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INTERNATIONAL JOURNAL OF

PROJECT
MANAGEMENT
International Journal of Project Management 22 (2004) 619–632
www.elsevier.com/locate/ijproman

Why risk efficiency is a key aspect of best practice projects


Chris Chapman *, Stephen Ward
Department of Accounting and Management Science, School of Management, University of Southampton, Highfield, Southampton SO17 1BJ, UK
Received 2 March 2004; received in revised form 26 April 2004; accepted 7 May 2004

Abstract

This paper explains what ‘risk efficiency’ means, why it is a key part of best practice project management, and why it may not be
delivered by common practice as defined by some guidelines. This paper also explains how risk efficiency can be addressed oper-
ationally using comparative cumulative probability distributions (S-curves). Further, this paper explains why risk efficiency provides
a foundation for a convincing business case for:
• formal project risk management processes designed for corporate needs,
• embracing the management of opportunities as well as threats,
• measuring threats and opportunities to assist decision making,
• developing a more effective risk taking culture,
• taking more risk for more reward.
The argument uses linked examples from four successful cases: the first use of a designed project risk management process by BP
for offshore North Sea oil and gas projects, the first use of a designed process by National Power for combined cycle gas powered
electricity generation, a culture change programme for IBM UK concerned with taking more risk to increase the rewards, and a due
diligence assessment of project risk management for a railway infrastructure project. The concepts and tools described are relevant
to any industry sector for projects of any size.
 2004 Elsevier Ltd and IPMA. All rights reserved.

Keywords: Best practice; Risk efficiency; Project risk management; Opportunity management; Culture change

1. Introduction but making a choice not to apply formal processes


requires a clear understanding of what best practice
Uncertainty which matters is central to all projects. It formal project risk management processes could de-
is not just a question of how long a project will take, or liver, and what this should cost, including associated
how much it will cost. Uncertainty which matters in- uncertainty and risk. Everyone involved in making
cludes which parties ought to be involved, the alignment such choices needs to understand the implications.
of their motives, the alignment of project objectives with Moreover, even if formal approaches are not appro-
corporate strategic objectives, shaping the design and priate for some projects, informal approaches ought to
resource requirements, choosing and managing appro- reflect an understanding of the principles underlying
priate processes, managing the underlying trade-offs formal processes. Everyone involved in projects ought
between all relevant attributes measuring performance, to understand these principles, because they are
and the implications of associated risk. the basis of simple rules of thumb that work in
It might be argued that formal project risk man- practice.
agement processes are not appropriate for all projects, Best practice in project risk management is con-
cerned with managing uncertainty that matters in an
effective and efficient manner. To do so we need to
*
Corresponding author. Tel.: +44-173-592-525; fax: +44-173-593-
understand where uncertainty matters, why it matters,
844. what could be done about it, what should be done about
E-mail address: cbc@soton.ac.uk (C. Chapman). it, and who should take managerial and financial

0263-7863/$30.00  2004 Elsevier Ltd and IPMA. All rights reserved.


doi:10.1016/j.ijproman.2004.05.001
620 C. Chapman, S. Ward / International Journal of Project Management 22 (2004) 619–632

responsibility for it. Best practice in project risk man- assumptions, always more difficult than just learning
agement also involves the elimination of dysfunctional something new.
‘corporate culture conditions’, like ‘a blame culture’ Risk efficiency is a basic concept in financial eco-
which fosters inappropriate blame because managers nomics, central to understanding risk management in
are unable to distinguish between good luck and good terms of financial portfolio decision making models, and
management, bad luck and bad management. In the the basis of most explanations of the way financial
authors’ view best practice in this sense cannot be markets work. In this context it is widely seen as ‘useful
achieved without a clear understanding of the concept theory’, in the sense that it provides an essential con-
of ‘risk efficiency’, and its vigorous pursuit using a ceptual framework to make experience operational, to
simple operational tool, cumulative probability distri- explain basic ideas like ‘do not put all your eggs in one
butions (S-curves) which compare alternative decision basket’, and to refine rules of thumb like ‘keep X% of
choices. This paper explains why the authors hold this your portfolio of investments in cash, Y% in equities,
view, and why this implies a general need for the pro- and so on’. Its direct application in terms of usable
ject management community to understand risk effi- operational tools is problematic, because of practical
ciency. operational difficulties using a Markowitz [5] mean–
A basic definition of ‘risk efficiency’ is simply variance quadratic programming framework, but un-
derstanding the concept is an integral part of a financial
‘the minimum risk decision choice for a given level of expected
performance’, ‘expected performance’ being a best estimate of economics education, and it is widely recognised that
what should happen on average, ‘risk’ being ‘the possibility of this understanding should underlie the use of all asso-
adverse departures from expectations’. ciated tools and rules of thumb. Markowitz was awar-
ded a Nobel Prize for Economics for his seminal work in
What this means and how it affects project manage-
this area, and the basic ideas he developed are generally
ment processes is more complex, the focus of this paper
understood by anyone with a degree in economics, fi-
as a whole.
nance, accounting, or business studies. Texts like Brea-
Common practice in project risk management involves
ley and Myers [6] provide a modern financial perspective
a limited agenda relative to best practice. Common
on risk efficiency and related subjects like the appro-
practice is largely focused on what we will call ‘risk
priate discount rate to use when evaluating projects
events’, rather than the accumulated effect of all the risk
which most people with an MBA will understand, and
events and all other sources of uncertainty which are
some involved in project management may find useful
relevant to decision choices. A ‘risk event’ in this sense is
reading.
‘risk’ as defined on page 127 of the 2000 edition of the
Risk efficiency is also central to understanding the
PMBOK by the PMI [1],
relationship between portfolio theory and decision the-
‘an uncertain event or condition that, if it occurs, has a positive ory, the two key conceptual frameworks for managing
or negative effect on a project objective’, uncertainty and risk in terms of making decision choices
with a directly comparable definition of ‘risk’ on page 16 any context [7]. In simple terms, basic portfolio theory
of the 1997 edition of the PRAM Guide by the APM [2], [5] is about continuous variable allocation of resource
choices, while basic decision theory [8] is about making
‘an uncertain event or set of circumstances that, should it occur, discrete either/or choices, using ‘stochastic dominance’
will have an effect on the achievement of the project’s objec-
notions directly comparable to risk efficiency. Features
tives’.
provided by a decision theory framework which are
The above PMI and APM definitions of ‘risk’ reflect particularly useful include multiple stage choices por-
and reinforce the common practice focus on ‘risk trayed by decision trees, statistical dependency por-
events’, as do many of the others covered in an extensive trayed by probability trees, and a range of approaches to
review of risk definitions by Hillson [3]. One of the ex- multiple attribute choices. In practice both frameworks
ceptions in the project risk management area is that used need to be integrated, embedding one in the other [7].
in the RAMP [4] guide, which accords with that used in A number of organisations which have been partic-
this paper, expressed slightly differently. ularly effective users of project risk management have
In the authors’ experience common practice in project seen risk efficiency as central to holistic project man-
risk management reflects important limiting character- agement for decades, and best practice project man-
istics which are linked to the PMI/APM views of risk agement has to be holistic. For example, risk efficiency
noted above and its lack of compatibility with a ‘risk was central to the published [9] project risk management
efficiency’ perspective on risk management. Under- process for offshore North Sea projects which BP in-
standing how risk efficiency is the key to moving from troduced in the late 1970s and adapted for use world
common practice to best practice has to begin by ‘un- wide by the early 1980s. Risk efficiency was an integral
learning’ the common PMI/APM definitions of risk part of all the cases described in [10] and associated
noted above if they are part of the reader’s framing underlying papers. And risk efficiency was central to a
C. Chapman, S. Ward / International Journal of Project Management 22 (2004) 619–632 621

