Understanding Risk before you start managing it

Richard NeweyDavis Langdon LLP

Lets look at Risk

Defining Risk• “An uncertain event or set of

circumstances that, should it or they occur, will have an effect on the achievement of the (business or) project’s objectives” APM PRAM Guide 1997

• “Project risk is an uncertain event or condition that, if it occurs, has a positive or negative effect on a project objective. A risk has a cause, and if it occurs, an impact” Revised PMBOK 2000.

Overview - Risk Management Definitions

Edwards & Bowen (1998) define risk management as:

‘…a systematic approach to dealing with risk. A risk management system should: establish an appropriate context; set goals and objectives; identify and analyse risks; influence risk decision making; and monitor and review risk responses.’ (p.339)

MoR:

‘The term ‘management of risk’ incorporates all the activities required to identify and control the exposure to risk which may have an impact on the achievement of an organisation’s business objectives.’

The Project Management Institute:

‘Risk Management is the systematic process of identifying, analysing and responding to project risk. It includes maximising the probability and consequences of positive events and minimizing the probability and consequences of positive events and minimising the probability and consequences of adverse events to project objectives.’

APM PRAM Guide 1997:

“The process whereby responses to the risks are formulated, justified, planned, initiated, progressed, monitored, measured for success, reviewed, adjusted and (hopefully) closed”

Considerations

• Likelihood – Probability • Impact –Effect on you…severity, consequence etc

• Proximity – when?• Perception• Testosterone?

What are you worried about?

• Death• Safety for you – your kids• Economy

– House– Taxes– Employment – job security

Probability

DeathDisease kills 15 times more people than accidentsOf the 500,000 people that die every year• 3000 people are killed on our roads (500 of these are

alcohol related) – 0.6% of all deaths, 0.01% of the population.

• 4000 accidental deaths around the home - 0.8% of the all deaths 0.07% of the population

• 18 knife fatalities this year (27 in total last year)

Safety of your children

• The chance of someone abducting your child is so low, it would only happen once every 200,000 years; and even then you would almost certainly get your child back anyway.

The food you eatOrganic…

• Plants produce toxins naturally to kill bugs – these cause cancer in the same way as man made pesticides

• The focus of regulatory policy is on synthetic chemicals, although 99.9 percent of the chemicals humans ingest are natural.

• Plants in the human diet contain thousands of natural pesticides that protect them from insects and other predators.

• There is no convincing evidence that synthetic chemical pollutants are important for human cancer. Regulations that try to eliminate minuscule levels of synthetic chemicals are enormously expensive:

• The Environmental Protection Agency has estimated that environmental regulations cost society $140 billion per year.

• if reducing synthetic pesticides makes fruits and vegetables more expensive, thereby decreasing consumption, then cancer will be increased, particularly for the poor.

Breast CancerThe commonly quoted figure of 1 in 9 extends over a woman’s

lifetime.

Magnitude of this risk will not manifest until a woman is over 80 years.

• Risk up to age 25 1 in 15000• Risk up to age 30 1 in 1900• Risk up to age 40 1 in 200• Risk up to age 50 1 in 50• Risk up to age 60 1 in 23• Risk up to age 70 1 in 15• Risk up to age 80 1 in 11• Risk up to age 85 1 in 10

Source Cancer Research UK.

Travelling safely

Flying is much safer than driving a car. You'd have to fly every day for the next 26,000 years to die in a crash. (during that time you would have died 20 times driving to the airport.)

Travel Perception

• Air industry will choose per Km basis as most fatalities occur on landing and take off

• Land based transport will select fatalities per journey or hours of travel – risks are uniformly spread

Repossessions

• 12,285,000 mortgages in UK• 25840 2007 - 0.21% of all mortgages• 45000 2008 – 0.37% of all mortgages• % increase = 174% • HEADLINE GRABBINGActual increase = 0.16 of 1%

Consequences of losing your property

• Who is actually taking the most risk? You or the Bank?

• Most houses that are repossessed are high loan value houses (i.e. the bank has lent you perhaps 95% of the value).

