Week 10 Ch. 11 Risk Management

• To understand risk management is to focus on the measures of project success. If your measures of project success include timely delivery, within the budget and to the satisfaction of your key stakeholders; than any event that may affect your realization of those success outcomes is a risk event.
• What Is The Concept Of Risk? 

  Probability of event occurring * Impact of that event = Risk / exposure.

  Consider the statement “we have a risk of over-running the budget on the project.” 
• What Is The Concept Of Risk? (cont’d.) 


  So we would say, “we have a risk of the supplier being late with our 

  delivery of materials which will cause a day-for-day slip in our 

  Schedule.” So now we can focus on the uncertainty of event of the supplier being late with our needed materials, and what we can do about this.

  
• Plan Risk Management and Identify Risks

  
• Project Risk Management


  Risk management usually includes: Plan Risk management; Identify Risks; Perform Qualitative Risk Analysis; Perform Quantitative Risk analysis; Plan risk responses; Control Risks.
• Plan Risk Management 


  the process of defining how to conduct risk management activities for a project. 
• Risk Management Plan


  Project Charter; Risk Policies; Role & Responsibilities; Stakeholder Risk Tolerances; Templates; WBS. => Risk Management Plan, Methodology: 1. Roles and Responsibilities; 2. Budgeting; 3. Timing; 4. Scoring & Interpretation; 5. Thresholds; 6. Reporting Formats; 7. Tracking.

  
• Identify Risks 


  the process of identifying individual risks as well as sources of overall risk and documenting their characteristics.
• Sources of Project Risk Common Internal

  Market; Assumption; Technical
• Sources of Project Risk Common External

  Competitor’s actions

  Market conditions

  Government Regulations

  Interest Rates

  Customer Needs

  Supplier Relations

  Available Labor
• Risk identification 


  Techniques that support risk identification include: Analogy; Checklists; WBS analysis; Process Flow Charts; Brainstorming.
• Example Prompt List of Risks

  
• Using the WBS to Identify Risks

  (look at the activities in the work packages)

  
• Risk Breakdown Structure

  
• Flowchart Example

  
• Cause and Effect Diagram

  
• Perform Qualitative Risk Analysis 


  the process of prioritizing individual project risks

  for further analysis or action by assessing

  their probability of occurrence and impact as

  well as other characteristics.
• Risk Analysis Tool


  Evaluating Impact on Project Objectives. This tool can be used to help you adopt a more standard approach to quantifying the magnitude of the impact of a risk event. For example, if a risk event would likely cause a 5-10% delay in schedule, you would consider that to be a moderate impact and assign an impact score of .2. Similarly, if a risk event was likely to render the end item unusable (quality), you would

  consider that to be a very high impact and assign an impact score of.8.

  
• Risk Analysis Tool (cont’d.)

  Probability - Impact Matrix: The probability-impact matrix

  illustrates a heuristic you can use to

  derive relative risk priorities based

  on your assessment of both

  probability and impact.

  It simply takes the impact scores you

  determined using the risk analysis

  tool on the previous slide, and

  multiplies the impact score by the

  probability of occurrence. The

  resulting product is the risk score.

  You can use this risk score to

  prioritize risk events.

  
• Prioritizing Risk Events (1)

  Another approach is to plot the events on

  two dimensional graph. You may

  encounter this graphic by a number of

  names to include the probability-impact

  matrix, a project risk map, or a heat map.

  In this example, each blue dot represents a

  risk event. The placement of dot on the

  graph represents your assessment of both

  the probability and impact associated with

  that risk event.

  The risk events in the upper right hand

  corner of the graph are the events that

  pose the highest overall risk and which

  merit a risk response.

  
• Prioritizing Risk Events (2)


  Here is another example.

  In this case which events

  will we prioritize and

  advance to risk response

  development?

  Well certainly, the events

  associated with lacking

  parts and materials

  when needed, or poor

  subcontractor

  performance. But we

  will also pay attention to

  each of the additional

  titled events.

  
• Prioritizing Risk Events (3)


  In this example, we will

  certainly develop risk

  responses for all events in

  the “red zone”.

  These will include:

  4. Work stoppage > week

  3. Copper price rise > 10%

  1. Supply chain disruption

  11. FCPA violation

  …. And several more!

  
• Perform Quantitative Risk Analysis


  the process of numerically analyzing the combined

  effect of identified individual project risks and

  other sources of uncertainty on overall project

  objectives.
• Costing Out Risks

  Expected Monetary Value (EMV): EMV "Costs Out" All Impacts - Now all outcomes are comparable on a financial Basis (a different way to look at exposure, cost exposure). Product of two values: Event uncertainty (probability); event value, ($impact); EMV = Risk event probability * Risk event value. EMV is "Risk Neutral"; neither risk averse nor risk prone.
• Decision Tree Diagram & Example

  Compute the EMV for the following decision tree. Aggressive schedule EMV = $110,000; Conservative schedule EMV = $87,000

  Therefore, choose the aggressive schedule option to maximize the EMV of the decision situation

  
• Cost Uncertainty Analysis


  Where should you set the budget for your

  project if the Monte Carlo uncertainty

  analysis generates the cumulative density

  function of probable cost provided on the

  left?

