Chapter Seven
Managing Risk
7–1
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7–2
Where We Are Now
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2
Learning Objectives
Describe the risk management process
Understand how to identify project risks
Assess the significance of different project risks
Describe the four different responses to managing risks
Understand the role contingency plans play in risk management process
Understand opportunity management and describe the four different approaches to responding to opportunities in a project
Understand how contingency funds and time buffers are used to manage risks on a project
Recognize the need for risk management being an ongoing activity
Describe the change control process
7–3
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Chapter Outline
7.1Risk Management Process
7.2Step 1: Risk Identification
7.3Step 2: Risk Assessment
7.4Step 3: Risk Response Development
7.5Contingency Planning
7.6Opportunity Management
7.7Contingency Funding and Time Buffers
7.8Step 4: Risk Response Control
7.9Change Control Management
7–4
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7–5
Risk Management Process
Risk
Uncertain or chance events that planning cannot overcome or control
Risk Management
An attempt to recognize and manage potential and unforeseen trouble spots that may occur when the project is implemented
What can go wrong (risk event)
How to minimize the risk event’s impact (consequences)
What can be done before an event occurs (anticipation)
What to do when an event occurs (contingency plans)
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7–6
The Risk Event Graph
FIGURE 7.1
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Risk Management’s Benefits
A proactive rather than reactive approach
Reduces surprises and negative consequences
Prepares the project manager to take advantage of appropriate risks
Provides better control over the future
Improves chances of reaching project performance objectives within budget and on time
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7–8
The Risk Management Process
FIGURE 7.2
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Managing Risk
Step 1: Risk Identification
Generate a list of possible risks through brainstorming, problem identification and risk profiling
Use risk breakdown structure (RBS) in conjunction with work breakdown structure (WBS) to identify and analyze risks
Macro risks first, then specific events
Risk profile is a list of questions addressing additional areas of uncertainty on a project.
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7–10
The Risk Breakdown Structure (RBS)
FIGURE 7.3
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Partial Risk Profile for Product Development Project
FIGURE 7.4
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Managing Risk
Step 2: Risk Assessment
Scenario analysis for event probability and impact
Risk assessment form
Risk severity matrix
Failure Mode and Effects Analysis (FMEA)
Risk Value = Impact x Probability x Detection
Probability analysis
Decision trees, NPV, and PERT
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7–13
Defined Conditions for Impact Scales of a Risk on Major Project Objectives (Examples for negative impacts only)
FIGURE 7.5
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Risk Assessment Form
FIGURE 7.6
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Risk Severity Matrix
FIGURE 7.7
Failure Mode and Effects Analysis (FMEA)Impact × Probability × Detection = Risk Value
| User Backlash | Interface problems | |||
| System freezing | ||||
| Hardware malfunc-tioning |
Likelihood
Impact
Red zone (major risk)
Yellow zone (moderate risk)
Green zone (minor risk)
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5
4
4
3
3
2
2
1
1
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Managing Risk (cont’d)
Step 3: Risk Response Development
Mitigating Risk
Reducing the likelihood an adverse event will occur
Reducing the impact of an adverse event
Avoiding Risk
Changing the project plan to eliminate the risk or condition
Transferring Risk
Paying a premium to pass the risk to another party
Requiring Build-Own-Operate-Transfer (BOOT) provisions
Accepting Risk
Making a conscious decision to accept the risk
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Contingency Planning
Contingency Plan
An alternative plan that will be used if a possible foreseen risk event actually occurs
A plan of actions that will reduce or mitigate the negative impact (consequences) of a risk event
Risks of Not Having a Contingency Plan
Having no plan may slow managerial response
Decisions made under pressure can be potentially dangerous and costly
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Risk Response Matrix
FIGURE 7.8
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Risk and Contingency Planning
Technical Risks
Backup strategies if chosen technology fails
Assessing whether technical uncertainties can be resolved
Schedule Risks
Use of slack increases the risk of a late project finish
Imposed duration dates (absolute project finish date)
Compression of project schedules due to a shortened project duration date
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Risk and Contingency Planning (cont’d)
Cost Risks
Time/cost dependency links: costs increase when problems take longer to solve than expected.
