Transcript No Slide Title

Chapter 10:
Project Risk
Management
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The Importance of Project Risk
Management
 Project risk management is the art and
science of identifying, assigning, and
responding to risk throughout the life of a
project and in the best interests of meeting
project objectives
 Risk management is often overlooked on
projects, but it can help improve project
success by helping select good projects,
determining project scope, and developing
realistic estimates
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What is Risk?
A dictionary definition of risk is “the
possibility of loss or injury”
Project risk involves understanding
potential problems that might occur on
the project and how they might impede
project success
Risk management is like a form of
insurance; it is an investment
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Why Take Risks? Because of
Opportunities!
Try to balance risks and opportunities
Risks
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Opportunities
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Risk Utility
Risk utility or risk tolerance is the
amount of satisfaction or pleasure
received from a potential payoff
– Utility rises at a decreasing rate for a
person who is risk-averse
– Those who are risk-seeking have a higher
tolerance for risk and their satisfaction
increases when more payoff is at stake
– The risk neutral approach achieves a
balance between risk and payoff
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Figure 10-1. Risk Utility Function
and Risk Preference
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What is Project Risk Management?
 The goal of project risk management is to
minimize potential risks while maximizing
potential opportunities. Major processes
include
– Risk identification: determining which risks are
likely to affect a project
– Risk quantification: evaluating risks to assess
the range of possible project outcomes
– Risk response development: taking steps to
enhance opportunities and developing
responses to threats
– Risk response control: responding to risks
over the course of the project
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Common Sources of Risk on
Information Technology Projects
Several studies show that IT projects
share some common sources of risk
The Standish Group developed an IT
success potential scoring sheet based
on potential risks
McFarlan developed a risk
questionnaire to help assess risk
Other broad categories of risk help
identify potential risks
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Table 10-1. Information Technology
Success Potential Scoring Sheet
Success Criterion
Points
User Involvement
19
Executive Management support
16
Clear Statement of Requirements
15
Proper Planning
11
Realistic Expectations
10
Smaller Project Milestones
9
Competent Staff
8
Ownership
6
Clear Visions and Objectives
3
Hard-Working, Focused Staff
3
Total
100
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Table 10-2. McFarlan’s Risk Questionnaire
1.
2.
3.
4.
What is the project estimate in calendar (elapsed) time?
( ) 12 months or less
Low = 1 point
( ) 13 months to 24 months
Medium = 2 points
( ) Over 24 months
High = 3 points
What is the estimated number of person days for the system?
( ) 12 to 375
Low = 1 point
( ) 375 to 1875
Medium = 2 points
( ) 1875 to 3750
Medium = 3 points
( ) Over 3750
High = 4 points
Number of departments involved (excluding IT)
( ) One
Low = 1 point
( ) Two
Medium = 2 points
( ) Three or more
High = 3 points
Is additional hardware required for the project?
( ) None
Low = 0 points
( ) Central processor type change
Low = 1 point
( ) Peripheral/storage device changes Low = 1
( ) Terminals
Med = 2
( ) Change of platform, for example High = 3
PCs replacing mainframes
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Market, Financial, and
Technology Risk
 Market risk: Will the new product be useful
to the organization or marketable to others?
Will users accept and use the product or
service?
 Financial risk: Can the organization afford to
undertake the project? Is this project the
best way to use the company’s financial
resources?
 Technology risk: Is the project technically
feasible? Could the technology be obsolete
before a useful product can be produced?
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What Went Wrong?
Several information technology projects fail because of technology risk.
One project manager documented an important lesson he learned on a
large IT projectfocus on business needs first, not technology. David
Anderson, a project manager for Kaman Sciences Corp., shared his
lessons learned from a project failure in an article for CIO Enterprise
Magazine. After spending two years and several hundred thousand
dollars on a project to provide new client-server based financial and
human resources information systems for their company, Anderson and
his team finally admitted they had a failure on their hands. Anderson
admitted that he was too enamored by using cutting edge technology
and took a high-risk approach on the project. He "ramrodded through"
what the project team was going to do, and he admitted that he was
wrong. The company finally decided to switch to a more stable
technology to meet the business needs of the company.
Hildebrand, Carol. “If At First You Don’t Succeed,” CIO Enterprise Magazine, April 15, 1998
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Risk Identification
Risk identification is the process of
understanding what potential
unsatisfactory outcomes are
associated with a particular project
Several risk identification tools include
checklists, flowcharts, and interviews
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Table 10-3. Potential Risk Conditions
Associated With Each Knowledge Area
Knowledge Area
Risk Conditions
Integration
Inadequate planning; poor resource allocation; poor integration
management; lack of post-project review
Scope
Poor definition of scope or work packages; incomplete definition
of quality requirements; inadequate scope control
Time
Errors in estimating time or resource availability; poor allocation
and management of float; early release of competitive products
Cost
Estimating errors; inadequate productivity, cost, change, or
contingency control; poor maintenance, security, purchasing, etc.
Quality
Poor attitude toward quality; substandard
design/materials/workmanship; inadequate quality assurance
program
Human Resources
Poor conflict management; poor project organization and
definition of responsibilities; absence of leadership
Communications
Carelessness in planning or communicating; lack of consultation
with key stakeholders
Risk
Ignoring risk; unclear assignment of risk; poor insurance
management
Procurement
Unenforceable conditions or contract clauses; adversarial relations
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Risk Quantification
 Risk quantification or risk analysis is the
process of evaluating risks to asses the
range of possible project outcomes
 Determine the risk’s probability of
occurrence and its impact to the project if
the risk does occur
 Risk quantification techniques include
expected monetary value analysis,
calculation of risk factors, PERT
estimations, simulations, and expert
judgment
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Figure 10-2. Expected Monetary
Value (EMV) Example
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Figure 10-3. Chart Showing High-,
Medium-, and Low-Risk Technologies
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Simulation for Risk Analysis
Simulation uses a representation or
model of a system to analyze the
expected behavior or performance of
the system
Monte Carlo analysis simulates a
model’s outcome many time to provide
a statistical distribution of the
calculated results
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What Went Right?
