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How to ManageProject Opportunity and Risk

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How to ManageProject Opportunity and Risk

Why uncertainty management can bea much better approach than risk management

The updated and re-titled 3rd edition of Project Risk Management: Processes, Insights and Techniques

Chris Chapman and Stephen WardUniversity of Southampton School of Management

A John Wiley and Sons, Ltd, Publication

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This edition fi rst published 2011

© 2011 John Wiley & Sons Ltd

Registered offi ceJohn Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, United Kingdom

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Library of Congress Cataloging- in- Publication Data

Chapman, C. B. How to manage project opportunity and risk: why uncertainty management can be a much better approach than risk management /Chris Chapman and Stephen Ward.—3rd ed. p. cm. Rev. ed. of : Project risk management, c 2003. Summary: “Based on a sound conceptual foundation yet developed to meet practical concerns, Project Risk Management has become recognized as a standard work on its subject”—Provided by publisher. ISBN 978-0-470-68649-2 (hardback) 1. Project management. 2. Risk management. I. Ward, Stephen (Stephen C.) II. Chapman, C. B., Project risk management. III. Title. T56.8.C52 2012 658.4'04 —dc23 2011035194

A catalogue record for this book is available from the British Library.

ISBN 978-0-470-68649-2 (hbk) ISBN 978-1-119-96263-2 (ebk)ISBN 978-1-119- 96666-1 (ebk) ISBN 978-1-119-96665-4 (ebk)

Set in 9/13pt Kuenstler by MPS Limited, a Macmillan Company, Chennai, IndiaPrinted and bound by CPI Group (UK) Ltd., Croydon, CRO 4YY

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For pessimists who want to release their inner optimist, optimists who want to fully exploit their inner pessimist,

analysts who want to keep in touch with their common sense, decision makers who want to understand their advisors.

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Contents

Foreword to this edition by Mike Nichols ixForeword to the second edition with an update by Tony Ridley xiForeword to the fi rst edition by Peter Wakeling xiii

Preface and overview by the authors xv

Acknowledgements xxv

PART I Setting the scene 1

1 Uncertainty in and around projects 3

2 Uncertainty, risk and opportunity 43

3 Key motives for uncertainty management 73

4 An overview of generic process frameworks 101

PART II The generic process in one key lifecycle stage 131

5 Defi ne the project 133

6 Focus the process 153

7 Identify all the relevant sources of uncertainty, response options and conditions 171

8 Structure all uncertainty 215

9 Clarify ownership 235

10 Quantify some uncertainty 251

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viii C O N T E N T S

11 Evaluate all the relevant implications 289

PART III The generic process in all lifecycle stages 325

12 Fully integrating the strategy shaping stages 327

13 Fully integrating the strategy implementation stages 365

PART IV Key corporate implications 389

14 Developing PUMP capability as a project 391

15 Contracts and governance as frameworks for enlightened relationship management 411

16 A corporate capability perspective 435

References 463

Glossary 473

Index 479

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Foreword to this edition

I am surely in a large majority in welcoming this new and substantially revised edition of the 1997 classic on risk management by Chris Chapman and Stephen Ward, two eminent authorities on the subject.

As mentioned in the book, Chris Chapman and I have worked together on a number of strategic consulting assignments and with Stephen Ward and others have collaborated in the development of RAMP and other risk management initiatives. From this I have gained a high degree of respect for Chris and Stephen’s deep and wide understanding of risk management in all its forms.

Like the earlier editions, this book is wide ranging and thorough in its treatment of all aspects of the subject, particularly in regard to project risk management. It responds to the need for an update to refl ect this fast developing fi eld of risk management.

I am delighted to see that the focus has moved on to management of opportunities as well as risks, and that the book emphasises the crucial importance of uncertainty. Chris and I may differ on the precise defi nition of ‘uncertainty’ (which I describe as ‘incomplete or imperfect knowledge’ —i.e.lack of required information for decision making), but we are at one in believing that to date risk management has unduly and prematurely concentrated on identifying and analysing risk events. A much better return from the effort involved is fi rst to assess systematically the information needed for decisions in pursuit of objectives; and only after this has been done to move on to evaluating risk events. The book makes a valuable contribution by putting management of uncer-tainty at the core of the recommended approach to risk management.

I am also pleased the book refers to the value of range estimating (based on confi dence intervals) rather than spot estimates, which we recommended and helped to implement in the Highways Agency. This can help to avoid creating false expectations about the out- turn costs of projects when they are at an early stage where there is a high degree of uncertainty about their fi nal scope and hence any single cost estimate is likely to be unreliable.

Three other points made which I particularly applaud are:

• decomposing all relevant uncertainty in a structured way which can avoid relying on opti-mism bias with its crude adjustment factors;

• the erroneous idea held by many that a defi ned or common approach in risk management is suffi cient, when frequently it is neither best nor even good practice;

• increased reference to ‘risk effi ciency’, and its extension to cover ‘opportunity effi ciency’ and ‘clarity effi ciency’.

