risk analysis for project decision-making, presented by keith gray, 10th oct 2016, apm north west...
TRANSCRIPT
Risk analysis for project decision-making
Keith GrayAPM Risk SIG Committee
Agenda
Research on project failures
Two questions
Challenges for project decision-makers
The project life cycle and decision-making
Risk analysis definitions and outputs
Can risk analysis help?
Research on project failures
1994,World Bank issued the Wapenhans Report on its overall project portfolio (Infrastructure for Development). It identified an increasing number of poorly performing projects and concluded that there were two main causes: over-optimistic estimates of project viability and inadequate attention to risk and uncertainty.
2013, National Audit Office identified that the tendency for over-optimism, whether unconsciously or deliberately, results in the underestimation of time, costs and risks to delivery and the over-estimation of the benefits.
Research on project failures
2014, PWC report ‘Portfolio and Programme Global Survey’ summarises regular themes from previous surveys. One of the themes is estimating. In 2004 and 2007 the theme was bad estimates while in 2012 and 2014 the focus was again on the same issue namely, poor estimating in the planning phase.
Research on project failures
2015, Calleam study concluded that there are 101 common causes of project failure grouped into 13 major categories, one of which is estimation. Two examples are i) decisions are made on singular values of duration and costs rather than using a range of values that reflect the risks and uncertainties in the estimates for the forthcoming project phase(s) and ii) there is a failure to build in contingency to handle risks and uncertainties.
Research on project failures
Infrastructure examples
Cost Overruns of High Profile Projects (Source: Megaprojects and Risk: An Anatomy of Ambition, Flyvbjerg, Bruzelius and
Rothengatter)
Two questions for project decision-makers
How risky is this project?*
How do you know?*
Risk analysis may be able to help answer these questions
*Acknowledgements to Dr David Hillson, The Risk Doctor
Challenges for decision-makers
Will everything go according to plan?
What can blow the project off course?
Is the plan optimistic?
What are the governance arrangements?
Who is the sponsor?
Who are the stakeholders?
Is the funding secure over the project life cycle?
How good are the estimates?
Have they been independently verified or tested as in reference class forecasting?
Have the assumptions been tested?
Have lessons learned from previous projects been reviewed and taken into account?
Do we have the resources (in house or in the supply chain) to meet the complexity of the project?
How experienced are the decision-makers in relation to the complexity of the projects they are making judgments on? To what extent do the project promoters present the project in such a way as to get the business?
Challenges for decision-makers
Do we have the resources (in house or in the supply chain) to meet the complexity of the project?
How experienced are the decision-makers in relation to the complexity of the projects they are making judgments on?
To what extent do the project promoters present the project in such a way as to get the business?
Challenges for decision-makers
The project life cycle
The risk process (PRAM* Guide)
*PRAM = (Association of Project Management) Project Risk Analysis and Management
Risk analysis definitions Qualitative – assessment of risk relating to the qualities and
subjective elements of the risk. Useful for understanding the effect of individual risks and prioritisation
Quantitative – modeling of numerical outcomes by combining values and relationships between values. Useful for determining a range of likely outcomes, risk drivers, planned effectiveness of risk responses and setting contingency
Source: PRAM Guide
Output of qualitative assessment – risk matrix
Outputs of quantitative analysis – tornado graph
Outputs of quantitative analysis – histogram and cumulative distribution graph
Outputs of quantitative analysis – comparison of cumulative distribution graphs
Can risk analysis help?
Questions of any project:
– How risky is this project?*
– How do you know?*
Use quantitative analysis to answer first question
Use qualitative assessment to help answer the second question
Risk analysis can help project decision makers by alerting them to the probabilistic nature of projects
The ranges of time and cost could be used instead of using a single value, to set a risk-adjusted baseline
A defensible contingency could be set based on risks and uncertainties
*Acknowledgements to Dr David Hillson, The Risk Doctor
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