Transcript Defining Risk • Risk is – the undesirable events, their chances of occurring and their consequences. • Some risk can be identified before the.

Defining Risk
• Risk is
– the undesirable events, their chances of occurring and
their consequences.
• Some risk can be identified before the project
starts, whereas some others cannot be imagined.
• Risks can have negative effect on the main
objectives of the project:
– cost, schedule and performance (quality)
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Risk Planning
• Risk Planning involves
– Identification of risks.
– Analysis and assessment of risks.
– Contingency planning.
• One advantage of risk planning:
– Helps project manager to take risks when there is a
potential advantage.
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Risk Information
• For each risk the following information must be
developed
–
–
–
–
–
The event forming the risk.
All outcomes of the event.
The magnitude (severity) of the event’s impact.
Probability of the event occurring.
The time(s) at which the event might occur.
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Risk Information
• Example:
– Activity ‘A’ might take twice as long.,
– Outcomes: project delayed, cost increased, a critical
resource will be overburdened for some time.
– Magnitudes: delay could be anywhere between 5% to
10% of total planned project duration. Total project
cost can go up by 4%.
– Chances: 10% probability estimated.
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Managing Risk –
Identification of Risks
• Identification of risks:
– The entire management team should be involved.
– First focus on macro risks that might affect the entire
project. Some useful questions:
• Are the core competencies of the firm adequate for the
challenges of the project?
• What is the degree of novelty in the project?
• Which one is the biggest risk: cost, time or performance?
– After the macro risks, more specific risks can be
identified using the WBS.
– Risks can be classified based on their source
• External and internal risks
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Risk Analysis and Assessment
• Risk analysis attempts to quantify the severity of
the impact of an identified risk event.
• By doing risk analysis, you can select potential
risk events that need attention because there is a
high chance of occurrence and/or large impact.
• Developing a “Risk Assessment Matrix” is a
useful first step.
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Risk Analysis and Assessment
• Risk assessment matrix for “switching to a new email software.
D e te c ti o n
R i sk e v e n t
C h a n c e - L M H S e v e r i ty - L M H
d i ffi c u l ty - L M H
W hen
S y s t e m fre e z in g
Low
H ig h
H ig h
S t a rt u p
U s e r c o m p la in t
H ig h
M e d iu m
M e d iu m
P o s t -in s t a lla t io n
H a rd w a re fa ilu re
Low
H ig h
H ig h
In s t a lla t io n
• Assessments could either be subjective or
quantitative.
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Semi-quantitative Scenario Analysis
• Obtain three estimates (the team members must be 90%
confident that the three estimates will be accurate):
– Baseline duration: there is 50% chance of project being complete
in this time.
– Best-case duration: there is 10% chance of project being complete
in this time.
– Worst-case duration: there is 90% chance of project being
complete in this time.
• Once the three estimates are made, it would be very useful
to
– Graph the three schedules
– Document time estimates, costs and assumptions
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Probabilistic Risk Analysis
Techniques
• Decision trees to assess alternative courses of
action, using expected value criterion.
– Covered in OPSM 632 Management Science
• Monte Carlo simulation
– Covered in OPSM 633 Business Simulation
– Some applications:
• NPV calculations with statistical variations.
• PERT simulation to identify project schedule risk.
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Sensitivity Analysis
• Sensitivity Analysis:
– Main idea: see the effect of changing values for project
parameters on the outcomes.
– For example:
• Effect of changing project durations on total project time.
• Effect of changing certain cost categories (or variables that
affect cost) on total project cost.
– Easily done by Monte Carlo simulation.
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Establishing Contingency Reserves
• Because plans seldom materialize as estimated, it
is common practice to have a contingency funds.
– These should be agreed upon before the project starts.
• The amount typically depends on the uncertainty
and risk of schedule and cost estimates.
– A low risk project might have a contingency reserve of
1 to 2% of the total cost.
– This percentage might be up to 20% in high risk
projects.
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Responding to Risk
• After a risk is identified and assessed there are
four types of actions:
– Reduce risk:
• In software development parallel innovation processes are used
in case one fails.
– Transfer risk
• Passing risk to another party (almost always results in paying a
premium).
• Examples:fixed price contracts; insurance.