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x F O R E W O R D T O T H I S E D I T I O N

For these and other reasons too numerous to mention, I am very pleased to commend this book to readers whatever their levels of expertise in the management of risk.

Mike NicholsChairman & Chief Executive, The Nichols Group

Chairman, Association for Project ManagementBoard Member, Major Projects Association

Chairman, British Standards Institution Standards Policy and Strategy Committee

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Foreword to the second edition

The analysis of risk and the development of risk management processes have come a long way over the last ten years, even since the late 1990s. Hence the need for a second edition of Chapman and Ward’s Project Risk Management, fi rst published in 1997.

They not only continue to push back the boundaries, Chapman has also been involved in the development of work aimed at practitioners – PRAM (Association for Project Management) and RAMP (Institution of Civil Engineers and Faculty/Institute of Actuaries). They importantly make comparisons between their work and both PRAM and RAMP, as well as with the Project Management Institute’s PMBOK 2000. They have developed and named the generic framework SHAMPU (Shape, Harness, and Manage Project Uncertainty) process and compare it with PRAM, RAMP and PMBOK 2000. I suggest that the authors of these three will want to use SHAMPU as a challenge to their own further thinking.

Chapman and Ward say that their book is largely about how to achieve effective and effi cient risk management in the context of a single project. Determining what can be simplifi ed, and what it is appropriate to simplify, is not a simple matter! In their fi nal chapter they adopt a corpo-rate perspective on project risk management processes. Thus they mirror the work already under way by the ICE/Actuaries team who have embarked on the development of STRATrisk, designed to enable prime decision makers to deal more systematically with the most important opportuni-ties and threats to their business.

They quote Walsham who has suggested a management framework which views organiza-tional change as a jointly analytical, educational and political process where important interacting dimensions are the context, content and process of the change. They conclude by stating that ‘most project risk is generated by the way different people perceive issues and react to them’. Those of us who have driven such projects as the Hong Kong Mass Railway (very successfully) and the Channel Tunnel (less so) will say ‘hear, hear’ to all of that.

Professor Tony M. RidleyImperial College London

Past President, Institution of Civil Engineers

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xii F O R E W O R D T O T H E S E C O N D E D I T I O N

Update to the foreword to the second editionSince I wrote the Foreword for the second edition of this book, risk management processes have become much more widely used, but controversy about what should be done and how best to do it has grown. In this third edition Chapman and Ward clarify the nature of this controversy, explain why common practices fail, and offer practical solutions. They reshape successful perspectives, widely used in practice, with new simplifi cations that have worked, guided by deeper background understanding. This will inform the appropriate application of RAMP and PRAM processes, and how ERM needs to be developed.

Managing risk is a risky business. Chapman and Ward provide an in- depth explanation of why it is important to understand and manage underlying uncertainty in all its forms, in order to realize opportunities more fully and enhance corporate performance. They show what best practice should look like. The implications go well beyond the conventional wisdom of project risk management, providing an enlightening new perspective.

Professor Tony M. RidleyImperial College London

Past President, Institution of Civil Engineers

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Foreword to the fi rst edition

All projects involve risk – the zero risk project is not worth pursuing. This is not purely intuitive but also a recognition that acceptance of some risk is likely to yield a more desirable and appropri-ate level of benefi t in return for the resources committed to the venture. Risk involves both threat and opportunity. Organizations that better understand the nature of risks and can manage them more effectively cannot only avoid unforeseen disasters but can work with tighter margins and less contingency, freeing resources for other endeavours, and seizing opportunities for advanta-geous investment that might otherwise be rejected as ‘too risky’.

Risk is present in every aspect of our lives; thus risk management is universal but in most circumstances an unstructured activity, based on common sense, relevant knowledge, experience and instinct. Project management has evolved over recent years into a fully- fl edged professional discipline characterized by a formalized body of knowledge and the defi nition of systematic proc-esses for the execution of a project. Yet project risk management has, until recently, generally been considered as an ‘add-on’ instead of being integral to the effective practice of project management.

This book provides the framework for integrating risk management into the management of projects. It explains how to do this through the defi nition of generic risk management processes and shows how these processes can be mapped onto the stages of the project lifecycle. As the disciplines of formal project management are being applied ever more widely (e.g., to the manage-ment of change within organizations) so the generic project risk management processes set out here will readily fi nd use in diverse areas of application.

The main emphasis is on processes rather than analytical techniques, which are already well documented. The danger in formalized processes is that they can become orthodox, bureaucratic, burdened with procedures, so that the practitioner loses sight of the real aims. This book provides the reader with a fundamental understanding of project risk management processes but avoids being over prescriptive in the description of the execution of these processes. Instead, there is positive encouragement to use these generic processes as a starting point for elaboration and adaptation to suit the circumstances of a particular application, to innovate and experiment, to simplify and streamline the practical implementation of the generic processes to achieve cost effective and effi cient risk management.

The notion of risk effi ciency is central to the theme. All risk management processes consume valuable resources and can themselves constitute a risk to the project that must be effectively managed. The level of investment in risk management within projects must be challenged and justifi ed on the level of expected benefi t to the overall project. Chris Chapman and Steve Ward

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