STATUS = RISK PROBABILITY X AMOUNT AT STAKE
EXAMPLES OF RISK SYMPTOMS: POOR MORALE = EARLY WARNING SIGN OF SCHEDULE DELAY EARLY PROJECT COST OVERRUN = POTENTIAL POOR PROJECT OVERALL ESTIMATING
Flowcharting
Cause & Effect (fishbone or Ishikawa charts
What could happen What ensues How they occur
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
Outputs
Potential Risk events
Specific discrete events that might effect the project Generally include: y
Probability Alternative outcomes Timing Frequency (more than once?)
Outputs
Risk Symptoms
Triggers, or trip wires, or indicators Indirect manifestations of risk events
Poor morale Lack of reported progress
Risk Quantification
Project Risk Management 11.0
Risk quantification consists of evaluating the risks and risk interactions to assess the range of possible project outcomes.
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%
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) = ( p ) ( pp ) 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
EMV Example
If no probabilities are given, use
EMV (Opt 4 ML EMV=(Opt + 4*ML + Pes)/6
Descriptive Statistics
Mean Mode Median Variance V i Standard Deviation Range
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. distribution (answer is 486 4) 486.4)
Standard deviation: square root of the variance (answer is 22) variance. 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)
Approximations
Mean = (Opt + 4*ML + Pes)/6 SD = (Max - Min)/6
Exercise
Opt ML Pess EMV SDev
13,000 13 000 7,500 7 500 17,500 17 500
Vari i
169,000,000 169 000 000 5,625,000 5 625 000 306,250,000 306 250 000
100,000 125,000 180,000 130,000 Proj. P j A 100 000 125 000 180 000 130 000
100,000 125,000 100,833 100 000 125 000 100 833 130,000 180,000 129,167 130 000 180 000 129 167
Normal Distribution
So What? S Wh t?
M Mean i expected value is t d l Mean = Mode = Median S d d d i i is a measure of dispersion Standard deviation i f di i about the mean
68 27% of cases occur between Mean + SD and 68.27% Mean - SD 95.45% of cases occur between Mean+2SD and Mean-2SD 99.73% of cases occur between Mean+3sd and Mean-3SD Mean 3SD
Mean Blue Bl = 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
Mode
Median
TRIANGULAR DISTRIBUTION
EXPECTED VALUE
P R O B A B I L I T Y
P R O B A B I L I T Y
Simulation
Simulation uses a representation or model of a system to analyze the behavior or performance of the system.
M t C l analysis is best known Monte Carlo l i i b tk results used to quantify risk of various schedule choices
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
Decision Trees
Aggressive schedule EMV = $110,000 Conservative schedule EMV = $7,000 Given th following decision tree: Gi the f ll i d i i t Outcome
250 k 60%
aggressive
EMV 150 k
Choice event
conservative
40% 20%
100 k 45 k
40 k 9k
80% 20 k 16 k
UTILITY THEORY
Definition
Endeavors to formalize managements attitude toward risk of the decision maker.
Types
Risk Seeking i k S ki Risk Neutral Risk Averse
Expert Judgment
Expert judgment can often be applied in lieu of or in addition to the mathematical techniques described above.
Derived from:
team members g others in or outside of organization published findings y g industry averages / statistics
Q 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 LONG TERM PERCEIVED & ACTUAL SUCCESS OF PROJECT
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
E A
MOST LIKELY 9 5 0 6 9 2 8 4 0 1 4 1
D
HIGH 10 6 0 7 14 7
LOW
SCHEDULEBRISK (CONT'D)
FINISH START
E A
SUM OF MOST LIKELY 14 15 11 A-B-E
Risk response development defines the enhancement steps for opportunities and responses to threats.
Types of Responses
Avoidance - eliminate Mitigation
Reduce EMV by reducing probability Reduce Impact - buy insurance
Acceptance
A i develop plan to deal with risk if it Active: d l l d l ih i k i occurs P i A Passive: Accept risk (e.g., lower profit) t i k( l fit)
PLANNING ALTERNATIVES
Project Managers have Several Response p Options
AVOIDANCE
Defined
Characterized by project manager h i db j statements such as: This alternative is totally unacceptable to me You would take the appropriate steps to avoid this situation.
ABSORPTION
Risk is Recognized-But Not Acted Upon Accept the Risk AS IS Its a Matter of Policy Retained Ab b d R i d & Absorbed (by prudential
allowances)
ADJUSTMENT
Modification of the Project
Scope Budget Schedule Quality Specification li ifi i Combination of the Above
DEFLECTION
Involves transfer of risk by such means as:
Contracting Out to Another Party Insurance or Bonding By Recognizing it in the Contract
Types of Responses
Prevent risk from occurring
Reduce the probability that the event will occur Eliminate means P=0
CONTRACT STRATEGY
To Select the Right Form of Contract q Requires:
Identification of Specific Risks Determination of how they should be shared between the parties, and The insertion of clear, legal language in the , g g g contract documents to put it into effect.
UNCERTAINTY
HIGH
MODERATE
LOW
DEGREE OF RISK
HIGH 100%
MEDIUM
AGENCY (BUYER)
CPPF
CPIF
CPFF
FPPI
FFP
Project B Fairly well defined scope and work content. Fair probability of achieving 100% cost estimate t ti t
Project c Poorly defined scope and content. Low probability of 100% cost estimate
80%
90%
95%
100%
110%
120%
140%
FAST-TRACKING
Awarding contracts before all the information is complete to reduce the p overall time for the project Much higher risk category!! Appropriate contingency allowances must be increased accordingly. accordingly
Contingency planning
what to do if the event occurs containment
Insurance
Risk response control involves responding to changes in risk over the life of the project.
Risk Documentation
Historical database Current project database Post project assessment and archive update j d hi d
Lessons learned Plan variances Actuals Methods, tools and techniques Case studies
SUMMARY
PROJECTS ARE LAUNCHED TO TAKE ADVANTAGE OF OPPORTUNITIES, BUT O O U U OPPORTUNITIES ARE ASSOCIATED WITH UNCERTAINTIES WHICH S SSOC U C S C 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, 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 MANAGEMENT A VITAL AND INTEGRAL PART OF PROJECT MANAGEMENT