Price protection risks (a rise in input costs) increase if the duration of a project is increased.
Funding Risks
Changes in the supply of funds for the project can dramatically affect the likelihood of implementation or successful completion of a project.
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Opportunity Management
Exploit
Seeking to eliminate the uncertainty associated with an opportunity to ensure that it definitely happens
Share
Allocating some or all of the ownership of an opportunity to another party who is best able to capture the opportunity for the benefit of the project
Enhance
Taking action to increase the probability and/or the positive impact of an opportunity
Accept
Being willing to take advantage of an opportunity if it occurs, but not taking action to pursue it
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Contingency Funding and Time Buffers
Contingency Funds
Funds to cover project risks—identified and unknown
Size of funds reflects overall risk of a project.
Budget reserves
Are linked to the identified risks of specific work packages.
Management reserves
Are large funds to be used to cover major unforeseen risks (e.g., change in project scope) of the total project.
Time Buffers
Amounts of time used to compensate for unplanned delays in the project schedule
Severe risk, merge, noncritical, and scarce resource activities
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Contingency Fund Estimate
TABLE 7.1
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Managing Risk (cont’d)
Step 4: Risk Response Control
Risk control
Execution of the risk response strategy
Monitoring of triggering events
Initiating contingency plans
Watching for new risks
Establishing a Change Management System
Monitoring, tracking, and reporting risk
Fostering an open organization environment
Repeating risk identification/assessment exercises
Assigning and documenting responsibility for managing risk
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Change Control Management
Sources of Change
Project scope changes
Implementation of contingency plans
Improvement changes
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Change Management Systems
Identify proposed changes
List expected effects of proposed changes on schedule and budget
Review, evaluate, and approve or disapprove of changes formally
Negotiate and resolve conflicts of change, condition, and cost
Communicate changes to parties affected
Assign responsibility for implementing change
Adjust master schedule and budget
Track all changes that are to be implemented
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The Change Control Process
FIGURE 7.9
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Benefits of a Change Control System
Inconsequential changes are discouraged by the formal process.
Costs of changes are maintained in a log.
Integrity of the WBS and performance measures is maintained.
Allocation and use of budget and management reserve funds are tracked.
Responsibility for implementation is clarified.
Effect of changes is visible to all parties involved.
Implementation of change is monitored.
Scope changes will be quickly reflected in baseline and performance measures.
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Sample Change Request
FIGURE 7.10
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Change Request Log
FIGURE 7.11
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Key Terms
Accept risk
Avoiding risk
Budget reserve
Change management system
Contingency plan
Management reserve
Mitigating risk
Opportunity
Risk
Risk breakdown structure (RBS)
Risk profile
Risk register
Risk severity matrix
Scenario analysis
Time buffer
Transferring risk
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Appendix 7.1
PERT and PERT Simulation
7–32
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PERT—Program Evaluation Review Technique
Assumes each activity duration has a range that statistically follows a beta distribution.
Uses three time estimates for each activity: optimistic, pessimistic, and a weighted average to represent activity durations.
Knowing the weighted average and variances for each activity allows the project planner to compute the probability of meeting different project durations.
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Activity and Project Frequency Distributions
FIGURE A7.1
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Activity Time Calculations
The weighted average activity time is computed by the following formula:
(7.1)
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Activity Time Calculations (cont’d)
The variability in the activity time estimates is approximated by the following equations:
The standard deviation for the activity:
The standard deviation for the project:
Note the standard deviation of the activity is squared in this equation; this is also called variance. This sum includes only activities on the critical path(s) or path being reviewed.
(7.2)
(7.3)
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Activity Times and Variances
TABLE A7.1
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Probability of Completing the Project
The equation below is used to compute the “Z” value found in statistical tables (Z = number of standard deviations from the mean), which, in turn, tells the probability of completing the project in the time specified.
(7.4)
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Hypothetical Network
FIGURE A7.2
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Hypothetical Network (cont’d)
FIGURE A7.2 (cont’d)
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Possible Project Duration
Probability project is completed before scheduled time (TS) of 67 units
Probability project is completed by the 60th unit time period (TS)
FIGURE A7.3
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Z Values and Probabilities
TABLE A7.2
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