successful early 1990s culture change programme un- project sequence, and there was considerable scope for
dertaken by IBM UK with contributions from both delays to earlier activities, there was a significant chance
authors of this paper. The 1997 PRAM process [2] as that this hook-up would have to be attempted in No-
elaborated by the 1997 first edition of Chapman and vember or December. Using a 1.6 m barge at this time of
Ward’s book ‘Project Risk Management’ gives risk ef- year would be costly because it would be time con-
ficiency a central position, as does the 2003 edition of suming. It might mean delays until the following spring,
this book [11], and both editions provide other examples with severe opportunity cost implications. A revised
of successful application of an approach to project analysis was undertaken assuming a 3 m wave height
management which integrates project risk management capability barge, costing more than twice as much per
centred on the pursuit of risk efficiency. This is done in day. This more capable barge was more effective in the
the context of describing best practice project risk face of bad weather, and it avoided the risk of going into
management processes as we understand them, based on the next season because of earlier delays as well as the
working with organisations which embrace best practice accumulated effects of bad weather during hook-up,
in this sense, as a target if not a current achievement. significantly reducing risk in terms of the threat of a cost
What is meant by the term ‘risk efficiency’ in a project overrun relative to the expected cost. It also significantly
management context has evolved considerably since the reduced the expected cost. Fig. 1 portrays this choice in
1970s. Explaining what it means with minimal com- the cumulative probability ‘S-curve’ format considered
plexity and how to use it effectively in simple forms has by the board.
also received considerable attention over this period [7]. The location of the point where the curves cross on
This paper reflects these developments. But the focus of the cumulative probability axis (point ‘a’) indicates that
this paper is providing a concise overview of the impli- most of the time the 1.6 m barge should be cheaper.
cations of successful use of the concept for those who However, the long right-hand tail on the 1.6 m barge
are interested in holistic project management, without curve drags the expected cost to point ‘c’ on the cost
fully exploring the associated operational implications axis, beyond the expected cost of the 3 m barge (point
for project risk management, leaving the reader inter- ‘b’). This long right-hand tail, with a horizontal portion,
ested in technical details to explore them elsewhere reflects the massive increase in cost if an additional
[7,11]. season is needed, a low probability but high impact
The next section of this paper outlines the example outcome. The 3 m barge curve is relatively vertical, be-
which motivated BP to adopt risk efficiency as a central cause the outcome is relatively certain. Most of the time
concern for all projects world wide, to provide a prac- the 3 m barge would be more expensive, but on average
tical motivating case study as a starting point, and a it would be cheaper, because it avoids the implications
basis for illustrating linked concepts later. This is of extreme events.
followed by the clearest full explanation of the risk ef- On the basis of this analysis, the 3 m barge was
ficiency concept the authors could devise, using simple chosen. Further, this change in decision choice was used
models in a restricted context, aiming for simplicity to demonstrate to the board the kind of insights the new
without being simplistic. Subsequent sections generalise project risk management process provided. The board
the concept and elaborate the explanation, including approved the 3 m barge choice and the project. The
linking it to organisational culture, with further case board also mandated use of the process world wide for
based examples. Cultural implications are central to a all projects of reasonable size or sensitivity. What they
holistic project management perspective. were looking for when they mandated this process was
risk efficiency in the sense portrayed by Fig. 1 – revised
decision choices which simultaneously reduce both
2. An initial project risk management case study
3.0 m barge 1.6 m barge
A major North Sea oil project was about to seek 1.0
revised choice initial choice

board approval and release of funds to begin construc-


Cumulative probability

tion. Risk analysis using a new process [9] was under-


taken to give the board confidence in the project plan
a
and its associated cost. One activity involved a hook-up,
connecting a pipeline to a platform. It had a target date
in August. A 1.6 m barge was specified, equipment
expected value
which could work in waves up to a nominal 1.6 m
height. Risk analysis demonstrated that August was an 1.6m
appropriate target date, and a 1.6 m barge was appro- 0
b c
Cost
priate in August. However, risk analysis also demon-
strated that, because this hook-up was late in the overall Fig. 1. Barge choice example.
622 C. Chapman, S. Ward / International Journal of Project Management 22 (2004) 619–632