McDonnell Aircraft Company used Monte Carlo simulation to help
quantify risks on several advanced-design engineering projects. The
National Aerospace Plan (NASP) project involved many risks. The
purpose of this multi-billion dollar project was to design and develop
a vehicle that could fly into space using a single-stage-to-orbit
approach. A single-stage-to-orbit approach meant the vehicle would
have to achieve a speed of Mach 25 (25 times the speed of sound)
without a rocket booster. A team of engineers and business
professionals worked together in the mid-1980s to develop a
software model for estimating the time and cost of developing the
NASP. This model was then linked with Monte Carlo simulation
software to determine the sources of cost and schedule risk for the
project. The results of the simulation were then used to determine
how the company would invest its internal research and
development funds. Although the NASP project was terminated, the
resulting research has helped develop more advanced materials and
propulsion systems used on many modern aircraft.
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Expert Judgment
Many organizations rely on the intuitive
feelings and past experience of experts
to help identify potential project risks
The Delphi method is a technique for
deriving a consensus among a panel of
experts to make predictions about
future developments
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Risk Response Development
Risk avoidance: eliminating a specific
threat or risk, usually by eliminating its
causes
Risk acceptance: accepting the
consequences should a risk occur
Risk mitigation: reducing th4e impact
of a risk event by reducing the
probability of its occurrence
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Table 10-4. General Risk Mitigation Strategies for
Technical, Cost, and Schedule Risks
Technical Risks
Cost Risks
Schedule Risks
Emphasize team support
and avoid stand alone
project structure
Increase the frequency of
project monitoring
Increase the frequency of
project monitoring
Increase project manager
authority
Use WBS and PERT/CPM
Use WBS and PERT/CPM
Improve problem handling
and communication
Improve communication,
project goals understanding
and team support
Select the most experienced
project manager
Increase the frequency of
project monitoring
Increase project manager
authority
Use WBS and PERT/CPM
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Risk Management Plans, Contingency
Plans, and Contingency Reserves
 A risk management plan documents the
procedures for managing risk throughout the
project
 Contingency plans are predefined actions
that the project team will take if an identified
risk event occurs
 Contingency reserves are provisions held by
the project sponsor for possible changes in
project scope or quality that can be used to
mitigate cost and/or schedule risk
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Table 10-5. Questions Addressed
in a Risk Management Plan
 Why is it important to take/not take this risk in
relation to the project objectives?
 What specifically is the risk and what are the risk
mitigation deliverables?
 How is the risk going to be mitigated? (What risk
mitigation approach is to be used?)
 Who are the individuals responsible for
implementing the risk management plan?
 When will the milestones associated with the
mitigation approach occur?
 How much is required in terms of resources to
mitigate risk?
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Risk Response Control
 Risk response control involves executing
the risk management processes and the risk
management plan to respond to risk events
 Risks must be monitored based on defined
milestones and decisions made regarding
risks and mitigation strategies
 Sometimes workarounds or unplanned
responses to risk events are needed when
there are no contingency plans
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Top 10 Risk Item Tracking
Top 10 risk item tracking is a tool for
maintaining an awareness of risk
throughout the life of a project
Establish a periodic review of the top
10 project risk items
List the current ranking, previous
ranking, number of times the risk
appears on the list over a period of
time, and a summary of progress made
in resolving the risk item
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Table 10-6. Example of Top 10
Risk Item Tracking
Monthly Ranking
Risk Item
This
Last
Month
Month
Inadequate
planning
1
2
4
Working on revising the
entire project plan
Poor definition
of scope
2
3
3
Holding meetings with
project customer and
sponsor to clarify scope
Absence of
leadership
3
1
2
Just assigned a new
project manager to lead
the project after old one
quit
Poor cost
estimates
4
4
3
Revising cost estimates
Poor time
estimates
5
5
3
Revising schedule
estimates
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Number
Risk Resolution
of Months Progress
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Using Software to Assist in
Project Risk Management
Databases can keep track of risks
Spreadsheets can aid in tracking and
quantifying risks
More sophisticated risk management
software helps develop models and
uses simulation to analyze and
respond to various project risks
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Figure 10-4. Sample Monte Carlo
Simulation Results for Project Schedule
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Figure 10-5. Sample Monte Carlo
Simulations Results for Project Costs
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Results of Good Project Risk
Management
Unlike crisis management, good
project risk management often goes
unnoticed
Well-run projects appear to be almost
effortless, but a lot of work goes into
running a project well
Project managers should strive to
make their jobs look easy to reflect the
results of well-run projects
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Discussion Questions
 Discuss the risk utility function and risk preference
chart in Figure 10-1. Would you rate yourself as
being risk averse, risk neutral, or risk seeking? Give
examples of each approach from different aspects of
your life, such as your current job, your personal
finances, romances, and eating habits.
 What is your organization’s (your employer's or your
college's) risk preference when it comes to
information technology projects? Give evidence to
support your position.
 Describe the Top 10 Risk Item Tracking approach.
How could you use this technique in your
organization?
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