risk management - · pdf filemay 2005 csc excellence in risk management traditional project...

May 2005CSC

Excellence In Risk Management

Risk Management

An Integrated Approach

May 2005CSC


Traditional

Project

Risk

Management

Time

Cost Quality

+ =

Optimized

Value

Fit for

Purpose

Continuous

ImprovementBreakthrough

Thinking

“Pick any Two”

Project Management Mantras

=+

CSC Works with the Project Team to maximize the Project value by

testing strategies to find the optimum.

May 2005CSC


Risk Management provides accountability for corporate governance and maximizes shareholder value.

• Strategic Options are quantified and compared on a value basis.

• Budgets and performance targets are set at appropriate confidence

levels.

• Contingency and Mitigation plans are identified and explored.

• All sources of risk and opportunity are identified.

• The most important risks and their impacts are communicated.

Modern Day Applications of Risk Analysis

May 2005CSC


CSC has developed a Risk and Decision Analysis Process that has

been applied to a variety of decisions that are made in an uncertain

environment.

• Asset Portfolio selection & management.

• Strategic examination and selection of project development alternatives.

• Full cycle economic risk analysis for defined projects with sensitivity and

mitigation alternatives examined.

• Tactical planning for project execution including contingency planning for

potential or occurring events.

• Corporate strategic planning and business case development.

• Merger and acquisition target identification.

• Merger and acquisition pricing, return analysis and integration planning.

• Project and venture team performance analysis.

May 2005CSC


Strategic / Tactical Alternatives

Range Estimating

Qualitative Analysis

Outside the Box Risks

Conditioning Variables (Corporate, Regulatory, Market)

External / Event Driven Risk

Integrated Modeling (Cost & Schedule)

A properly conducted risk analysis builds on the early tools used for qualitative analysis

(KT, SWOT), and range estimating to include all the risk & opportunity impacts on a

project or decision.

Full Cycle Analysis (Revenue, Production, OPEX, Finance)

Co

mp

rehen

sive R

isk E

nv

elop

e for d

ecision

mak

ing

May 2005CSC


Full

None

Planning Definition Execution Start Up

Ab

ilit

y to

in

flu

ence

th

e o

utc

om

es

Under any execution strategy, the ability to influence the outcome is significantly

reduced as the project advances.

Risk Management

Closure

The earlier a risk analysis is done, the greater the benefits that can be achieved.

May 2005CSC


Planning Definition Execution Start Up

Ab

ilit

y to

in

flu

ence

th

e o

utc

om

es

Full

None

In addition, the sooner mitigation strategies are applied, the lower their overall cost

Risk Management

Closure

Early mitigation steps are generally more effective and require less cost.

Co

st o

f M

itig

ati

on

Ste

ps

High

Low

May 2005CSC


Cold Eyes Review

Team Involvement

Project Team Involvement

Operations Team Involvement

Risk Contractor

Involvement

Risk Management Process

An effective Risk Management plan must re-evaluate the risks on the project

and their impacts throughout the project life cycle. Each phase of the risk

analysis involves a different focus and a different mix of disciplines.

Strategic

Planning

Project

Definition

Project

Financing

Mid-

Construction

Project

Start Up

Year 1

Full

Operations

Project

Execution

Corporate Planning

Involvement

StrategicTactical

May 2005CSC


CSC’s Risk Analysis Process proceeds in a systematic sequence

1Frame

TheProblem

2Develop

AnalysisBasis

3Evaluate

TheRisks

4Interpret

TheResults

Risk

Management

Recycle to Focus on

Most Important Risks

DevelopAlternativeStrategies.

Identify allImportant Sources ofUncertainty.

Model how underlyinguncertaintiesinteract to influence outcomeson the Project.

Identify the Experts in eachof the uncertainvariables.

Assess the impact and theprobability ofoccurrence foreach uncertainvariable.

Calculate the uncertainty inthe key resultmeasures.

Quantify therisk & return for each scenario.

Analyze anddocument theresults.

Identifypreemptiveactions.

Developcontingencyplans.

Recommendedactions.

5

May 2005CSC


“Framing the problem” is often the most difficult but

most valuable step in the process

• Project scope, basic assumptions, and cost & schedule milestones

are identified.

• Strategic alternatives and logical development paths are identified, and

decision criteria are defined.

• All project decisions (both made and not made), and the logical

links between decisions, are identified.

• All risk issues and their potential impact areas for the project are identified.

• Three graphical techniques are used during the framing step.