expected cost (our best estimate of what things should cost. For example, when choosing between alternative
cost on average) and risk (possible unfavourable de- approaches to a project, assume any scope for relevant
partures from expectations). Looking for risk efficiency time uncertainty can be translated into a cost equivalent
was a key step in this process, in effect the central pur- and added to other cost uncertainty, and all other
pose of the process. It was immediately recognised at measures of performance (‘quality’ measures for exam-
board level that a process with this risk efficiency goal ple) can be translated and added in a similar manner if
would pay for itself many times over. Eventually it was relevant.
acknowledged that because this process was not an ‘add- Second, assume all relevant uncertainty about alter-
on’ to give the board comfort, it was an ‘add-in’ to make native approaches to a project can be measured in terms
project planning and costing more effective, organisa- of linear cumulative probability distributions. Linear
tional structure changes would be useful. Initially a cumulative probability distributions correspond to uni-
project risk management team was set up to support form probability density functions – any value in the
project planning, then it became a driving part of project feasible range is equally likely. This implies expected
planning, then it became a driving part of project values are defined by the mid-point in the range, which
planning and costing. Later still the links between pro- is also the median value (there is a 50% chance of higher
ject risk management and corporate risk management or lower values), and modal (most likely) values are not
were strengthened. an issue. Easy identification of expected values is one
It is worth noting that this case illustrates the key simplification here, but another key simplification is
importance of a top-down view of uncertainty man- there are no conditions (assumptions) which are not
agement, concerned with the accumulative effect of all common to all the choices being considered.
sources of uncertainty from the beginning of the project With these assumptions in mind, consider a project
until the completion of the hook-up, and general (not which involves a choice between three strategies or
event specific) responses to deal with this uncertainty, tactics, designated P, Q and R, with associated cost
risk being the result of a failure to ensure such flexible uncertainty portrayed by Fig. 2. At a strategic level three
responses are in place. Best practice involves the inte- different ways of getting oil from an oil field to a refinery
gration of a bottom-up perspective which may be risk might be involved – pipelines, ships, and a combination
event driven in part with a top-down perspective. Both of both, for example. At a tactical level, three different
are important, but a top-down perspective is the only ways of responding to a particular risk event given a
one viable on its own, whether or not a formal risk particular strategy might be involved – replacing a failed
management process is used. photocopier with the same model from the same sup-
It is also worth noting that the basis of the business plier, a new model from the same supplier, or a new
case for making formal risk management as described in model from another supplier, for example. Throughout
[9] mandatory world wide was improvements in risk the project life cycle, any organisation undertaking any
efficiency, and this in turn led to it being seen as an add- project has a wide range of choices to make between
in rather than an add-on, with widespread implications. bounds comparable to these strategic and tactical level
examples. The linearity of the cumulative probability
distribution curves in Fig. 2 is most realistic in the
3. Risk efficiency as a complete concept using simple context of a simple tactical choice like the photocopier
models example, but it is helpful to use this simple starting point
for all levels of decision choices.
The notion that looking for risk efficiency can deliver To provide a concrete example, assume Fig. 2 is de-
both lower expected cost and lower associated risk is a fined by our photocopier example. Assume all three
basic characteristic of the concept, in line with the basic
definition provided earlier, but it does not really explain
risk efficiency as a complete concept. The long right-
hand tail of the 1.6 m barge choice in Fig. 1 was an 1.0
P .Q .R
e f
important characteristic of this particular decision, but
Cumulative probability

such tails are not always a feature of risk efficient


choices. In addition, some choices involve more than
.
d

one attribute, including attributes associated with safety


and other issues which raise measurement difficulties.
This section provides a complete concept description
using simple models in a simple context in terms of two
0
key simplifying characteristics. a b c
Cost
First, assume all aspects of project uncertainty can be
reduced to a single attribute, and that single attribute is Fig. 2. Response choice example with linear distributions.
C. Chapman, S. Ward / International Journal of Project Management 22 (2004) 619–632 623

choices involve a known contracted rent per unit time The associated decision rules for making choices
plus a known contracted charge per copy – the only follow.
unknown is the number of copies which will be needed. 1. If one choice has a curve entirely to the left of the oth-
In each case the bottom of the cumulative probability ers, chose it as the only risk efficient choice (illustrated
curve, associated with a cumulative probability of zero, by P in Fig. 2).
is defined by the minimum plausible number of copies, 2. If two curves cross, one has an equal or preferable ex-
and the top of the curve is defined by the maximum pected value and a preferable risk portrait, chose it as
plausible number of copies. Fig. 2 implies choice P in- the only risk efficient choice (illustrated by the 3 m
volves the highest charge per copy (hence the flattest barge choice in Fig. 1, and a curve like Q in Fig. 2
slope), but a significantly lower rent per unit time (the which has been shifted to the left so that the point of
reason it is entirely to the left of the other curves). As- intersection ‘ d’ is at or below the expected value of R).
sume choice P is the same machine from the same sup- 3. If two curves cross, one has a preferable expected value
plier as the failed photocopier. and the other has a preferred risk portrait, both are risk
Choice P is clearly and unequivocally risk efficient, efficient, and a choice must be made considering the
because it has a lower expected value (at ‘a’, relative to risk-reward trade-off (illustrated by Q and R when P
‘b’ and ‘c’), and less risk, defining risk as the possibility is not available in Fig. 2).
of adverse departures from expectations as noted earlier. The first rule could be expressed as a special case of
For example, the probability of exceeding any given cost the second, so a joint rule could be defined, but it is
is less using P than it is for Q or R. This is indicated by useful to keep them separate to simplify interpretation.
the line for P being entirely to the left of the lines for Q Understanding the risk efficiency concept in general
and R. In decision theory terms [8], P exhibits stochastic and the issue of trade-offs in particular is helped by
dominance relative to Q and R. P is a preferable choice another form of diagram, a variant of that used by
for any rational person. But note that P exhibits more Markowitz [5], as shown in Fig. 3.
variability than Q or R. Variability (as measured by Fig. 3 can be associated with portraying all feasible
range or variance for example) is only a valid measure of ways to complete a project using two dimensions – ex-
risk if we are comparing distributions with the same pected cost and associated cost risk. It provides a
expected value (mean) and all other moments (which framework for thinking about making an optimal choice
define shape) are the same, as observed by Markowitz of approach from all feasible choices in terms of these
[5] in relation to his mean–variance approach to port- two dimensions. Point G portrays the minimum ex-
folio theory. pected cost solution – an option with a lower expected
Now assume choice P is not available – we cannot cost is not available. Point C portrays the minimum cost
obtain the same photocopy machine, and we must risk solution – an option with a lower risk is not avail-
choose between Q and R. Both are risk efficient. This able. The points C, D, E, F and G all lie on the ‘risk
is indicated by the fact that the lines cross (at ‘d’) and efficient boundary’ C–G, and illustrate what we mean by
the lower expected value for R. Given the linear form risk efficiency. All options defined by points on the risk
of the cumulative probability distribution curves, two efficient boundary C–G minimise risk for a given level of
curves crossing above expected values imply both expected cost, and/or minimise expected cost for a given
choices are risk efficient. Choice R has a lower ex- level of risk. They are what economists call a Pareto
pected cost, but more risk defined in terms of adverse optimum, defining an efficient frontier. We cannot do
variability relative to the expected outcome for the better in one dimension without doing worse in the
preferred choice. The dimensions of the triangle d–e–f other. All options defined by points below and to the left
provide measures of this risk, but viewing the size and of this boundary are not feasible because they are not
shape of the triangle d–e–f in the context of both
cumulative distributions as a whole is more useful
than decomposed measurements. Figs. 1 and 2 provide
what we will call a ‘risk portrait’, portraying risk-re- non-feasible
solution area
ward trade-offs in terms of identified expected values
and the effect of all moments as captured by the cu-
Cost risk

