slide 10.1 maylor, project management, 4 th edition, © pearson education limited 2011 chapter 10...

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Maylor, Project Management, 4th Edition, © Pearson Education Limited 2011

Chapter 10 Risk and opportunities management• Introduction

• The nature of risk and risk management

• Qualitative and quantitative approaches

• Opportunities management

• Summary

Project management in practice: It’s a risky business

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Introduction

• Uncertainty distinguishes projects from repetitive operations, key

• Risk is complex in nature and it may (or may not) be manageable – Elements of management may be beyond the single project

• These often reflect political, social and other organisational issues

– Evaluation of risk is important, it indicates whether a project is viable

– There are well-developed procedures for managing risks• Management of the process and outcomes• Identifying eventualities in advance allows PM to choose actions

• Opportunity also a part of uncertainty, consider at– Project level: new capabilities or unexpected uses of outcome – Task level: an early finish allows next project to start early or

development of a better method

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10.1 The nature of risk and risk management

• Definitions of risk:– The possibility of suffering harm or loss

[PMI BoK 2004]

– Uncertainty inherent in plans and the possibility of something happening (i.e. a contingency) that can affect the prospects of achieving business or project goals

[BS 6097 (2000) Part 3: Guide to the Management of Business Related Project Risk]

‘Known knowns’ form the basis of planning‘Known unknowns’ are uncertainties

‘Unknown unknowns’ are not known in advance

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10.1 The nature of risk and risk management (Continued)

• Risk management incorporates a process for – Identifying potential risks– Analysing them – Managing the significant ones

• Project planning looks into the future; there is always uncertainty– Objective is not necessarily to eliminate all uncertainty– Risk is proportional to return, view as trade-off – Saving money on one activity may mean an increase in risks

• Individuals have different perspectives on risk– Individuals are prepared to accept different cost/benefit levels– Individuals will choose different levels of risk– Treatment of risk is based on partial knowledge and instinct

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• Framework for risk management

Figure 10.1 Risk management schema


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• Risk Identification– The process of prediction of the key risk outcomes– Indicators that something is going/may go wrong

in a project• How to identify risks

– By brainstorming – By consultation activities

• Seek the wider stakeholder views• Seek the view of experts

– Refer to the WBS– Look to time, cost and quality plans


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• Categories of risk identification– Consider what might happen

• The possibility of missing key objectives• Unexpected changes demanded by stakeholders• Technological problems • Staffing changes• Behaviour that would conspire to cause failure

– Particular aspects• Time: critical path, critical chain• Cost: how good are the estimates?


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• Quality: assurance for all processes or are some out of the projects control?

• Health and safety• Legal or financial standing of the organisation

– Check key assumptions• Will changes made to save money increase costs

elsewhere?• Will changes produce further risks?• Have the risks become ‘normal’?

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Response control or mitigation (1)• Procedures are required to ensure

– Either the likelihood of the event occurring is reduced– Or effects can be managed or mitigated

• Consider – Corrective action– Contingencies and reserves– Outsourcing the risk to contractors, experts or insurance– Conducting limited trials (fundamental to agile/extreme

approaches)• The top 20 percent of risks are likely to cause 80

percent of delays or over-runs– For these significant risks make contingency plans– Put contingency plans into the project proposal


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Response control or mitigation (2)• Formal techniques may be required by

– Organisation policy– Client demand

• Benefits– Improvements to plans, better reflecting reality– Highlighting areas that need attention and

contingency planning– Harnessing the ‘gut-feel’/intuition element– Allowing factors/events to be traced historically – Building up experience in a structured way


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Response control or mitigation (3)• Benefits from ongoing process through the project

– Support documentation

• the risk register or the risk log

• Risk register/risk log:– List identified risks– Their occurrence– Actions taken to mitigate them– Results of the actions taken– Add new risks as they become apparent– Remove expired risks– Beneficial as highlights ongoing process


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• How risky is an event or activity?– How likely is it to occur, what is the probability?

• Improbable to highly likely– What might be the effect (impact/severity) of the

event?