• Higher value to loan repossessions are rare – yohave many more options (Sell, downsize etc)

What’s the worst that can happen?

Lose your job, lose your house, lose your money…

Destitution

• an extreme state of poverty, in which a person is almost completely lacking in resources or means of support.

• In this country – probability is negligible.

Protecting against risk

• If you are protected – you take more risks• If you are protected – you are in more

danger• Children are unlikely to be able to cope

with the world unless they learned the consequences of risk

Helmets are shown to have no statistically significant effect on the probability of a fatality given that a motorcycle accident has occurred. This means that based on standard statistical tests we cannot reject the claim that helmets do not affect the probability that a rider will survive a motorcycle accident.

It is shown that past a critical impact velocity to the helmet (approximately 13 mph), helmet use has a statistically significant effect which increases the severity of neck injuries.

If a major concern of policy makers is the prevention of fatalities, helmet legislation may not be effective in achieving that objective.

Project Risk Management helps deliver:

• Robust Management Infrastructure – can drive the development of processes and procedures

• Informs decisions• Clear, realistic, achievable Project Objectives• Coherent Risk Profile and Risk Allocation Matrix• Effective management of Risk• Improved confidence in delivery of successful outcomes• Quantified Risk Allowances to assist Funding and

Control• Regular reports to all levels of Management• Lessons Learnt for continuous Improvement

Integrating RM in the Project Cycle

Inception

StrategyCommission

Design

FeasibilityConstruct

Focus on raising the maturity

12

3

45

Undeveloped

Formalised

Established

Embedded

OptimisedRisk management objective

Causal mapping & Structure

Political

Economic

Legal

Social

Environmental

High Inflation

Graduate Recruitment –Shortage

UK Employment Law Changes Technological

New Cost Planning Software used by Architects

The GlobalCredit Crunch

Change in Government

Spending Policy

Political interferenceon the Olympics

Policy not to employ Consultants for

Government work

Fraud

Government imposed Green Tax

The Plan - Scales and rangesLIKELIHOOD

Description Scenario Code Letter

Guide Probability

RAMP Value

Very High Almost certain to occur VH 90 16

High More likely to occur than not H 75 12

Medium Fairly likely to happen M 50 8

Low Low but not impossible L 25 4

Very Low Extremely unlikely to happen VL 5 2IMPACT

Description Scenario Code Letter

RAMP Value Guide Cost % of Project

Guide Time % of Prog.

Very High Critical impact on the achievement of objectives and overall performance. Huge impact on costs and/or reputation. Very difficult and possibly long-term to recover.

VH 1000 2 5

High Major impact on costs, objectives. Serious impact on output and/or quality and reputation. Medium to long-term effect and expensive to recover.

H 500 1.5 3

Medium Reduces viability significant waste of time and resources and impact on operational efficiency, output, and quality. Medium term effect, which may be expensive to recover.

M 50 1 1.5

Low Minor loss, delay, inconvenience or interruption. Short to medium term effect.

L 5 0.5 0.75

Very Low Minimal loss, delay, inconvenience or interruption. Can be easily and quickly remedied.

VL 1 0.25 0.25

VH 16 80 800 8000 16000

H 12 60 600 6000 12000

M 8 40 400 4000 8000

L 4 20 200 2000 4000

VL 2 10 100 1000 2000

VL L M H VH

Impact

Like

lihoo

d

The Plan - Thresholds

Analysis - Proximity

PROXIMITY

IMPACT

LIKE

LIH

OO

D

H

HL

LIMMINENT

DISTANT

Immediate area of focus

Mitigation• Value for money• Appropriate • Doable• Success should be obvious• Focus on:

– Reducing likelihood– Reducing the impact

• Need not be what has been done before• Ignore the ‘flannel’ – ask will it really make a

difference to this risk?

The Risk Manager• Understand the risks• Don’t sit back and wait -

monitor and drive actions and change

• Share knowledge and lessons

• Constantly strive to raise maturity