A
mulative probability curve as a whole. Whether or not G
linear forms are used, risk and risk efficient choices F
B
need to be judged using risk portrait diagrams in the E feasible
Figs. 1 and 2 formats, without any summary measures D solution area
C
risk efficient
other than the expected values indicated in Figs. 1 and boundary C-G
0
2, because this is the only simple way to visualise in a 0 Expected cost
holistic manner the implications of distribution shape
[7]. Fig. 3. Risk efficient options.
624 C. Chapman, S. Ward / International Journal of Project Management 22 (2004) 619–632

available. Best practice by definition requires an effective profits associated with risk it could live with, as a con-
and efficient search for risk efficiency in this sense. Points sequence of an ‘insurance’ approach to risk reduction, it
A and B are feasible but not risk efficient. For example, would risk lowering its overall profit levels to the point
F is better than B because it has a lower expected cost, D where predatory take-over became a serious risk, by
is better than B because it has less cost risk, and E is organisations who would live with such risk, to their
better than B in both these respects. shareholders benefit. This can lead us to distinguish
The risk efficient boundary C–G is usually portrayed between ‘project choice’ (pc) and ‘corporate perspective’
as smooth and well behaved, as shown in Fig. 3, because (cp) risk efficiency, formally associating Fig. 3 with these
the choices allowed by basic Markowitz [5] mean–vari- two separate cases. For example, point G in a cp context
ance quadratic programming models yield this form. In involves minimising expected cost for all projects with
practice discrete choices may render this boundary no exceptions, while point F in a cp context involves a
rough and badly behaved, but the risk efficiency concept slight reduction in expected cost on some projects when
is unchanged. In a project management context we are a significant risk reduction can be obtained. For present
not dependent upon continuous variable mathematics to purposes the key point is the implications of a ‘complete
define the risk efficient boundary. Indeed, we cannot view’ of risk efficiency which uses the broader corporate
define the whole of the boundary or the feasible solution perspective to suggest the following decision rule.
area, only the finite set of choices which we start with
and evolve as the project plans evolve. We may believe Always minimise the expected cost of a project unless the risk
implications at a corporate level are unacceptable, in which case
we are at a point like E, but later discover we were at a the minimum expected cost increase to yield an acceptable level
point like B or A. For example, the change from a 1.6 m of corporate risk should be sought.
barge to a 3 m barge in the barge selection example
could be associated with a move from B to E if no other This complete risk efficiency concept adopting a
sources of risk inefficiency remained. But if other sour- corporate perspective has the virtue of simplicity at an
ces of risk inefficiency remained, a move from A to B operational level, as well as a higher level of optimality.
would be a more appropriate portrayal. Risk efficiency at a project level will yield inappropriate
Fig. 3 is especially useful to consider risk-reward ‘local optimality’ rather than an appropriate ‘global
trade-offs in conceptual terms. For the moment consider optimality’ unless a corporate perspective drives a focus
a variant of the barge selection example. Assume this on expected cost outcomes. And if the focus is a cor-
variant involves a different risk portrait which yields a porate perspective, most of the time expected cost out-
version of Fig. 1 which involves shifting the expected comes are all that need consideration, provided choices
value for the 3 m barge at point b to the right of point c involving potentially unacceptable corporate risks are
by £5 million. Then the 3 m barge and the 1.6 m barge identified and considered more fully, using the Fig. 1
are both risk efficient choices. Point F in Fig. 3 might risk portrait approach.
correspond to the 1.6 m choice, and point E might As part of the culture change programme mentioned
correspond to the 3 m choice. Moving from F to E re- earlier, IBM UK adopted this rule and took an ag-
duces the risk, but it increases the expected cost. Is it gressive view of the need to take cost risk on each pro-
worth it? ject when bidding for projects, in the sense that they
If we are considering this project in isolation from recognised that the risk of not obtaining enough prof-
other corporate risk, the basic Markowitz perspective itable projects by minimising the expected cost of de-
applies, and this question has to be answered in terms of livering what customers wanted on all projects was
the preferences of those making the decision on behalf much more important than the risk of loosing money on
of the project. If our variant of the barge selection ex- any particular project. Put another way, contractors
ample involved an increase in expected cost of £5 million who bid for work on a basis which avoids the risk of
to avoid a 10% chance of an extra £100 million, this loosing money on all projects inevitably go out of
might look like reasonably priced ‘insurance’, worth business, because they are underbid by contractors who
buying. However, if we are considering this project from are prepared to take and manage risk in a way which
a corporate policy perspective, a much more aggressive balances the risk of going out of business as a conse-
view of appropriate risk-reward trade-offs is needed. quence of any single project with the risk of not ob-
Knowing such projects could double in cost, and to cope taining enough business.
with this a consortium approach to all offshore projects Fig. 4 is a useful linear cumulative distribution in-
had been put in place to cope with cost overruns of terpretation (linear S-curves) of some of the points
£1000 million, a risk efficient corporate perspective shown in Fig. 3. For example: A is dominated by B (A
would demand the 1.6 m barge choice, on the grounds is relatively risk inefficient), indicated in Fig. 4 by the
the organisation could live with £100 million losses and line for A being entirely to the right of the line for
should not lower expected profits by avoiding risk it B, indicated in Fig. 3 by the point for A being to the
could live with. If the organisation ‘gave away’ expected right and above the point for B; B is dominated by D,
C. Chapman, S. Ward / International Journal of Project Management 22 (2004) 619–632 625

1
D
B A
E
Cumulative probability

0.8

0.6

0.4

0.2
B D
0
Cost

Fig. 4. Example cumulative probability distribution portrayals.


Fig. 5. An illustrative opportunity/incompetence boundary.

