Lecture # 26
PRM 702
Project Quality and Risk Management
Ghazala Amin
What is Risk?
Risk and uncertainty are
equivalent
Three Definitions
• Risk
– A possible future event which if it occurs will
lead to an undesirable outcome.
• Project Risk
– The cumulative effect of the chances of an
uncertain occurrence that will adversely affect
project 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
RISK MANAGEMENT PURPOSE
IDENTIFY FACTORS THAT ARE LIKELY TO IMPACT THE PROJECT
OBJECTIVES OF SCOPE, QUALITY, COST AND TIME
QUANTIFY THE LIKELY IMPACT OF EACH FACTOR
GIVE A BASELINE FOR PROJECT NON-CONTROLLABLES
MITIGATE IMPACTS BY EXERCISING INFLUENCE OVER PROJECT
CONTROLLABLES
THE PMBOK ALSO POINTS OUT THAT RISK MANAGEMENT INCLUDES
MAXIMIZING THE RESULTS OF POSITIVE EVENTS AND MINIMIZING THE
CONSEQUENCES OF ADVERSE EVENTS.
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?
NATURE OF RISK MANAGEMENT
WHEN SPEAKING OF RISK, THINK OF ONLY HAZARDOUS ONES
EVERYDAY COMMON DAY ONES ARE IGNORED
RARELY DO WE SYSTEMATICALLY IDENTIFY ALL RISKS INVOLVED
HOWEVER, INCLINED TO CONSIDER RISK DIFFERENTLY RELATIVE TO
FAMILY - VERY PRECIOUS AND LOTS OF POTENTIAL
EXAMPLES:
SMALL CHILDREN - STAY AWAY FROM ROAD
HOW DID DAY GO? - DO MORE TO HELP THEM
- RISK ID & AVOIDANCE
- INFO FEEDBACK
THESE ACTIONS ARE ESTABLISHING THE BASIC ELEMENTS OF
MANAGING PROJECT RISK INTO OUR CHILDREN
PROJECT RISK MGMT IS PRO-ACTIVE
CLASSIC SYSTEMS METHODOLOGY:
INPUT
PROCESS
OUTPUT
FEEDBACK LOOP
THIS PROCESS VITAL TO EFFECTIVE PROJECT CONTROL, HOWEVER
RISK IS DIFFERENT - - HAS TO DO WITH:
UNCERTAINTY, PROBABILITY OR UNPREDICTABILITY, AND
CONTINGENT PLANNING
REACTIVE vs. PRO-ACTIVE
CRISIS MANAGEMENT -- REACTIVE MODE -- SELECT RESPONSE
PRO-ACTIVE -- ANTICIPATE AND PLAN TO AVOID
RISK & DECISION MAKING:
TAKE RISK IF POTENTIAL BENEFIT AND CHANCE OF WINNING
EXCEEDS COST OF UNSUCCESSFUL DECISION AND CHANCES OF
LOSING BY A SATISFACTORY MARGIN (CLASSIC COST / BENEFIT
ANALYSIS)
Positive and Negative Risk
• Opportunities - Positive outcome
• Threats - Negative outcome
Benefits of Risk Management
• More and better information is available
during planning and decision making
• Project objectives are verified
• Improved communications
• Higher probability of project success
• Proactive approach
• Project might be canceled
Why Organizations don’t do
Risk Management
• Unwillingness to admit risks exist
• Postpone the hard parts of the project until
later
• Risk management costs money
– Up front investment of time
– Can’t prove it’s necessary
• Think health insurance
Why Organizations don’t do
Risk Management
• “Can Do” management style severely
inhibits risk management
• Risk identification can make you look like a
whiner
Ways to Avoid
Risk Management
• “Managing risk is everybody’s business”
• “There is only one risk: The project might
fail. And we’re managing that by working
real hard to assure that doesn’t happen.”
The Uncertainty Spectrum
NO
Information
Partial
Information
(Unknown
unknowns)
(Known
unknowns)
GENERAL
TOTAL
UNCERTAINTY UNCERTAINTY
SPECIFIC
UNCERTAINTY
Complete
Information
(Knowns)
TOTAL
CERTAINTY
SCOPE OF PROJECT RISK MANAGEMENT*
*Note: in this range the information to be sought is known
Project Risk
Integration
Communication
Scope
Time
Project Risk
Quality
Cost
Procurement
Human Resources
INTEGRATING RISK
PROJECT
MANAGEMENT
INTEGRATION
Life Cycle and
Environment Variables
SCOPE
Ideas, Directives,
Data Exchange Accuracy
Expectations
Feasibility
Requirements
Standards
QUALITY
PROJECT
RISK
Time Objectives,
Restraints
TIME
INFORMATION /
COMMUNICATIONS
Availability
Productivity
HUMAN
RESOURCES
Services, Plant, Materials:
Performance
Cost Objectives,
Restraints
COST
CONTRACT /
PROCUREMENT
Project Risk Management
A subset of project management that
includes the processes concerned with
identifying, analyzing, and responding to
project risk.
Risk Management Objectives
• Reduce the number of surprise events
• Minimize consequences of adverse events
• Maximize the results of positive events
Risk Classification
•
•
•
•
•
•
Business risks vs. pure (insurable) risks
Classified by uncertainty (business risks)
Classified by impact on project elements
Classified by their nature
Classified by their source
Classified by their probability to occur and
amount at stake
Consequences of Risk Analysis
Positives
• greater information is made available during the
course of planning and decision making
• project objectives are verified
• better communications
• better probability that project realization will be
optimal
• increased chance of project success
Consequences of Risk Analysis
Negatives
• belief that all risks have been accounted for
• project could be shut down
Some Considerations
• Real information is the key.
• 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.
SUMMARY
PROJECTS ARE LAUNCHED TO TAKE ADVANTAGE OF OPPORTUNITIES,
BUT OPPORTUNITIES ARE ASSOCIATED WITH UNCERTAINTIES WHICH
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, 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
A VITAL AND INTEGRAL PART OF PROJECT MANAGEMENT
When Should Risk Assessments
be Carried Out?
Risk assessments should be carried out
as early as possible and then continuously.
Don’t take the risk if...
•
•
•
•
•
•
the organization cannot afford to lose.
the exposure to the outcome is too great.
the situation (or project) is not worth it.
the odds are not in the project’s favor.
the benefits are not clearly identified.
there appear to be a large number of acceptable
alternatives.
Don’t take the risk if...
• the risk does not achieve the project objective.
• the expected value from baseline assumptions is
negative.
• the data is unorganized, without structure or
pattern.
• there is not enough data to understand the results.
• a contingency plan for recovery is not in place
should the results prove unsatisfactory.