• Critical – will cause total failure• Major – will hold up or increase costs in one or

more areas• Minor – will only cause inconvenience

10.2 Qualitative and quantitative approaches

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• Qualitative approaches• Gather peoples’ perceptions as to probability and

impact• Use scales

– Low–medium–high; 1 to 3; 1 to 5 (APM); 1 to 10 (PMI)

– Ratings based on opinion or perception

• Chart on matrix– Visual identity of high risks needing attention

10.2 Qualitative and quantitative approaches (Continued)

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• Risks in the pink boxes need to be actioned

Figure 10.2 Probability impact chart


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Failure mode effect analysis (FMEA)

• Consider three elements of each activity or path through the activities:– Likelihood, severity and hideability– Estimate each on a scale of 1–10– Total risk is product of all three: likelihood × severity ×

hideability

Table 10.1 FMEA analysis


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Quantitative approaches

• Mathematical models of the scenario

• Enables a large number of variablesto be considered

• Useful guides for decision making

• Four models shown:

1. Expected Value

– The expected value of the event• is the possible outcome multiplied by• the probability of its occurrence

– Useful for comparing several projects or alternatives

– Percent chance (probability) can be estimated or calculated using Monte Carlo analysis.

Project Possible outcome

Probability of occurrence

Expected Value

1 £200 mill 50% £100 mill

2 £150 mill 70% £105 mill


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2. Sensitivity analysis• Use expected, optimistic and pessimistic value of inputs

(e.g. costs)– Shows effect on the outcome of a change in the variable– Shows where management attention and control is needed

• Example– Prices on materials and labour likely to fluctuate– Contract price is fixed in advance – Need to see effect of fluctuations on profit– Costs of materials say £0.6m– Costs of direct labour say £0.2m– Contribution to say 175 percent of direct labour– Revenues: fixed at £1.2m– Profit = revenue – material costs – (labour + overheads)


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• This shows when the project will make a profit or a loss• Should materials increase by 10 percent, unless there is a drop in labour

costs, the project will make a loss

Table 10.2 Sensitivity analysis


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3. Monte Carlo simulation– Practicable if use computer (extension to popular

spread sheets)

– Use range of values of distribution apply to time, cost and other estimates

– Shows effect on finances or other critical factors


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• Example– Revenue stream to be generated: in the range of

£.75m to £1.15m• Equally likely to be any value

– Materials costs: £.25m most likely • could be considerably more, unlikely to be less

– Labour costs: £.55m• Could be more, could be less

– Profit• Normally = revenue–materials–labour = £.15• Uncertainties suggest otherwise


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Figure 10.3 Examples of the use of Monte Carlo analysis


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4. PERT: Programme evaluation and review technique• Likely a single value for ‘time for completion’ will have an error• Three estimates for each activity are required

– Optimistic (o) – if conditions are ideal– Most probable (m) – if conditions are ‘normal’– Pessimistic (p) – if things go wrong

• Expected time is (o + 4m + p)/6 • Use expected time in critical path analysis

– May effect the duration, may change the critical path

• The downside– Shows outcome (partial picture) but does not indicate probability– Additional complexity may not be justified by a return in accuracy of

the plans– Relies on people being accurate in their forecasting


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Figure 10.4 Network showing optimistic, most probable and pessimistic times


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Figure 10.5 Distribution of estimated times for an activity


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Table 10.3 Three-point estimates for tasks


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Table 10.4 Three-point estimates and variances for tasks


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Table 10.5 Probabilities of completing tasks


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10.3 Opportunities management

‘On a recent project, my team spent two days trying to reducea £50 000 risk. I would much rather they spent that time looking to see how the project could yield an extra £50 000 of business benefit’ [Project Director, Rolls-Royce]• Many ideas are lost because there is no route to exploit them• Rare that great innovative products are the result of a development process that started out with that objective in mind• A route to exploit opportunities is essential • One framework:

– Negative to positive: a risk that doesn’t materialise is a benefit– Opportunities of response: a high risk that is mitigated presents an

opportunity– Random good fortune: opportunities presented by a breakthrough

• Qualitative process for managing opportunities similar to that of managing risks

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Summary

• The issue of risk is central to projects– How risk is managed will impact on project success– A basic process provides a structure

• Identification, quantification and mitigation

– Use ‘enterprise risk management’ to establish a ‘risk portfolio’• Inclusion of high and low risk projects

• Using a risk management framework is strongly recommended– Practice and reflection is essential

• Do risk processes work?– Recent research suggests that success is limited – Risk an opportunity management only part of the process– Important how organisations respond– Consideration of process necessary– As is attention to behaviour

slide 10.1 maylor, project management, 4 th edition, © pearson education limited 2011 chapter 10...

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