indicated in Fig. 4 by B and D having the same expected trated by the initial version of the BP barge selection
value but a greater slope on the B line, indicated in example with opportunity management, moving from a
Fig. 3 by the point for B being directly above the point point like B to a point like E in Fig. 5. There is no need
for D; E involves more risk than D, but less expected to suggest that reasonable planning prior to effective risk
cost, so a trade-off is involved, indicated by the Fig. 4 management processes was incompetent. A more useful
lines crossing with a lower expected cost for E, the perspective is that effective risk management processes
points for both being on the Fig. 3 risk efficient facilitate systematic searches for opportunities to im-
boundary. prove risk efficiency. Indeed, searching for opportunities
One of the virtues of the simple linear cumulative to improve risk efficiency is the best way to visualise
probability distribution portrayal illustrated by Fig. 4 is what is going on, and to motivate those involved to do it
a starting place to understand the link between the effectively. However, if planning without effective risk
conceptually useful framework of Fig. 3 and the oper- management processes is incompetent, or risk manage-
ationally useful framework provided by cumulative ment processes themselves foster incompetent planning,
probability distribution diagrams like Fig. 1. To con- it can be useful to associate this with a point like A in
sider risk efficient choices in practice we use the con- Fig. 5, as part of a change management process. Not all
ceptual framework of Fig. 3 and the operational feasible approaches are competent, and what is and is
framework of Fig. 1. It is worth developing familiarity not competent matters. If you want to stop incompetent
with the relationship between Figs. 3 and 4, then Fig. 3 practices, you have to understand what makes them
and sets of curves like those of Fig. 1. incompetent, and how to avoid it. Point A in Fig. 5 may
The feasible solution boundary other than the risk ef- depict a strategy which fails to deliver risk efficiency
ficient portion, above G and to the right of C, is also because the risk efficiency concept is not understood, so
usually portrayed as shown in Fig. 3. The mathematical risk efficient choices are not looked for. If corporate
assumptions behind a basic Markowitz model [5] support decision processes do not look for risk efficiency, it is
this portrayal for financial portfolios. In practice the unlikely to found.
feasible solution area for project management option The initial version of the BP barge selection example
choices may only be constrained above and to the right by involves an opportunity associated with avoiding the
eliminating the obviously ridiculous options, treating threat of an additional season because of an accumula-
them as non-feasible because no reasonable person would tion of delays associated with threats, not a ‘proper
contemplate them. Some readers may prefer to include the opportunity’ from some perspectives, although the au-
ridiculous and draw a horizontal boundary from C to the thors see viewing the search for such changes as an
right, a vertical boundary from G upwards. important part of opportunity management.
Fig. 5 refines the idea of a finite feasible solution area The IBM culture change example illustrates taking
defined by excluding ridiculous options. It shows an more risk on individual projects for more reward at a
opportunity/incompetence boundary which separates an corporate level, part of their business case and BP’s
‘opportunity region’ close to the risk efficient boundary business case for formal risk management, and an
from an ‘incompetence region’ significantly removed important part of any organisation’s business case for
from the risk efficient boundary. Several threads of ra- formal risk management if risk efficiency is under-
tionale lie behind Fig. 5, explored in [11], outlined briefly stood in the complete sense of interest here. This can
here. be associated with reducing corporate level risk by
Exactly where the opportunity/incompetence bound- increasing project level risk. But in the authors’ view it
ary lies is clearly open to debate, but it is very useful to is a key part of opportunity management, best viewed
associate risk efficiency improvements like that illus- from that perspective in a Fig. 5 context, because a
626 C. Chapman, S. Ward / International Journal of Project Management 22 (2004) 619–632

positive spin which allows the integration of all deci- 4. Non-linear cumulative probability distributions
sion choices improves the effectiveness of the process.
Consider two further examples of opportunities of Linear cumulative probability distributions, like those
the kind best practice must stimulate a search for. of Figs. 2 and 4, provide a useful conceptual simplifica-
In North Sea projects it is obvious that ‘bad weather’ is tion. This linearity can also be useful at an operational
a threat to be managed. ‘Good weather’ is an associated level, for simple tactical decisions like our photocopier
opportunity. If a pipeline progresses faster than expected, example, or for a first cut analysis of strategic decisions
it is very important not to run out of pipe. Further, if any [7,11,14–16]. But generalising the direct use of figures like
activity finishes early, it is very important to manage this 2 and 4 to direct use of figures like 1 poses no difficulties
good luck proactively, pulling other activities forward in beyond getting used to the implications of more complex
time, otherwise the swings and roundabouts of good luck shapes. This is in stark contrast to generalising Marko-
and bad luck will suffer a ratchet effect and become pure witz’s two moment (mean–variance) approach to ac-
bad luck – the good luck will be lost if it is not captured by commodate asymmetric distributions [5].
opportunity management [7,11]. Direct visualisation of risk and risk efficient choices in
A combined cycle gas-powered electricity generation a cumulative probability framework is a key ingredient
station assessed by a designed modification of the BP in the ‘constructively simple’ approach to decision
process discussed earlier [9] for use by National Power making involving risk and uncertainty, which overcomes
on its first outing had to look for a general response to barriers to practical operational tools to exploit risk ef-
the combined effect of a series of threats, including de- ficiency in a financial portfolio context as well as a pro-
lays in obtaining permissions from government agencies ject management context [7]. In these and other contexts
because of a new political context. The focus of the risk efficiency is essential ‘useful theory’, in the sense that
management of this risk by the engineers involved was it provides a conceptual framework to understand in ‘big
completing testing of the plant prior to the ‘first gas picture’ terms what we are trying to do. It is also the basis
contract date’ involving a take-or-pay contract for gas of associated operational tools and rules of thumb.
which might lead to delay penalties. But when the fi- ‘Constructive simplicity’ can be related to risk efficiency
nance staff saw how the engineers had solved this issue in terms of a ‘simplicity efficiency’ concept [7], a frame-
[11], they recognised a later first gas contract date could work for thinking about what level of simplicity is ap-
be used to improve the cash flow, an opportunity in propriate, and never using complexity which is not
terms of more profit in year one of operation. The res- constructive, explored briefly later in this paper.
olution of a threat by one part of the organisation was The framework for making risk efficient choices a
recognised as the basis of an opportunity by another practical proposition in the context of non-linear cumu-
part of the organisation. lative probability distribution curves is a well developed
Opportunities and threats are not distinct event risks. understanding of the relationship between Figs. 1–5, a
They are aspects of uncertainty. An important feature of conceptual risk management education issue of relevance
this perspective is the view that ‘opportunities’ are not to everyone involved in project management. The tool
just good luck capitalised or potential favourable events used on an operational basis is diagrams of the Fig. 1
made more likely. form, reflecting the issues discussed in terms of Figs. 2–5.
An example of a related rule of thumb is
Opportunities are all feasible ways of improving the expected
outcome in terms of all relevant attributes without increasing always try to identify at least one general response, which will
associated risk in an inappropriate manner. deal with any combination of earlier specific sources of risk give
the best specific responses, including specific sources we failed to
Value management [12] and all other aspects of best identify.
practice project management are clearly part of this.
The 3 m barge example of Section 2 can be seen as a
Defining risk management to fully embrace opportunity
general response in this sense, and this rule of thumb
management in this sense requires a risk efficiency per-
was the explicit basis of the success achieved in the
spective, although for some organisations it might be
National Power example.
useful to depart from tradition and refer to ‘risk effi-
ciency’ as ‘opportunity efficiency’ or ‘risk-reward effi-
ciency’.
Full integration of opportunity management in this 5. Non-quantified conditions or assumptions
sense clearly takes project risk management beyond
many descriptions of what project risk management is If a choice between tactics like replacing a failed
about, along lines explored by [13], but users of project photocopier is made in terms of a quantification of
risk management who do not see this as a goal are never uncertainty like that of Fig. 2, there may be no associ-
going to achieve full project risk management maturity ated conditions (assumptions) which matter, in the sense
in a best practice sense in the authors’ view. that the uncertainty associated with all decision options
C. Chapman, S. Ward / International Journal of Project Management 22 (2004) 619–632 627