• The Strategy Table - clearly lays out the strategic alternatives to be analyzed.

• The Influence Diagram - illustrates relationships between the variables and the key results.

• The Decision Map - illustrates all the decisions that need to be made and their timing.

May 2005CSC


Project Strategy Table

Base Plan

Sensitivity

Alternate

Project

Size

Cogen Water

Source

OperationsLogistics

Building

Schedule

None

Phased

4 x 25

Start

@ 100

Step

25 + 75

1 - 80 MW

2 - 60 MW

No Cogen

Ground

Water

River

Water

Plant

Water

Pre-

Build

None

Support

50 kb/d

Support

100 kb/d

Access

Direct

Route

Indirect

Route

OperatingPhilosophy

Site

Control

Plant

Control

Central

Control

Drive w/

Camp

Fly w/o

Camp

Drive w/o

Camp

Match

Cash

Flow

Fast Track

Expand

1 Year

Early

May 2005CSC


The Influence Diagram shows how the risks influence each other and their impact

on the project. Correlations between variables must be properly captured.

Conditioning

Variables

Impact

Variables

Results

CapitalCost

CapitalCost

MaterialRates

MaterialRates

OrganizationalPerformance

OrganizationalPerformance

RegulatoryEnvironment

RegulatoryEnvironment

CompetingProjects

CompetingProjects

ProductivityRates

ProductivityRates

RegulatoryDelays

RegulatoryDelays

OperatingCosts

OperatingCosts

LabourAvailability

LabourAvailability

ScopeChanges

ScopeChanges

WeatherDelays

WeatherDelays

ContractorRates

ContractorRates

ContractorDefault

ContractorDefault

OperatingRevenue

OperatingRevenue

ScheduleSchedule

NPVNPV

May 2005CSC


CSC’s Risk Analysis Process proceeds in a systematic sequence

1Frame

TheProblem

2Develop

AnalysisBasis

3Evaluate

TheRisks

4Interpret

TheResults

Risk

Management

Recycle to Focus on











Developcontingencyplans.

Recommendedactions.

5

May 2005CSC


ProbabilityDistributions

Tornado DiagramsStep Diagrams

Interview Issues Model and Test Options

Scheduled, Formal ReviewsUpdated Model Results

(Probabilities, Tornados, Steps)

Management Risk Reporting

Base Design

& Operating Plans

Contingency Plans

Risk

Monitoring System

Project Targets Immediate Risk

Control Measures

Risk Analysis

Risk Analysis is the centerpiece of a Risk Management Process

There are four key outputs from a comprehensive Risk Analysis

May 2005CSC


The probability distribution illustrates the full

range of project uncertainty and is used to set the

project targets at appropriate confidence levels.

*Expected

Value

10/90 Range

CAPEX, Schedule, OPEX, etc.

90%

50%

10%

Note:1. Each point on the curve is a result from

a single Monte Carlo trial. The expected

value represents the average value of all

the trials.

2. The slope of the 10/90 range represents

the uncertainty, the flatter the curve, the

more uncertainty.

3. The curve below the expected value

indicates upside opportunity, the

portion above shows the downside risk.

Pro

ba

bil

ity

Project Targets

P80 (?) Confidence Level

Upside

Opportunity

Downside

Risk

May 2005CSC


*

Project Production (or NPV, ROCE, ROR)

90%

50%

10%

Pro

ba

bil

ity

Upside

Opportunity

Downside

Risk

Probability distributions illustrate opportunity and risk trade-

offs, and can be used to select the best project option.

Option B

Expected

Value

Option A

Project Targets

Option B has slightly more risk

with a much greater upside

opportunity.

May 2005CSC


-60 -40 -20 0 20 40 60Start Date

EV = 20-Dec-07

Days

The tornado diagram identifies and ranks the key project

risks and is a tool that helps the project team to focus on the

most important drivers.

