Black swans—
high-impact,
low-probability
events—are nearly
impossible to predict.
But good contingency
planning can
mitigate the fallout.
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PM NETWORK april 2011 WWW.PMI.ORG
Controlling
A
CH O S
by Sarah Fister
Gale
illustration by ian
whadcock
risk
management would be a whole lot
easier if everyone knew exactly what the
risks were.
Of course, it’s not as simple as that.
And when the completely unexpected
happens, the fallout can derail even the
best-planned initiative. These low-probability, high-risk events, such as the rise
of the Internet and the 11 September
attacks, were originally dubbed “black
swans” by risk management author Nassim Nicholas Taleb in his book The
Black Swan: The Impact of the Highly
Improbable, now in its second edition
[Random House Trade Paperbacks,
2010]. They strike without warning
and can have a devastating impact on an
organization’s project portfolio—unless
basic parameters for crisis response are
part of the risk-management and project
planning process.
“You can’t always know what will
go wrong, but you do have to have
the flexibility to respond when something does go wrong,” says Bob Prieto,
senior vice president of the industrial
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PM NETWORK april 2011 WWW.PMI.ORG
and infrastructure group at Fluor Corp.,
the global engineering, construction and
maintenance services firm headquartered
in Princeton, New Jersey, USA. “Building resiliency is key.”
Most risk-management processes
focus on known events, and that’s a
problem, adds Pablo Lledó, PMP, CEO
of MasConsulting, a project management consultancy to the oil industry
based in Mendoza, Argentina. He argues
that one of the biggest flaws in the riskmanagement process is relying on past
data to predict future events.
Everyone must at least
be aware of the possibility of unexpected
risks. Then it’s time to
create the best possible
contingency plan. Project teams should make
black swans part of
every risk-management
consideration.
—Pablo Lledó, PMP, MasConsulting, Mendoza, Argentina
This strategy makes sense for common, easy-to-identify risks such as labor
shortages or shipping delays, but it’s useless for rare yet earth-shattering events
that may only occur once in a project
manager’s career, Mr. Lledó says.
To protect your projects, have a discussion with team members and executives, he suggests. Everyone must at least
be aware of the possibility of unexpected
risks. Then it’s time to create the best
possible contingency plan. Project teams
should make black swans part of every
risk-management consideration, Mr.
Lledó adds.
He accomplishes this by creating a
“black swan” category in his risk-management process and has his team identify the worst-case scenarios with regard
to cost, schedule, scope and quality.
“In the risk register, we might add
how to react if an oil pipeline explodes—
even though we do not have any idea
what negative risk would cause that
impact,” he points out.
Expecting the Unexpected
Instead, focus on how a team will respond
in a crisis.
“We are big on risk identification and
contingency planning. But if you ask
your project team to plan for an infinite
number of scenarios, it can have a declining return on investment,” says Brett
Pitts, senior vice president of the Internet
services group for the banking company
Wells Fargo, San Francisco, California,
USA. “It is difficult to try to anticipate
mitigation and contingency plans for
plagues, famines, wars and environmental disasters. For those types of things,
we count more on our robust business
continuity planning.”
As part of every project plan, teams
identify which elements on the critical
path could be affected by a crisis. Mr.
Pitts then clearly defines a process of
response, including who the key decision-makers are and who is responsible
for invoking contingency plans.
Since Wells Fargo acquired Wachovia Bank for US$15.1 billion in late
2008, Mr. Pitts’ department has been
running all activities to integrate the
two websites, including product and
platform selection, system integration
strategies and monthly data-conversion
projects to transfer customer information from legacy products to the products that customers will be using after
being converted.
If a black swan, such as an earthquake
where a key data center is housed, swoops
in on one of these projects, business con-
Big Risks in the Small Details
Huge risks often hide in the corners of project plans. Seemingly innocuous tasks or events can unexpectedly wreak
havoc on a project because they represent an undiagnosed
bottleneck on the critical path, warns Bob Prieto, Fluor
Corp., Princeton, New Jersey, USA.
Many projects at construction and engineering giant
Fluor take place in remote locations and require project
leaders to create living quarters for workers. And while the
company has yet to experience something along the lines
of an outbreak of food poisoning, such an occurrence could
end up delaying the entire project, and impacting hiring
and retention of workers. “Failure to identify that seemingly minor risk could cause a standstill on the project,” Mr.
Prieto says.