can be quantified in probability distributions using the explain why, in terms of scope assumptions associated
same assumptions, and they are equally robust in terms with both approaches to risk analysis, modelling bias,
of relaxation of those assumptions. However, if a stra- and proposed contractual arrangements. Chapter 5 in
tegic choice like getting oil to market via pipelines or [7] discusses a variant of this assessment, transformed
ships is involved, using a diagram like Fig. 1, important into a property development tale.
assumptions which are robust to different degrees for The Green Book [18] adjustment for optimistic bias
different choices may be important. If the choice is ‘de- currently advocated by the UK Treasury can be inter-
velop the oil field or not’, important assumptions which preted as a rather crude cube factor, and such adjust-
matter to a different extent for each choice are inevita- ments arguably make more sense in a cube factor
ble. At a conceptual level, risk efficient choices must be framework. Ignoring a cube factor can be interpreted as
made assuming a common set of conditions apply, or ignoring all the risk events which frequently matter most
obvious problems arise. Stand-alone cost estimates – the assumptions which condition a numeric estimate
(which are not comparative) always involve assumptions failing to hold.
which condition the estimate – scope assumptions which The cube factor is both a conceptual device and an
may not hold for example. operational tool for dealing with assumptions or con-
A direct operational approach to ensure a compara- ditions used to quantify uncertainty which may not
ble set of assumptions or no overlooked conditions as- hold.
sociated with a stand-alone estimate can be provided
using what the authors call a ‘cube factor’ [7,11,14]. In
brief, any estimator’s expected value should be inter-
preted using three adjustments, which can be defined in 6. Choices involving multiple attributes
terms of an expected value and associated variability.
One adjustment is for known unknowns – explicit as- To start with an example context drawing on a case
sumptions which have been identified via a risk man- just touched on, consider a railway infrastructure pro-
agement process but not quantified, treated as ject. Say the capital cost uncertainty measurement pro-
conditions. A second is for unknown unknowns – im- cess has to relate that uncertainty to time (delay)
plicit assumptions which have not been identified. A uncertainty. But assume for the moment that quality (all
third is for bias – a tendency to optimism or pessimism, other measures of performance) uncertainty can treated
conscious or unconscious. The ‘cube factor’ designation as a separate pre-specified set of conditions. Generalis-
is a simplification of known unknowns, unknown un- ing the risk efficiency concept to accommodate this
knowns, and bias, kuuub, reflecting a convenient three context has to be based on an understanding of appro-
dimensional portrayal [7,11]. The technicalities of how priate trade-offs between cost and time. Most option
this can be made operational are not relevant here. choices will impact on both, but even if they do not,
What is relevant is the need to adjust judgements for both need to be considered when seeking a risk efficient
different assumptions or conditions and the availability set of choices. In effect, the two dimensional Fig. 3 has
of a framework to address this issue if it matters. In to take a three dimension form, with an additional axis
effect we need a device to ensure that all decision options for time, assuming risk associated with cost and time is
considered involve the same conditions (assumptions) or portrayed in one dimension. The feasible solution area
suitable adjustments are made to reflect the differences. becomes a three dimensional space. The risk efficient
A cube factor provides a direct approach. Indirect ap- boundary line becomes a surface. In conceptual terms
proaches are also possible [7], like looking at the we need to locate the point on this surface which pro-
quantified difference and a list of non-quantified factors vides the most appropriate trade-off between minimising
and asking which seems bigger. The US defence secre- expected cost and minimising expected time, and be-
tary Donald Rumsfeld may have won a Plain English tween these two expected outcomes and associated risk.
Campaign ‘Foot In Mouth trophy’ for his description of In practical terms we need to judge any two options in
‘unknown unknowns’ [17], but he is right to point out terms of two diagrams like Fig. 1, one for cost and an-
that they matter. other for time, implicitly using attribute trade-offs when
An example use of the cube factor concept in practice necessary, because we have not explicitly predefined
involved a railway infrastructure project due diligence appropriate attribute trade-offs, and attribute trade-offs
process. One party said the project will cost X, based on may be crucial if one choice does not dominate the other
their risk analysis. Another party said the project will in terms of both attributes. Two figures like Fig. 1
cost Y, based on their risk analysis, where Y was sig- provide a practical operational view of a three dimen-
nificantly larger than X. Chapman was asked to assess sional version of Fig. 3.
where reality lay, anticipating a response somewhere To continue with the railway infrastructure project
between X and Y. The answer was Z, where Z was illustration, if other measures of performance also
substantially greater than Y. A cube factor was used to require joint consideration, operating costs and safety
628 C. Chapman, S. Ward / International Journal of Project Management 22 (2004) 619–632

for example, then further dimensions become relevant 7. Further project and process objectives, including
in Fig. 3 conceptual terms, and further versions of cultural changes
Fig. 1 become necessary in operational terms. For
example, a change in contract strategy might increase If everyone involved in a project visualises themselves
expected capital cost and expected operating cost, at a point like B in Fig. 5, seeking opportunities to move
decrease expected time, and increase expected safety, to E, a rich range of objectives which build on this po-
with no significant change in associated risk. To make sition can follow, as discussed in Chapter 3 of [11]. In
a choice, the differences in the expected outcomes can contrast, organisations which effectively operate at a
be compared, and implicit or explicit preferences used point like A in Fig. 5 usually have a complex set of
to make a choice. If associated risks are also different, cultural conditions which can be treated via appropriate
four figures like Fig. 1 would have to be consulted to process changes [7]. This section outlines some of the
make a choice. further objectives that can be pursued in the framework
Explicit consideration of appropriate trade-offs be- of a risk efficiency perspective, finishing with a culture
tween capital cost, operating cost and time generally change example.
provides more effective management of these trade-offs. Once it is clear there are many ways to perform a
In the limit such joint management can lead to the project which need to be avoided because they are not
equivalent of a conversion of the multiple attribute de- risk efficient, and we need to seek an ‘efficient frontier’ in
cision problem into a single attribute decision problem. terms of our approach to each project, it follows that a
A failure to consider such trade-offs explicitly can be similar argument applies to the processes used to plan
interpreted as a failure to manage such trade-offs. Sim- and manage projects. This involves a need for what the
ilar arguments can be applied to safety, although this authors call ‘simplicity efficiency’, ‘the minimum level of
raises a range of ethical issues outlined in [7, Chapter 7], complexity for any given level of insight, choosing an
involving another railway case. appropriate level of insight for each pass of every pro-
Sometimes a balanced scorecard approach [19] is cess’, a reinterpretation of ‘KISS’ as Keep it Simple
appropriate, involving a range of attribute measures Systematically [7]. Fig. 6 illustrates this concept in a
which are not usually converted to a single measure like manner comparable to Fig. 3.
cost or considered explicitly in terms of trade-offs. This has a number of implications for best practice
However, trade-offs still underlie the choices made, and risk management processes.
it can be useful to consider them indirectly [7]. First, best practice risk management processes must
In principle, all decision choices could be reduced to a be highly iterative, with early passes designed to corre-
single attribute choice in a Fig. 5 framework if appro- spond to point ‘b’ in Fig. 6 used to discover where un-
priate trade-offs are identified, via a goal programming certainty matters, sizing it in rough terms at a low cost in
approach for example [20]. In practice it is not sensible terms of effort and complexity. Later passes can then
to attempt this directly, but it is clearly important to focus more time and effort effectively and efficiently,
avoid choices like A, which will be inevitable if trade-offs using processes designed to correspond to points be-
are not considered in an effective manner. The project tween ‘b’ and ‘d’ like ‘c’. We want to spend 80% of our
risk management processes embedded in general cor- time on the 20% of the project that matters most, or
porate decision making processes must confront the some variant of this 80:20 rule. Single pass processes
question of trade-offs between multiple attributes in an
effective manner if outcomes like A in Fig. 5 are to be
avoided. All those involved in projects who have any say Key:
in the operation and use of such processes need to un- a-b ineffective level of insight
b-d effective and efficient boundary
derstand this. It is not just an issue for specialist project b-c first pass range for models (target - may not be achieved)
risk management staff. It is a holistic project manage- c-d last pass range for models when more insight is useful (target)
e inefficient approach
ment issue which affects everyone involved in projects d
and everyone concerned with their outcomes. The six
Ws framework discussed in [11] provides an operational
framework to assist with the analysis of these issues, and
Insight