  If you set the budget at $2.2M, there will

  only be a 23% chance of completing your

  project within budget.

  If you set the budget at $2.45M there will be

  an 85% chance, but can you convince your

  leadership to set aside the $2.45M?

  This example illustrates how analysis can

  create a shared understanding of the

  uncertainty of your cost estimate.

  
• Plan and Implement Risk Responses 


  So now that we have identified the abundant harvest of risk events, and then used

  qualitative risk analysis to prioritize these risk events based on probability and

  impact, it is now time to develop risk responses for the risk events that create the

  greatest risk exposure.

  In this episode we present broad approaches you can use like escalate / avoid,

  transfer, mitigate and accept the risk. In the end, your creativity and managerial skills, as well as the

  great ideas you receive from your project team may be the key achieve project success.
• Plan Risk Responses (cont’d.)

  In general, there are several broad

  approaches to respond to risks:

  Escalate/avoid risk; Transfer Risk; Mitigate/reduce risk; Accept risk (passively and actively); Prepare contingency plans.
• Escalate and Avoid Risks

  Escalate

   Move responses to a risk which beyond the control

  authority of the project manager to upper

  management

  Avoid

   Eliminate the source of the risk typically by

  reducing scope (eliminate the requirement that

  spanned the activity which caused the risk)
• Transfer Risks (To a Third Party)


  Insurance (e.g., think auto insurance to allow you to drive

  with liability protection for the risk of an accident)

   Property damage or personal injury suffered as a consequence

  of the project

   Damage to materials while in transit or in storage

   Breakdown or damage of equipment

   Theft of equipment and materials

   Sickness or injury of workers, managers, and staff

   Insure against exchange rate fluctuations for foreign projects

  Contracts

   Seller’s economic risk for fixed-price versus cost-plus contracts
• Risk Mitigation/Reduction - Technical


  To reduce technical risks: Employ best technical team; Base decisions on models and simulations of key technical parameters; use mature computer aided system engineering tools; Use parallel development on high risk tasks; provide technical team incentives; hire outside specialists; perform extensive tests and evaluations; use design margins; minimize system complexity where possible.
• Risk Mitigation/Reduction - Schedule


  To reduce schedule risks: Create master project schedule and strive to adhere to it; Schedule most risky tasks as early as possible to allow time for failure recovery; maintain close focus on critical and near-critical activities; assign best worker on time-critical tasks; provide incentives for overtime work; consider shifting high-risk activities from series to parallel; organize project early and be careful to staff it adequately.
• Risk Mitigation/Reduction - Cost



  To reduce cost risks: Identify and monitor key cost drivers; use low cost design alternative review and assessments; verify system design and performance through modeling and assessment; maximize usage of proven technology and commercial off-the-shelf equipment; Provide contingency reserves in project budgets; perform early bread-boarding, prototyping, and testing on risky components and modules.
• Accept Risks


  • Active: Accept by producing a contingency plan and

  provide funding with a contingency reserve (effectively

  have a plan in effect that can be activated promptly and

  funded by the contingency reserve to quickly “buy our

  way out” of the risk impact should the risk occur)

  • Passive: Accept the consequences (put the risk on a

  watch list and monitor – for low priority / exposure risks)
• Control Risks (1)

  The initial risk management plans you develop can be captured in a risk register.

  We will provide an example of a risk register in this episode. But the important

  point to emphasize, is that risk management must continue throughout the

  performance of the project. The circumstances that led you to assess a particular

  risk event as likely or severe, may change. Perhaps, a risk was not likely last

  month, but now that things have changed it highly likely!
• Control Risks 


  the process of implementing

  risk response plans, tracking identified risks,

  monitoring residual risks, identifying new

  risks, and evaluating risk process effectiveness

  throughout the project.
• Control Risks (3)

  create risk log or risk register; risks are rank ordered, greatest risk consequences first. Risk log and mitigation plan; example, next slide. Continuously monitor: project for trigger symptoms of previously identified risks, for symptoms of risks newly emerging and not previously identified.
• Example Risk Register

  
• Example Risk Register (cont’d.)

  
• Risk Management Principles


  Things you can do: Create risk management plan; create a risk profile for each risk; consider appointing a risk officer; include reserve for budget and schedule; continuously monitor; keep communication lines open.