Advanced Project Management Project Risk Management

1. Advanced Project ManagementProject Risk Management Ghazala Amin

2. Project Risk Management • Reference study materials • A guide to the Project Management Body of Knowledge (PMBOK Guide), Chapter 11 • Study notes • Dr. Kerzner’s book, Chapter 17

3. Project Risk Management • What to Study • Risks – with various qualifiers • The three components of risk: Risk Event, Probability of Risk Event and Impact of Risk • Probability-Impact Matrix • Risk assessment using decision trees and expected monetary values • The relationship of risk and the project life cycle

4. Project Risk Management • Key Definitions • Certainty, Risk, Uncertainty • Business Risk, Insurable(Pure) Risk • Technical Risks, Project Management Risks, Organizational Risks, External Risks, Internal Risks,, Legal Risks • Known Risks, Unknown Risks • Expected Monetary Value (EMV) • Trigger (a.k.a Risk symptom or Warning sign) • Contingency Plan, Fallback Plan • Contingency Reserve, Management Reserve

5. What is a risk? • A risk is a potential event or a future situation that may negatively affect the project. • Risks are identified, described and analyzed in terms of; • Probability that they will occur • Effects or consequences if they do happen • Time frame within which their consequences might occur • Examples of few risks to the project; • Technology not easily available • Resources not committed to the project • Sponsor does not show up for meetings • Unidentified end users etc. etc. • Source/Reference: IBM Learning Centre for development of PM Curriculum

6. Project Risk Management • Risk Management is the systematic process of identifying, analyzing, and responding to project risk • It is continuous process of identifying, analyzing, and planning for risks. • It is the most effective means of preventing and/or minimizing exposure to your project. Risks associated with project integration are usually the smallest during the project’s initiation and charter approval phase of the project life cycle.

7. Project Risk Management • Risk Management process include: • Formal planning activity, • Analysis to quantify the likelihood and predict impact on the project, • Handling strategy for selected risks, • Ability to monitor progress in reducing these risk to the level to minimize impact on the project.

8. Project Risk Management • Project Risk Management Processes (PMBOK) • Plan Risk Management • Risk Identification • Qualitative Risk Analysis • Quantitative Risk Analysis • Risk Response Planning • Risk Monitoring and Control

9. Project Risk Management Processes (PMBOK) Project Risk Management is the process of being proactive rather than reactive.

10. Risk Preference and Utility Theory • “Utility” which can be defined as the amount of satisfaction or pleasure that the project manager receives from a payoff (This is also called project manager’s tolerance for risk). • PM must use expert judgment and tools to deal with risks. • The ultimate decision on how the PM deals with risk is based on his/her own tolerance for risk.

11. Types of Risk Takers • Risk Averter (Risk Avoider) • Utility rises at the decreasing rate • When more money is at stake, project manager’s satisfaction or tolerance decreases • Prefers certain outcome and demand premium to accept risks.

12. Types of Risk Takers • Risk Neutral • The slope of utility curve is constant

13. Types of Risk Takers • Risk Seeker (Risk Lover) • The utility rises at the increasing rate • The project manager’s satisfaction increases when more money is at stake • Prefers uncertain outcome and willing to pay penalty to take risks

14. Risk - Definitions • Decision making falls into the following categories: • Certainty • All information for making the right decision is available • Can predict the outcome with confidence • Risk • The totality of the occurrence can be described within established confidence limit • Expected payoff can be mathematically calculated • Uncertainty • Meaningful assignments of probabilities are not possible • Management decision can be made applying one of 4 criteria

15. Decision Making Under Risk: Expected Value Expected value is the product of two numbers: • Risk Event Probability (states of nature) • An estimate of the probability that a given risk event will occur. • Risk Event Value (Payoff for strategies) • An estimate of the gain or loss that will be incurred if the risk event does occur.

16. Decision Making Under Risk: Expected Value • Expected monetary value Mathematically: E i = Σ Pij pj, Where E i = expected payoff for strategy i P = Payoff element p = Probability of event E 1 = (50)(0.25)+40(0.25)+90(0.5) = 67.50 E 2 = (50)(0.25)+50(0.25)+60(0.5) = 55 E 3 = (100)(0.25)+80(0.25)+(-50)(0.5) = 20 Based on the Expected payoff value, Strategy 1 should be used. N j = 1

17. Decision Making Under Uncertainty • Hurwicz Criterion (Maximax) • The decision maker is always optimistic and attempts to maximize profits by a go-for-broke strategy • Wald Criterion (Maximin) • The decision maker is concerned with how much he/she can afford to lose. In this criteria, a pessimistic approach is taken • Savage Criterion (Minimax) • The project manager attempts to minimize the maximum regrets • Laplace Criterion • Transforms decision making under uncertainty into decision making under risk

18. Decision Trees • A decision tree is a diagram that depicts key interactions among decisions and associated chance events as they are understood by the decision makers • The branches of the tree represent either decisions (shown as boxes) or chance events (shown as circles)

19. Decision Tree - Example • A product can be manufactured using Machine A or Machine B • Machine A has a 40% chance of being used and Machine B has a 60% chance of being used • When Machine A is selected, Process C is selected 80% of the time and Process D 20% of the time • When Machine B is selected, Process C is selected 30% of the time and Process D 70% of the time • What is the probability of being produced by the various combinations?

20. Decision Tree - Example

21. Decision Tree - Example