[7] provides further operational frameworks and tools. feasible alternatives


Best practice project risk management insists that the
project team as a whole confronts the issue of trade-offs e
c
between attributes, and a risk efficient perspective as
outlined in [7] provides the conceptual framework and b
a
basic tools to do so recognising uncertainty about the
Simplicity Complexity
trade-offs as well as uncertainty about our ability to
measure the appropriate attributes. Fig. 6. Simplicity efficiency boundary.
C. Chapman, S. Ward / International Journal of Project Management 22 (2004) 619–632 629

Base plan can be interpreted as an equivalent to a probability-


completion date
1
impact grid in this sense – uncertainty about the number
Probability of achievement by dates indicated

of copies is the only risk event equivalent, it is certain to


0.9
1
2 occur, and plausible minimum and maximum numbers
0.8 3
4 define the end points of each curve. Diagrams like Fig. 7
0.7
5 are used to understand how risk and uncertainty builds
0.6 6 up, from a bottom level of risk events and other sources
0.5 of local uncertainty, to a top level of project completion
0.4 date, cost and quality measures. And they are used to
0.3 explain it top down. Diagrams like Fig. 1 are used to
0.2 make decisions during the process of building it up,
0.1
starting with tactical decisions, then moving on to
strategic decisions, which are always conditioned by
0
Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov lower level tactical decisions. Trade-offs between attri-
5th year
Probability curves show the cumulative effect of the following issues:
butes must be considered as part of this process as ap-
1. yard not available, or mobilisation delays
propriate.
2. construction problems / adverse weather Third, when this approach to analysis is adopted the
3. subcontracted nodes delivery delays
4. material delivery delays importance of treating dependence properly becomes
5. industrial disputes inescapable, a key aspect of best practice. There are
6. delayed award of fabrication contract
simple ways of modelling widespread dependence based
Notes:
1. the curves assume a minimum fabrication period of 20 months on covariance, correlation or percent dependence.
2. no work is transferred offsite to improve progress Portfolio theory, the birthplace of risk efficiency, is
3. no major fire, explosion or other damage
usually couched in these terms [5]. There are simple ways
Fig. 7. Initial level output for an offshore project. of modelling a limited number of dependence relation-
ships in a more detailed and less restrictive manner using
cannot be efficient or effective in comparison to well conditional probability specifications. Decision theory
designed iterative processes. Single pass processes cor- [8] can be interpreted as the home of the probability
respond to a point like ‘e’. trees which underlie this approach. Causal modelling of
Second, early passes must identify what matters in a relationships provides the greatest insight when it is
simple unambiguous manner, and facilitate further more feasible, one of the key motives for the modelling of
refined analysis in a consistent framework. The use of sources of risk and responses in [9] and all subsequent
cumulative probability distributions in a Fig. 7 frame- derivatives of this approach. Chapter 10 of [7] considers
work provides the basic tool here, this example involv- all three in a portfolio management context, to clarify
ing time uncertainty for the jacket fabrication activity of how they can be used for different ends, jointly or sep-
a BP North Sea project. arately. One or more of these approaches needs to be
The curve labelled 1 reflects issue 1 on its own, the selected for project risk management processes, with a
curve labelled 2 reflects 1+2, the curve labelled 3 reflects clear understanding of what is needed and how these
issues 1+2+3, and so on. The small gap between issues 1 needs are best served. Simply assuming independence is
and 2 shows we do not need to worry about issue 2, but generally not a viable option, and it routinely leads to
the large gap between curves 4 and 5 shows we do need grave misjudgements, often involving understatements
to worry about issue 5, given the low chance of of uncertainty by an order of magnitude.
achieving the base plan completion date (about 0.15 Fourth, once this kind of analysis is common place
probability, associated with the intersection of the dot- and widely understood within a risk efficiency perspec-
ted line and curve 6). As explained in [11], if an early tive, it becomes sensible to distinguish between ‘targets’
pass shows this result when all the risk events involved which should be aspired to, expected values which
have been estimated simply and directly without any should be the basis of most decisions, and commitments
attempt to gather data or think about alternative re- which involve an appropriate contingency, with respect
sponses, the next pass might look for data to confirm the to all relevant attribute measures. Further, it becomes
seriousness of industrial disputes, or it might look for obvious how this framework can be used to manage
better ways to manage this issue, or both. Very early good and bad luck, ensure ownership of contingencies
passes can use linear cumulative distributions which are and provisions is appropriate, and ensure contracts are
directly comparable to a probability-impact grid except effective and efficient [11].
that a minimum and maximum probability and impact Fifth, once this kind of approach is clear it becomes
box is specified for each risk event instead of insisting on obvious why the PRAM [2] process uses a ‘focus the
a common box structure, and there is no need for an process phase’ to tailor the generic risk management
ambiguous ‘risk index’ [7,14–16]. Each curve in Fig. 2 process to the context of the particular project being
630 C. Chapman, S. Ward / International Journal of Project Management 22 (2004) 619–632