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Responding to Risk
– Retain risk
• Some very large risks (e.g. earthquake) cannot be reduced or
retained. The chances are quite lowç so you accept it.
• Sometimes you accept the risk and place a budget reserve for
it, in case it materializes.
• Sometimes you just ignore the risk.
– Share risk
• Allocate portions of risk to different parties.
• Example: Airbus R&D is done by several countries.
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Responding to Risk
• Contingency planning
– Without a contingency plan, a manager cannot react to
a risk event quickly. This results in
• Panic
• Crisis mismanagement
• Acceptance of first solution suggested.
• Conditions for activating (or triggering) a
contingency plan must be decided and
documented.
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Responding to Risk
• Risk response matrix
Experiment with a prototype
A c c e p t, r e d u c e ,
C o n ti n g e n c y
sh a r e , tr a n sfe r
p la n
T rig g e r
S y s t e m fre e z in g R e d u c e
R e in s t a ll O S
F ro z e n fo r 1 h r
U s e r c o m p la in t
In c re a s e s t a ff
C a ll fro m t o p
s u p p o rt
m anagem ent
O rd e r d iffe re n t
R e p la c e m e n t d o e s n 't
b ra n d
w o rk
R i sk e v e n t
H a rd w a re fa ilu re
Reduc e
Tra n s fe r
Use a supplier with a warranty
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Managing Risk –
Schedule Risks
• Use of slack
– Recall that total slack is shared by multiple activities.
– A manager should not use the slack available for his
activity irresponsibly. It may be needed by activities
later on the path.
– Managing slack can reduce schedule risks!
• Incentive systems to report early completion of activities?
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Managing Risk –
Schedule Risks
• Problem with imposed deadlines
– Since imposed by upper management, typically too
tight for the normal activity durations.
– Results in increased cost, higher probability of being
late.
– Fundamental question: Are these deadlines due to poor
planning or are they really necessary?
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Managing Risk –
Schedule Risks
• Compressed project schedule
– Increases the number of critical paths.
– The more the number of critical (or near critical) paths,
the higher the chance of a late project.
• Much harder to manager and control a large number of critical
activities.
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Managing Risk –
Cost Risks
• Most cost risks are due to errors in schedule and
technical estimates.
• Other issues: exchange rate and inflation risks.
• An objective of minimizing net present value of
costs would make a late-start schedule more
attractive.
– This would reduce slacks and increase schedule risks.
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Example: Cost Risk Analysis
• File: CostEstimating.xls
• Using Excel’s
• Data-Subtotal functionality, which creates an outline automatically.
• @RISK for performing simulation.
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Example: Cost Risk Analysis
• Some questions:
– Will the contingency funds be enough?
– What is the expected cost of the project?
Minimum
$69,361,820.00
Maximum
$82,174,300.00
Mean
$74,655,740.00
Std Dev
$2,570,983.00
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Example: Cost Risk Analysis
• To which cost component is the total project cost most
sensitive?
– In other words, how much of the variance in total project cost is
due to variance of cost components.
Regression Sensitivity for PROJECT
TOTAL/L40
CONSTRUCTION/L26
,96
,243
OTHER PROJECT COST/L31
,119
PROJECT MANAGEMENT/L5
,083
SAFETY & ENVIRONMENTAL/L38
,083
CENRTC/L17
-1
-0,75
@RISK Student Version
ENGINEERING/L12
,04
-0,5
-0,25
0
0,25
0,5
0,75
1
Std b Coefficients
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Example: Schedule Risk Analysis
• Filename: CriticalPath.xls
• We will determine the probability distribution for the project
duration and probability of each activity being on the critical
path for the following project network.
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Example: Schedule Risk Analysis
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Example: Schedule Risk Analysis
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Example: Schedule Risk Analysis
CriticalActs (N5 to N24)
1,00
0,75
@RISK Student Version
0,50
For Academic Use Only
0,25
Cell:
0,00
N5
N6
N7
N8
N9 N10 N11 N12 N13 N14 N15 N16 N17 N18 N19 N20 N21 N22 N23 N24
=Mean,+1/-1SD
=+95%,-5%
The yellow line gives the estimated probability of each activity being on
the critical path.
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