Road Preparation Duration 3 6

Labour Productivity Delays -1.25 1.75

Plant Pad Preparation Duration 3 6

Labour Unrest Delays 0 2.3

Execution Organization Performance Best Worst

Regulatory Duration 11.3 16.5

Competing Project Environment Low Heated

Start-up & Commissioning Duration (Early Steam) 1.5 2.4

Terms of Reference - Duration 3 4

Regulatory Environment Relaxed Stringent

Terms of Reference - Application Date 1-Aug-02 1-Oct-02

Labour Availability Delays 0 1.4

OTSG Manufacture & Delivery Duration 12 16

Weather Delays 0 0.5

Long Lead Equipment Delays -1 2

Immediate Risk Control Measures

May 2

005

CS

CExcellence In Risk Management

15-A

ug

-07

1-S

ep-0

7

15-S

ep-0

7

1-O

ct-07

15-O

ct-07

1-N

ov-0

7

15-N

ov

-07

01-D

ec-07

15-D

ec-07

01-J

an

-08

AFE Approval

+6

Engineering to 60%

+1

3

Preliminary Vendor Data

+7

Module Steel Fabrication

0

Module Pipe

Fabrication Duration

0

Rack/ Process

Module Assembly

-3

Last Process Area Module

On-site to Construction

Complete

0

Evaporator Units

0Vapour Compressors 0

Site Prep Duration

+1

Piling

-8

Commissioning Duration

+1

4

Start-up Duration

-3

Construction Duration

+3

1

Materials Delivery

+5

Weather Delay

+5

Labour Issues

+1

2

Long Leads

Complete to MC

+1

4

Design definition Changes

+5

Labour Productivity

+1

0

Reworks

+3

Sta

rt Date

Base=

03-S

ep-0

7

EV

= 2

0-D

ec-07

Th

e Step

Dia

gra

m d

emon

strates w

here th

e gro

wth

from

the

base estim

ate to

the E

xpected

Valu

e occu

rs, an

d id

entifies k

ey

facto

rs impactin

g th

e cost.

Imm

edia

te Risk

Con

trol M

easu

res

May 2005CSC


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1-Jan-03 1-Jan-04 1-Jan-05 1-Jan-06 1-Jan-07

Unconstrained

Fix Filing Date (-120 days)

Early Application (-40 days)

No JV Delays (-60 days)

No Staffing Delays (-30 days)

The analysis can be used to evaluate impacts of schedule

risks, and test mitigation steps to show the potential for

schedule advancement. Incremental mitigation can be

applied to reach an acceptable target date.

Base

EV = 1-Nov-04

Mitigated

EV = 21-Feb-04

Contingency Plans

May 2005CSC


Pro

ba

bil

ity

Project NPV ($MM)

10%

30%

50%

70%

90%

2000-800 -400 0 400 800 1200 1600

Definition

EV = 528 $MM Project AFE

EV = 697 $MM

Mid-ConstructionEV = 669 $MM

Start Up

EV = 695 $MM

PlanningEV = 460 $MM

Use of risk analysis throughout the project life helps the

project team to focus on the most important risks for each

stage of development, resulting in a better defined project

(i.e. less risk).

Risk Monitoring System

May 2005CSC


CSC utilizes a proven risk analysis process that captures the total

risk environment, quantifies the project impacts and provides the

project team with effective risk management tools.

1Frame

TheProblem

2Develop

AnalysisBasis

3Evaluate

TheRisks

4Interpret

TheResults

Risk

Management

Recycle to Focus on











Develop & Testcontingencyplans.

Recommendedactions.

5

May 2005CSC


CSC Specifics:

• Supports Owner Organizations in major project development.

• Group formed in 1982, over 250 project assignments in 7 countries.

• Extensive and varied background in Project Planning and Management.

CSC Specialties:

• Risk & Decision Analysis for a wide range of Business Application.

• Strategic & Mitigation Planning for projects using risk models.

• Facilitation of Project Management & Reviews, Business Planning,

Value Engineering, Opportunity Analysis and Team Building.

• Project Management and Risk Management Education Workshops.

• Development of Contract Claims and disputes and litigation support.

May 2005CSC


• Risk Management is fundamental for accountability on corporate governance and on maximizing shareholder value. It begins with strategic definition and continues in a consistent manner throughout the investment life cycle. The earlier risk management starts, the earlier you can

avoid or mitigate risks and capture opportunities.

• Risk Management ensures that there are no surprises.Documentation of assumptions and all risks. Communication of risk analysis results and the plan for managing those risks (avoid, accept, manage). The focus of efforts is on the underlying project risks.

• Range Estimating is not Risk Analysis.Risk analysis must consider the specific uncertainties of a project, and incorporate these underlying risks into the project value. Processes that provide single-point outcomes or risk distributions based on the probability of fixed outcomes (decision trees, KT, range estimating) do not meet the definition of risk analysis.

• “Ignoring risks to a project is not an option; important decisions will be made anyway, should they not be made with the best information available?”(Project Manager Today, October 2000)

Modern Day Applications of Risk Analysis

risk management - · pdf filemay 2005 csc excellence in risk management traditional project...

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