addressed. The BP barge selection example and the the implications of uncertainty about the level of performance
National Power example both involved processes de- achievable, portrayed by adverse variability relative to expected
outcomes, assessed for each performance attribute using com-
signed for particular types of projects for particular parative cumulative probability distributions when measure-
organisations. Organisations can now base a compara- ment is appropriate.
ble process on generic best practice processes [11], but
they will still need the equivalent of a PRAM focus This captures what BP and IBM and others using a
phase, and they need to avoid using any guideline in a risk efficiency based approach to project risk manage-
manner which reflects common practice rather than best ment have been doing for years, and it is a clear gen-
practice. eralisation of a Markowitz perspective. It is implicit in
Finally, within this kind of process it is feasible to the earlier discussion in this paper. But it is substan-
select and manage specific culture change objectives. tially different to the definitions of risk adopted by
For example, the hook-up discussed earlier in this PIMBOK 2000 [1] and PRAM 1997 [2]. Indeed, their
paper actually took place in late October, the weather definitions of risk are not really compatible with a risk
was very good at the time, and it became clear after- efficiency perspective. The process recommended in
the-fact that they could have got away with the 1.6 m PRAM 1997 in Chapter 3 is consistent with risk effi-
barge. Reflecting on these facts, it became clear that ciency concept, as is its elaboration in [11] and the 1997
the decision to use a more expensive barge was ap- first edition of this book, but these books need to be
propriate, the project manager had done well to com- understood to interpret the PRAM process in these
plete the hook-up by the end of October, and everyone terms. Both guides need to change their definition of
involved had been lucky with the weather. Further, risk to accommodate a risk efficiency interpretation of
because there was an effective risk management process their process. The 1997 PRAM Guide is currently be-
based on risk efficiency in place, it was clear the project ing revised, and as currently drafted this change has
manager was both effective and lucky, but if the same been made, along with a number of other useful
project manager had made the same choice without changes which follow on from this change in perspec-
formal risk analysis support, his career prospects tive, outlined in Chapter 4 of [11].
would have looked decidedly different. He would have Key implications if all these changes are made include
been accused of being a ‘wimp’ and wasting money. It linked shifts in emphasis:
was understood that experienced project managers 1. from a bottom-up focus on events which generate
would anticipate this, and go for the 1.6 m barge risk, to a top-down focus on the implications of the
choice in such circumstances, because the organisation accumulated effects of all sources of uncertainty;
was incapable of distinguishing between good luck and 2. from a focus on responses to specific events, to a
good management, bad luck and bad management. focus on responses which deal with collections of
More generally, the wrong risks would be taken, the sources of uncertainty, building flexibility into a
wrong risks would be avoided, and a blame culture project;
would shape behaviour in a way which accelerates the 3. from qualitative probability-impact grid portrayals of
movement in Fig. 5 from B to A and beyond, unless events which generate risk given specific responses, to
the culture change implications of the ability to dis- quantitative portrayals using Figs. 2 and 4 equiva-
tinguish good luck and good management, bad luck lents initially, Fig. 1 equivalents when uncertainty
and bad management, are exploited for all levels of clearly matters;
decision making, including those when formal risk 4. from processes based on probability-impact grid or
management processes are not appropriate. conventional probability distribution approaches
Risk efficiency at a conceptual level has cultural im- which are iterative to a limited extent, to highly iter-
plications of immense practical importance. Best prac- ative approaches which bridge the qualitative-quanti-
tice projects have to address these implications. The tative uncertainty and risk evaluation gap in a
IBM culture change programme mentioned earlier was smoother manner;
centred on these ideas. 5. from constraining the scope of ‘project’ and ‘risk’ def-
Whether culture change is seen as part of the sim- initions to keep ‘project risk management’ processes
plicity efficiency concept portrayed by Fig. 6 or not, it simple and self-contained, to enlarging the scope of
should be clear that simplicity efficiency is a necessary these definitions to interface and integrate project,
aspect of risk efficiency broadly defined. programme, strategic and operations management;
6. from a focus on threats, to a focus on opportunity,
taking more risk in order to be more successful,
8. Some further implications of a central role for risk knowing which risks to take and which to avoid;
efficiency 7. from a focus on technical fixes for technical prob-
lems, to culture changes which pay dividends which
The operational definition of ‘risk’ which [11] uses is are subtle but substantial.
C. Chapman, S. Ward / International Journal of Project Management 22 (2004) 619–632 631

All of these implications increase the tension between ambition. Projects involve significant inherent uncer-
simple entry level tools/training and sophisticated tainty which often implies risk. Explicit understanding
practice/education, unless sound conceptual links be- of what is involved is essential for competent man-
tween effective novice best practice and effective mature agement of it. The only way project risk management
best practice are developed, the focus of what con- processes can avoid confronting this issue is to define
structive simplicity [7] attempts to deliver. The way risk in a restrictive manner, as a limited form of add-
guides like PRAM and PMBOK accommodate this on for projects defined in a limited manner, as distinct
tension is a big issue for all those interested in best from a comprehensive add-in. All guidelines need en-
practice project management. It also has implications couragement to avoid such a stance, because simplic-
for what we mean by project risk management maturity ity is an attractive and understandable goal, but
[21,22] and linked broader project management maturity simplistic approaches to complex issues will inevitably
concepts. fail.
At a practical working tool level, Figs. 1 and 2, used
to implement choice processes reflecting the ideas asso-
9. Implications for project risk management process ciated with Figs. 3–5 including the generalisations dis-
choices cussed in later sections of this paper, is both simple and
flexible, free from implicit assumptions which lead to
Not all projects need formal project risk management interpretations lacking in robustness. Practical concepts
processes. However, when deciding a project does or and tools for best practice projects must be simple, but
does not need a formal process, big mistakes may be not simplistic, and robustness is a key aspect of avoiding
made if a best practice project risk management process simplicity which is not appropriate.
is not one choice being considered, and the implications
of either choice is not clear. Project management edu-
cation does not need to include a detailed technical Acknowledgements
understanding of project risk management for everyone,
but it does require a conceptual understanding of what A number of UK colleagues helped to shape this
best practice project risk management involves, and the paper via feedback on an early version for the APM/
basic tools. Central to this is the role of trade-offs be- Project Manager Today 6th Risk Conference, From Di-
tween attributes like cost, time and quality – always agnosis to Delivery, 28 November 2003, London. Several
uncertain but usually critical. In the authors’ view key US colleagues also shaped it via discussions about a
implications if this understanding is developed include: version of this paper given as an opening keynote ad-
1. informal use of best practice project risk management dress for the IRR/PMI Project Risk Symposium 2004,
concepts in an effective manner for very simple 16–19 May 2004, Anaheim CA. The authors are very
projects; grateful for their help. The authors would also like to
2. formal use of best practice project risk management thank John Wiley and Sons Ltd, Chichester, for per-
concepts on a much wider scale than is currently the mission to use Figs. 1–7 from [11].
case;
3. best practice for project risk management being under-
stood in terms of a very much wider scope than some References
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