copyright course technology 1999 1 chapter 10: project risk management
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Copyright Course Technology 1999
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Chapter 10:Project Risk Management
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The Importance of Project Risk ManagementProject 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!
OpportunitiesRisks
Try to balance risks and 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 ProjectsSeveral studies show that IT projects
share some common sources of riskThe 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 Questionnaire1. 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
2. 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
3. Number of departments involved (excluding IT)
( ) One Low = 1 point
( ) Two Medium = 2 points
( ) Three or more High = 3 points
4. 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 RiskMarket 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 projectfocus 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 AreaKnowledge Area Risk Conditions
Integration Inadequate planning; poor resource allocation; poor integrationmanagement; lack of post-project review
Scope Poor definition of scope or work packages; incomplete definitionof quality requirements; inadequate scope control
Time Errors in estimating time or resource availability; poor allocationand management of float; early release of competitive products
Cost Estimating errors; inadequate productivity, cost, change, orcontingency control; poor maintenance, security, purchasing, etc.
Quality Poor attitude toward quality; substandarddesign/materials/workmanship; inadequate quality assuranceprogram
Human Resources Poor conflict management; poor project organization anddefinition of responsibilities; absence of leadership
Communications Carelessness in planning or communicating; lack of consultationwith key stakeholders
Risk Ignoring risk; unclear assignment of risk; poor insurancemanagement
Procurement Unenforceable conditions or contract clauses; adversarial relations
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Risk QuantificationRisk 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 supportand avoid stand aloneproject structure
Increase the frequency ofproject monitoring
Increase the frequency ofproject monitoring
Increase project managerauthority
Use WBS and PERT/CPM Use WBS and PERT/CPM
Improve problem handlingand communication
Improve communication,project goals understandingand team support
Select the most experiencedproject manager
Increase the frequency ofproject monitoring
Increase project managerauthority
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 PlanWhy 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 ControlRisk 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 TrackingTop 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
Month
Last
Month
Numberof Months
Risk ResolutionProgress
Inadequateplanning
1 2 4 Working on revising theentire project plan
Poor definitionof scope
2 3 3 Holding meetings withproject customer andsponsor to clarify scope
Absence ofleadership
3 1 2 Just assigned a newproject manager to leadthe project after old onequit
Poor costestimates
4 4 3 Revising cost estimates
Poor timeestimates
5 5 3 Revising scheduleestimates
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Using Software to Assist in Project Risk ManagementDatabases can keep track of risksSpreadsheets can aid in tracking and
quantifying risksMore 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 ManagementUnlike 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 QuestionsDiscuss 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?