Most project teams are good at identifying big, obvious
risks, he says, but they don’t invest enough time exploring
the low-probability risks that arise from the interrelationships between tasks. “It’s the white spaces in-between
projects where black swans hide,” he says.
tinuity plans are invoked. These include
adjustments to ongoing operations and
technology contingencies.
The project team has an immediate response scenario already defined as
well. The first step is to convene a meeting with pre-determined stakeholders,
including regional executives from the
impacted market and senior leaders from
the bank’s Internet services group. “We
have a game plan already in place the
moment we walk into that discussion,”
Mr. Pitts says.
In a black swan crisis-aversion meet-
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29
Why Black Swans?
“As rare as a black swan” originated in a
Latin expression later popularized in 16thcentury England. At the time, it was used
to describe something nonexistent—as
the British believed that all swans were
white. Then, in 1697, a Dutch expedition
discovered black swans in Australia, and
the term came to mean something once
thought to be impossible. It’s now used
in the business world to describe a highimpact, hard-to-predict event.
ing, the project leader identifies risks,
outlines how significant events could
affect the initiative and determines:
n Which
steps on the critical path would
be impacted
n The
implications for overall project and
portfolio success, and
n Which
business-critical issues require
immediate attention.
The project manager then offers possible solutions with pros and cons for
each scenario. Finally, the leadership
team makes a decision about how the
organization will proceed.
Having such a plan in place stream-
lines the response process during a catastrophe. “In crisis situations, you want
to minimize improvisation as much as
possible,” Mr. Pitts says.
It also prevents project professionals
from getting sidetracked in the midst
of a panic. In the event of a black swan,
project teams often find themselves discombobulated, responding to questions
and concerns from dozens of executives
and employees who are not part of the
official decision-making team. And if the
incident isn’t resolved quickly, rumors
and fears can spiral out of control, making the problem that much more difficult to solve.
“When you have a crisis contingency plan,” Mr. Pitts says, “it’s easier
to filter out the noise and focus on
what it takes to move confidently forward toward a solution.”
Flight to Safety
There are other tools and strategies
in a project professional’s arsenal that
can help prevent black swan events
from derailing initiatives—if they are
used correctly.
“The problem is not the riskmanagement tools used, but in how
they are applied,” notes José Eduardo
Motta Garcia, PMP, portfolio, program and project manager at Itaú
Unibanco Holding S.A., a bank in Sao
Paulo, Brazil.
“There is a tendency to simplify
We are big on risk identification and
contingency planning. But if you ask your
project team to plan for an infinite number
of scenarios, it can have a declining return
on investment.
—Brett Pitts, Wells Fargo, San Francisco, California, USA
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PM NETWORK april 2011 WWW.PMI.ORG
>TIP
Encourage your team to think about
the impact of black swan events, says José
Eduardo Motta Garcia, PMP, Itaú Unibanco Holding S.A., Sao Paulo, Brazil. “Project teams tend to
inhibit those who think of the non-obvious risks,
considering them out of reality,” he says. “But this is a
blunder. A risk identification with no constraints and a contingency plan well implemented are the key to increasing
the effectiveness of risk management.”
processes and eliminate steps often considered unnecessary or cumbersome.”
He points to his own experience
with a black swan, and how effective up-front risk management helped
mitigate its impact. In February 2010,
Mr. Motta Garcia was working with a
colleague on the rollout of a large IT
project. One of the deployments was
in Santiago, Chile, where a massive
earthquake destroyed infrastructure and
killed more than 700 people.
“The project was strongly affected
in time and cost, but there was a
redundancy being implemented in
Argentina, which made possible the
continuation of the project,” he says.
Having that just-in-case backup plan in
place substantially reduced the impact
to the overall rollout.
Contingency planning is one of the
most-effective strategies for mitigating
the risk of the unknown. “Because
there is no way to prevent such events,
the default response is always to have
a contingency elsewhere,” Mr. Motta
Garcia says.
Monitoring the marketplace can
also give project teams a head start in
dealing with crises before they arise. In
financial services, for example, black
swans are usually related to economic
downturns, Mr. Motta Garcia notes.
“Financial crises may be caused by
several factors, and in many cases they
are unpredictable,” he says. “But we
are able to reduce the unexpected by
continuously monitoring the market
and taking corrective actions in the
project in response to changes in the
economic scenario.”
No one can predict the magnitude
of the risks that come with black swan
events. Contingency planning, though,
can help provide a bird’s-eye view at the
organizational and project level. PM
april 2011 PM NETWORK
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